Edgar Filing: CAPITAL ONE FINANCIAL CORP

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

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

For the transition period from to

Commission File No. 1-13300

CAPITAL ONE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


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

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

Registrant’s telephone number, including area code: (703) 720-1000

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

(Not applicable)

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

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

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


Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

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

As of July 31, 2013, there were 585,340,832 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION			1
Item 1.	Financial Statements		65
	Condensed Consolidated Statements of Income		66
	Condensed Consolidated Statements of Comprehensive Income		67
	Condensed Consolidated Balance Sheets		68
	Condensed Consolidated Statements of Changes in Stockholders’ Equity.		69
	Condensed Consolidated Statements of Cash Flows.		70
	Notes to Condensed Consolidated Financial Statements		71
	Note 1 — Summary of Significant Accounting Policies		71
	Note 2 — Discontinued Operations		73
	Note 3 — Investment Securities		74
	Note 4 — Loans		84
	Note 5 — Allowance for Loan and Lease Losses.		108
	Note 6 — Variable Interest Entities and Securitizations.		112
	Note 7 — Goodwill and Other Intangible Assets		117
	Note 8 — Deposits and Borrowings		118
	Note 9 — Derivative Instruments and Hedging Activities		121
	Note 10 — Stockholders’ Equity		128
	Note 11 — Earnings Per Common Share		130
	Note 12 — Fair Value of Financial Instruments.		131
	Note 13 — Business Segments		147
	Note 14 — Commitments, Contingencies and Guarantees		150
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)		1
	Summary of Selected Financial Data		1
	Introduction.		6
	Executive Summary and Business Outlook		7
	Critical Accounting Policies and Estimates		11
	Accounting Changes and Developments		13
	Consolidated Results of Operations		13
	Business Segment Financial Performance		20
	Consolidated Balance Sheet Analysis.		33
	Off-Balance Sheet Arrangements and Variable Interest Entities		38
	Capital Management		39
	Risk Management		42
	Credit Risk Profile		42
	Liquidity Risk Profile		54
	Market Risk Profile.		58
	Supervision and Regulation		60
	Forward-Looking Statements		61
	Supplemental Tables		64
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		163
Item 4.	Controls and Procedures		163

PART II—OTHER INFORMATION			164
Item 1.	Legal Proceedings		164
Item 1A.	Risk Factors		164
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		164


		Page
Item 3.	Defaults upon Senior Securities		164
Item 5.	Other Information		164
Item 6.	Exhibits		164

SIGNATURES			165
EXHIBIT INDEX			166

INDEX OF MD&A TABLES AND SUPPLEMENTAL TABLES


Table	Description	Page
—	MD&A Tables:
1	Consolidated Financial Highlights (Unaudited)		3
2	Business Segment Results		7
3	Average Balances, Net Interest Income and Net Interest Yield		14
4	Rate/Volume Analysis of Net Interest Income		16
5	Non-Interest Income		17
6	Non-Interest Expense		19
7	Credit Card Business Results		22
7.1	Domestic Card Business Results		25
7.2	International Card Business Results		26
8	Consumer Banking Business Results		28
9	Commercial Banking Business Results		31
10	“Other” Results		33
11	Investment Securities Available for Sale		34
12	Non-Agency Investment Securities Credit Ratings		36
13	Net Loans Held for Investment		36
14	Changes in Representation and Warranty Reserve		38
15	Capital Ratios Under Basel I		40
16	Loan Portfolio Composition		43
17	30+ Days Delinquencies		45
18	Aging and Geography of 30+ Days Delinquent Loans		46
19	90+ Days Delinquent Loans Accruing Interest		46
20	Nonperforming Loans and Other Nonperforming Assets		47
21	Net Charge-Offs		48
22	Loan Modifications and Restructurings		50
23	Allowance for Loan and Lease Losses Activity		52
24	Allocation of the Allowance for Loan and Lease Losses		53
25	Liquidity Reserves		54
26	Deposit Composition and Average Deposit Rates		55
27	Short-term Borrowings		56
28	Contractual Maturity Profile of Outstanding Debt		57
29	Senior Unsecured Debt Credit Ratings		58
30	Interest Rate Sensitivity Analysis		60

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

iii

PART I—FINANCIAL INFORMATION

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

This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Forward-Looking Statements” for more information on the forward-looking statements in this Quarterly Report on Form 10-Q (“this Report”). Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Part II—Item 1A. Risk Factors” in this Report and in “Part I—Item 1A. Risk Factors” in our 2012 Annual Report on Form 10-K (“2012 Form 10-K”). Unless otherwise specified, references to Notes to our consolidated financial statements are to the Notes to our unaudited condensed consolidated financial statements as of June 30, 2013 included in this Report.

Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is intended to provide the reader with an understanding of our results of operations, financial condition and liquidity by focusing on changes from year to year in certain key measures used by management to evaluate performance, such as profitability, growth and credit quality metrics. MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and related notes in this Report and the more detailed information contained in our 2012 Form 10-K. MD&A is organized in the following sections:


• Summary of Selected Financial Data		• Off-Balance Sheet Arrangements and Variable
• Introduction		Interest Entities
• Executive Summary and Business Outlook		• Capital Management
• Critical Accounting Policies and Estimates		• Risk Management
• Accounting Changes and Developments		• Credit Risk Profile
• Consolidated Results of Operations		• Liquidity Risk Profile
• Business Segment Financial Performance		• Market Risk Profile
• Consolidated Balance Sheet Analysis		• Supervision and Regulation
		• Supplemental Tables

SUMMARY OF SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data from our results of operations for the second quarter and first six months of 2013 and 2012, and selected comparative consolidated balance sheet data as of June 30, 2013, and December 31, 2012. We also provide selected key metrics we use in evaluating our performance. Certain prior period amounts have been reclassified to conform to the current period presentation. The comparability of our results of operations between reported periods is impacted by the following acquisitions completed in 2012:

•

On February 17, 2012, we completed the acquisition (the “ING Direct acquisition”) of substantially all of the ING Direct business in the United States (“ING Direct”) from ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp (collectively the “ING Direct Sellers”). The ING Direct acquisition resulted in the addition of loans of $40.4 billion, other assets of $53.9 billion and deposits of $84.4 billion as of the acquisition date.

•

On May 1, 2012, pursuant to the agreement with HSBC Finance Corporation, HSBC USA Inc. and HSBC Technology and Services (USA) Inc. (collectively, “HSBC”), we closed the acquisition of substantially all of the assets and assumed liabilities of HSBC’s credit card and private-label credit card business in the United States (other than the HSBC Bank USA, National Association consumer credit card program and certain other

retained assets and liabilities) (the “2012 U.S. card acquisition”). The 2012 U.S. card acquisition included (i) the acquisition of HSBC’s U.S. credit card portfolio, (ii) its on-going private label and co-branded partnerships, and (iii) other assets, including infrastructure and capabilities. At closing, we acquired approximately 27 million new active accounts, $27.8 billion in outstanding credit card receivables designated as held for investment and $327 million in other net assets.

We use the term “acquired loans” to refer to a limited portion of the credit card loans acquired in the 2012 U.S. card acquisition and the substantial majority of consumer and commercial loans acquired in the ING Direct and Chevy Chase Bank (“CCB”) acquisitions, which were recorded at fair value at acquisition and subsequently accounted for based on expected cash flows to be collected (under the accounting standard formerly known as “Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” commonly referred to as “SOP 03-3”). The period-end carrying value of acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected was $32.3 billion and $37.1 billion as of June 30, 2013 and December 31, 2012, respectively. The difference between the fair value at acquisition and initial expected cash flows represents the accretable yield, which is recognized into interest income over the life of the loans. The difference between the contractual payments on the loans and the expected cash flows represents the nonaccretable difference or the amount not considered collectible, which approximates what we refer to as the “credit mark.” The credit mark established under the accounting for these loans takes into consideration future expected credit losses over the life of the loans. Accordingly, there are no charge-offs and no allowance associated with these loans unless the estimated cash flows expected to be collected decrease subsequent to acquisition. In addition, these loans are not classified as delinquent or nonperforming even though the customer may be contractually past due because we expect that we will fully collect the carrying value of these loans. The accounting and classification of these loans may significantly alter some of our reported credit quality metrics. We therefore supplement certain reported credit quality metrics with metrics adjusted to exclude the impact of these acquired loans. For additional information, see “Credit Risk Profile” and “Note 4—Loans—Acquired Loans.”

Table 1: Consolidated Financial Highlights (Unaudited)


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions, except per share data as noted)	2013			2012			Change			2013			2012			Change
Income statement
Net interest income	$	4,553		$	4,001			14	%	$	9,123		$	7,415			23	%
Non-interest income⁽¹⁾		1,085			1,054			3			2,066			2,575			(20	)

Total net revenue⁽²⁾		5,638			5,055			12			11,189			9,990			12
Provision for credit losses		762			1,677			(55	)		1,647			2,250			(27	)
Non-interest expense⁽³⁾		3,059			3,142			(3	)		6,087			5,646			8

Income from continuing operations before income taxes		1,817			236			670			3,455			2,094			65
Income tax provision		581			43			1,251			1,075			396			171

Income from continuing operations, net of tax		1,236			193			540			2,380			1,698			40
Loss from discontinued operations, net of tax⁽⁴⁾		(119	)		(100	)		(19	)		(197	)		(202	)		2

Net income		1,117			93			1,101			2,183			1,496			46
Dividends and undistributed earnings allocated to participating securities		(4	)		(1	)		(300	)		(9	)		(8	)		(13	)
Preferred stock dividends		(13	)		—			**			(26	)		—			**

Net income available to common shareholders	$	1,100		$	92			1,096	%	$	2,148		$	1,488			44	%

Common share statistics
Earnings per common share:
Basic earnings per common share .	$	1.89		$	0.16			1,081	%	$	3.70		$	2.74			35	%
Diluted earnings per common share		1.87			0.16			1,069			3.65			2.72			34
Weighted average common shares outstanding:
Basic earnings per common share .		581.5			577.7			1			581.0			543.3			7
Diluted earnings per common share		588.8			582.8			1			587.9			548.0			7
Dividends per common share		0.30			0.05			500			0.35			0.10			250
Average balances
Loans held for investment⁽⁵⁾	$	190,562		$	192,632			(1	)%	$	193,265		$	172,767			12	%
Interest-earning assets		266,544			265,019			1			269,008			237,667			13
Total assets		297,766			295,306			1			300,294			270,786			11
Interest-bearing deposits		189,311			195,597			(3	)		189,958			173,611			9
Total deposits		210,650			214,914			(2	)		211,100			192,586			10
Borrowings		36,915			35,418			4			39,232			35,706			10
Common equity		40,726			37,533			9			40,418			35,258			15
Total stockholders’ equity		41,579			37,533			11			41,271			35,258			17
Selected performance metrics
Purchase volume⁽⁶⁾	$	50,788		$	45,228			12	%	$	95,886		$	79,726			20	%
Total net revenue margin⁽⁷⁾		8.46	%		7.63	%		83	bps		8.32	%		8.41	%		(9	)bps
Net interest margin⁽⁸⁾		6.83			6.04			79			6.78			6.24			54
Net charge-offs	$	969		$	738			31	%	$	2,048		$	1,518			35	%
Net charge-off rate⁽⁹⁾		2.03	%		1.53	%		50	bps		2.12	%		1.76	%		36	bps
Net charge-off rate (excluding acquired loans)⁽¹⁰⁾		2.46			1.96			50			2.58			2.17			41
Return on average assets⁽¹¹⁾		1.66			0.26			140			1.59			1.25			34
Return on average common equity⁽¹²⁾		11.97			2.05			992			11.60			9.59			201
Return on average tangible common equity⁽¹³⁾		19.70			3.52			1,618			19.27			16.55			272
Equity-to-assets ratio⁽¹⁴⁾		13.96			12.71			125			13.74			13.02			72

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in millions, except per share data as noted)

2013

2012

Change

2013

2012

Change

Non-interest expense as a % of average loans held for investment⁽¹⁵⁾

6.42

6.52

(10

)

6.30

6.54

(24

)

Efficiency ratio⁽¹⁶⁾

54.26

62.16

(790

)

54.40

56.52

(212

)

Effective income tax rate

32.0

18.2

1,380

31.1

18.9

1,220


	June 30, 2013			December 31, 2012			Change
Balance sheet (period end)
Loans held for investment⁽⁵⁾	$	191,512		$	205,889			(7	)%
Interest-earning assets		265,693			280,096			(5	)
Total assets.		296,542			312,918			(5	)
Interest-bearing deposits		187,768			190,018			(1	)
Total deposits		209,865			212,485			(1	)
Borrowings.		36,231			49,910			(27	)
Common equity		40,188			39,646			1
Total stockholders’ equity		41,041			40,499			1
Credit quality metrics (period end)
Allowance for loan and lease losses	$	4,407		$	5,156			(15	)%
Allowance as a % of loans held of investment (“allowance coverage ratio”)		2.30	%		2.50	%		(20	)bps
Allowance as a % of loans held of investment (excluding acquired loans)⁽¹⁰⁾		2.74			3.02			(28	)
30+ days performing delinquency rate		2.35			2.70			(35	)
30+ days performing delinquency rate (excluding acquired loans)⁽¹⁰⁾		2.83			3.29			(46	)
30+ days delinquency rate		2.71			3.09			(38	)
30+ days delinquency rate (excluding acquired loans)⁽¹⁰⁾		3.26			3.77			(51	)
Capital ratios
Tier 1 common ratio⁽¹⁷⁾		12.06	%		10.96	%		110	bps
Tier 1 risk-based capital ratio⁽¹⁸⁾		12.45			11.34			111
Total risk-based capital ratio⁽¹⁹⁾		14.67			13.56			111
Tangible common equity (“TCE”) ratio⁽²⁰⁾		8.67			7.90			77
Associates
Full-time equivalent employees (in thousands)		39.6			39.6			—	%

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

⁽¹⁾

Includes a bargain purchase gain of $594 million attributable to the ING Direct acquisition recognized in non-interest income in the first quarter of 2012. The bargain purchase gain represents the excess of the fair value of the net assets acquired from ING Direct as of the acquisition date over the consideration transferred.

⁽²⁾

Total net revenue was reduced by $192 million and $311 million in the second quarter of 2013 and 2012, respectively, and by $457 million and $434 million in the first six months of 2013 and 2012, respectively, for the estimated uncollectible amount of billed finance charges and fees. The reserve for estimated uncollectible billed finance charges and fees, which we refer to as the finance charge and fee reserve, totaled $197 million and $307 million as of June 30, 2013 and December 31, 2012, respectively.

⁽³⁾

Includes purchased credit card relationship (“PCCR”) intangible amortization of $110 million and $88 million in the second quarter of 2013 and 2012, respectively, and $226 million and $92 million in the first six months of 2013 and 2012, respectively, the substantial majority of which is attributable to the 2012 U.S. card acquisition. Also includes core deposit intangible amortization of $43 million and $51 million in the second quarter of 2013 and 2012, respectively, and $87 million and $97 million in the first six months of 2013 and 2012, respectively.

⁽⁴⁾	Discontinued operations reflect ongoing costs related to the mortgage origination operations of GreenPoint’s wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“Greenpoint”), which we closed in 2007.

⁽⁵⁾	Loans held for investment includes loans acquired in the CCB, ING Direct and 2012 U.S. card acquisitions. The period-end carrying value of acquired loans accounted for subsequent to acquisition based on expected cash flows to be

collected was $32.3 billion and $37.1 billion as of June 30, 2013 and December 31, 2012, respectively. The average carrying value of acquired loans was $33.1 billion and $42.2 billion in the second quarter of 2013 and 2012, respectively, and $34.4 billion and $32.6 billion in the first six months of 2013 and 2012, respectively. The average balance of loans held for investment, excluding the carrying value of acquired loans, was $157.4 billion and $150.5 billion in the second quarter of 2013 and 2012, respectively, and $158.8 billion and $140.1 billion in the first six months of 2013 and 2012, respectively. See “Note 4—Loans” for additional information.

⁽⁶⁾	Consists of credit card purchase transactions, net of returns, for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance transactions.

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

⁽⁸⁾	Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

⁽⁹⁾	Calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period.

⁽¹⁰⁾

Calculation of ratio adjusted to exclude from the denominator acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected. See “Business Segment Financial Performance,” “Credit Risk Profile” and “Note 4—Loans—Credit Quality” for additional information on the impact of acquired loans on our credit quality metrics.

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

⁽¹²⁾

Prior to the second quarter of 2013, we disclosed return on average total stockholders’ equity, which we calculated based on annualized income from continuing operations, net of tax, for the period divided by average stockholders’ equity for the period. Effective for the second quarter of 2013, we began disclosing return on average common equity (“ROCE”), which is calculated based on the annualized sum of (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average common equity. We believe ROCE is a more useful measure to assess operating performance and capital adequacy because it better reflects income available to common equity holders after taking into account consideration paid on securities senior to our common equity. Our calculation of ROCE may not be comparable to similarly titled measures reported by other companies.

⁽¹³⁾

Prior to the second quarter of 2013, we calculated return on average tangible common equity (“ROTCE”), a non-GAAP measure, based on annualized income from continuing operations, net of tax, for the period divided by average tangible common equity for the period. Effective for the second quarter of 2013, we revised our method of calculating ROTCE to reflect the annualized sum of (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average tangible common equity. We believe our revised calculation of ROTCE is a more useful measure to assess operating performance and capital adequacy because the revised calculation better reflects income available to common equity holders after taking into account consideration paid on securities senior to our common equity. Our calculation of ROTCE may not be comparable to similarly titled measures reported by other companies. See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I” for additional information.

⁽¹⁴⁾	Calculated based on average stockholders’ equity for the period divided by average total assets for the period.

⁽¹⁵⁾	Calculated based on annualized non-interest expense, excluding goodwill impairment charges, for the period divided by average loans held for investment for the period.

⁽¹⁶⁾	Calculated based on non-interest expense, excluding goodwill impairment charges, for the period divided by total net revenue for the period.

⁽¹⁷⁾

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

⁽¹⁸⁾

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

⁽¹⁹⁾

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

⁽²⁰⁾

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

INTRODUCTION

We are a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of June 30, 2013, our principal subsidiaries included:

•

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

•

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

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

We had total loans held for investment of $191.5 billion, deposits of $209.9 billion and stockholders’ equity of $41.0 billion as of June 30, 2013, compared with total loans held for investment of $205.9 billion, deposits of $212.5 billion and stockholders’ equity of $40.5 billion as of December 31, 2012.

Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers and by deposit gathering activities net of the costs associated with funding our assets, which generate net interest income, and by activities that generate non-interest income, such as fee-based services provided to customers and merchant interchange fees with respect to certain credit card transactions. Our expenses primarily consist of the provision for credit losses, operating expenses (including associate salaries and benefits, occupancy and equipment costs, professional services, infrastructure enhancements, branch operations and expansion costs), marketing expenses and income taxes.

Our principal operations are currently organized for management reporting purposes into three primary business segments, which are defined primarily based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. The acquired ING Direct business is primarily reflected in our Consumer Banking business, while the business acquired in the 2012 U.S. card acquisition is reflected in our Credit Card business. Certain activities that are not part of a segment are included in our “Other” category.

•

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

•

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

•

Commercial Banking: Consists of our lending, deposit gathering and treasury management services to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $10 million to $1 billion.

Table 2 summarizes our business segment results, which we report based on income from continuing operations, net of tax, for the second quarter and first six months of 2013 and 2012. We provide information on the allocation methodologies used to derive our business segment results in “Note 20—Business Segments” in our 2012 Form 10-K. We also provide additional information on the allocation methodologies used to derive our business segment results and a reconciliation of our total business segment results to our consolidated generally accepted accounting principles in the U.S. (“U.S. GAAP”) results in “Note 13—Business Segments” of this Report.

Table 2: Business Segment Results


	Three Months Ended June 30,
	2013												2012
	Total Net Revenue⁽¹⁾						Net Income (Loss)⁽²⁾						Total Net Revenue⁽¹⁾						Net Income (Loss)⁽²⁾
(Dollars in millions)	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total
Credit Card	$	3,636			65	%	$	719			58	%	$	3,121			62	%	$	(297	)		(154	)%
Consumer Banking		1,667			30			444			36			1,681			33			438			227
Commercial Banking		550			9			190			15			509			10			228			118
Other⁽³⁾		(215	)		(4	)		(117	)		(9	)		(256	)		(5	)		(176	)		(91	)

Total from continuing operations	$	5,638			100	%	$	1,236			100	%	$	5,055			100	%	$	193			100	%


	Six Months Ended June 30,
	2013												2012
	Total Net Revenue⁽¹⁾						Net Income (Loss)⁽²⁾						Total Net Revenue⁽¹⁾					Net Income (Loss)⁽²⁾
(Dollars in millions)	Amount			% of Total			Amount			% of Total			Amount		% of Total			Amount		% of Total
Credit Card	$	7,287			65	%	$	1,405			59	%	$	5,711		57	%	$	269		16	%
Consumer Banking		3,326			30			827			35			3,145		32			662		39
Commercial Banking		1,088			10			393			16			1,025		10			438		26
Other⁽³⁾		(512	)		(5	)		(245	)		(10	)		109		1			329		19

Total from continuing operations	$	11,189			100	%	$	2,380			100	%	$	9,990		100	%	$	1,698		100	%

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

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

⁽³⁾

Includes the residual impact of the allocation of our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio and asset/liability management, to our business segments as well as other items as described in “Note 20 —Business Segments” in our 2012 Form 10-K.

EXECUTIVE SUMMARY AND BUSINESS OUTLOOK

Each of our businesses generated solid results in the second quarter of 2013, led by strong profitability and market share gains in parts of our Domestic Card business. Relatively stable economic conditions in the U.S. drove contributed to purchase volume growth and continued overall positive credit metrics. Our earnings for the quarter further strengthened our balance sheet and existing capital levels.

On May 2, 2013, our Board of Directors approved an increase in our quarterly common stock dividend per share from $0.05 per share to $0.30 per share. On July 2, 2013, we announced that our Board of Directors authorized the repurchase of up to $1 billion of shares of our common stock, subject to the closing of the previously announced sale of our Best Buy loan portfolio. The Board of Governors of the Federal Reserve System (the “Federal Reserve”) informed us that, contingent on the closing of the sale of the Best Buy loan portfolio, we may repurchase the shares through March 31, 2014. We expect the sale of the Best Buy loan portfolio to be completed in the third quarter of 2013.

In the near term, we continue to navigate the impact of changes in our product mix, the expected run-off of certain acquired mortgage and card loans, competitive dynamics in our business and macroeconomic trends. We believe that the ING Direct and 2012 U.S. card acquisitions have strengthened and expanded our customer base and driven substantial growth in our total net revenues, putting us in what we believe is a strong position to continue to generate and distribute capital, deliver sustained shareholder value and deepen our customer relationships with new products and services.

Financial Highlights

We reported net income of $1.1 billion ($1.87 per diluted share) on total net revenue of $5.6 billion for the second quarter of 2013, with each of our three business segments contributing to our earnings. In comparison, we reported net income of $93 million ($0.16 per diluted share) on total net revenue of $5.1 billion for the second quarter of 2012. Net income totaled $2.2 billion ($3.65 per diluted share) on total net revenue of $11.2 billion for the first six months of 2013, compared with net income of $1.5 billion ($2.72 per diluted share) on total net revenue of $10.0 billion for the first six months of 2012.

Our Tier 1 common ratio, as calculated under Basel I, increased to 12.1% as of June 30, 2013, up 30 basis points from 11.8% as of March 31, 2013, and up 110 basis points from 11.0% as of December 31, 2012. The increase in our Tier 1 common ratio reflects strong internal capital generation from earnings. See “Capital Management” below for additional information.

Below are additional highlights of our performance in the second quarter and first six months of 2013. These highlights generally are based on a comparison between the second quarter of 2013 and 2012 results and the first six months of 2013 and 2012 results, except as otherwise noted. The discussion of our financial condition and credit performance is generally based on changes between June 30, 2013 and December 31, 2012. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”

Total Company

•

Earnings: Our net income of $1.1 billion for the second quarter of 2013 increased by $1.0 billion from the second quarter of 2012, while our net income of $2.2 billion for the first six months of 2013 increased by $687 million from the first six months of 2012. A significant driver of the increase in earnings in the second quarter and first six months of 2013 versus the second quarter and first six months of 2012 was the absence of the provision for credit losses of $1.2 billion for the credit card receivables acquired in the 2012 U.S. card acquisition and the absence of a charge of $174 million to establish a reserve for estimated uncollectible billed finance charges and fees related to these loans, both of which were recorded in the second quarter of 2012, which was partially offset by the absence of the bargain purchase gain of $594 million recorded at acquisition of ING Direct in the first quarter of 2012. Other factors contributing to the increase in earnings included growth in total net revenues attributable to the substantial increase in average interest-earning assets as a result of the ING Direct and 2012 U.S. card acquisitions, which was partially offset by higher ongoing operating expenses associated with these acquisitions as well as an increase in intangible amortization expense.

•

Loans Held for Investment: Period-end loans held for investment decreased by $14.4 billion, or 7%, in the first six months of 2013, to $191.5 billion as of June 30, 2013, from $205.9 billion as of December 31, 2012. The decrease was due in part to the transfer of the Best Buy loan portfolio of approximately $7 billion to the held-for-sale category in the first quarter of 2013. Excluding the transfer of the Best Buy loan portfolio to held for sale, period-end loans held for investment decreased due to typical seasonally lower purchase volumes and higher credit card loan pay downs in the first half of the year, the expected run-off of certain other credit card loans acquired in the 2012 U.S. card acquisition and continued expected run-off of installment loans in our Credit Card business and home loans in our Consumer Banking business. The pay downs and run-off of card balances were partially offset by increased purchase volume in our Credit Card business, higher period-end auto balances due to the continued high volume of auto loan originations and strong loan originations in our commercial and industrial and commercial real estate loan portfolios.

•

Charge-off and Delinquency Statistics: Our reported net charge-off rate was 2.03% for the second quarter of 2013, compared with 1.53% for the second quarter of 2012. The net-charge off rate was 2.12% for the first six months of 2013, compared with 1.76% for the first six months of 2012. The increase in our reported net charge-offs and net charge-off rates was largely due to the inclusion in the second quarter and first six months of 2012 of the addition of acquired loans from the 2012 U.S. card acquisition in the denominator in

calculating our reported net charge-off rates, coupled with a lag in initial charge-offs related to this portfolio because we typically do not charge-off credit card loans until the account is 180 days past due. Our reported 30+ day delinquency rate declined to 2.71% as of June 30, 2013, from 3.09% as of December 31, 2012. Delinquency rates in our consumer lending businesses have historically exhibited seasonal patterns, with delinquency rates generally tending to decrease in the first two quarters of the year as customers use income tax refunds to pay down outstanding loan balances. However, the improvement in our card delinquency rates in the second quarter of 2013 was better than expected based on normal seasonal patterns. We provide information on our credit quality metrics, excluding the impact of acquired loans accounted for based on estimated cash flows expected to be collected, below under “Business Segments” and “Credit Risk Profile.”

•

Allowance for Loan and Lease Losses: We reduced our allowance by $749 million to $4.4 billion as of June 30, 2013, from $5.2 billion as of December 31, 2012. The reduction was attributable to an allowance release of $460 million, attributable to an improved credit outlook, and the transfer of the Best Buy loan portfolio to held for sale. The allowance coverage ratio declined to 2.30% as of June 30, 2013, from 2.50% as of December 31, 2012.

•

Representation and Warranty Reserve: We recorded a provision for mortgage representation and warranty losses of $183 million and $280 million in the second quarter and first six months of 2013, respectively, compared with a provision for mortgage representation and warranty losses of $180 million and $349 million in the second quarter and first six months of 2012, respectively. Our mortgage representation and warranty reserve increased to $1.2 billion as of June 30, 2013, from $899 million as of December 31, 2012.

Business Segments

•

Credit Card: Our Credit Card business generated net income from continuing operations of $719 million and $1.4 billion in the second quarter and first six months of 2013, respectively, compared with a net loss from continuing operations of $297 million in the second quarter of 2012 and net income from continuing operations of $269 million in the first six months of 2012. A significant driver of the improvement in the results of our Credit Card business in the second quarter and first six months of 2013 versus the second quarter and first six months of 2012 was the absence of the provision for credit losses of $1.2 billion to establish an allowance for the credit card receivables acquired in the 2012 U.S. card acquisition and the absence of a charge of $174 million to establish a reserve for estimated uncollectible billed finance charges and fees related to these loans, both of which were recorded in the second quarter of 2012. The improvement also reflected higher total net revenue attributable to the 2012 U.S. card acquisition, coupled with increased purchase volume in our legacy card business. The increase in total net revenue was partially offset by higher operating expenses resulting from the 2012 U.S. card acquisition. Period-end loans held for investment in our Credit Card business decreased by $13.5 billion, or 15%, in the first six months of 2013, to $78.3 billion as of June 30, 2013, from $91.8 billion as of December 31, 2012. The decrease was due in part to the transfer of the Best Buy loan portfolio to the held for sale category. Excluding the transfer of the Best Buy loan portfolio, period-end loans held for investment decreased due to typical seasonally lower purchase volumes and higher pay downs in the first half of the year, as well as the expected continued run-off of our installment loan portfolio and the expected run-off of certain other credit card loans acquired in the 2012 U.S. card acquisition.

•

Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $444 million and $827 million in the second quarter and first six months of 2013, respectively, compared with net income from continuing operations of $438 million and $662 million in the second quarter and first six months of 2012, respectively. The increase in earnings was attributable to growth in total net revenue and a decrease in non-interest expense. Growth in total net revenue was primarily due to a significant increase in average loan balances due to the addition of home loans from the ING Direct acquisition. The decrease in non-interest expense was largely due to the significant reduction of ING Direct acquisition-related costs most of which were incurred in the first quarter of 2012, which was partially offset by increased expenses related to the growth in our auto loan portfolio. Period-end loans held for investment in

our Consumer Banking business declined by $2.9 billion, or 4%, in the first six months of 2013 to $72.2 billion as of June 30, 2013, from $75.1 billion as of December 31, 2012, due to the continued run-off of acquired home loans, which was partially offset by higher period-end auto balances due to the continued portfolio growth.

•

Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $190 million and $393 million in the second quarter and first six months of 2013, respectively, compared with net income from continuing operations of $228 million and $438 million in the second quarter and first six months of 2012, respectively. Growth in commercial real estate and commercial and industrial loans and higher deposit balances contributed to an increase in total net revenue. The favorable impact from higher total net revenue was offset by smaller allowance releases, which impacted the provision for credit losses in the second quarter and first six months of 2013 relative to the same prior year periods. Period-end loans held for investment in our Commercial Banking business increased by $2.0 billion, or 5%, in the first six months of 2013 to $40.8 billion as of June 30, 2013, from $38.8 billion as of December 31, 2012. The increase was driven by strong loan originations in the commercial and industrial and commercial real estate businesses, which were partially offset by the continued run-off of the small-ticket commercial real estate loan portfolio.

Business Outlook

We discuss below our current expectations regarding our total company performance and the performance of each of our business segments over the near-term based on market conditions, the regulatory environment and our business strategies as of the time we filed this Report. The statements contained in this section are based on our current expectations regarding our outlook for our financial results and business strategies. Our expectations take into account, and should be read in conjunction with, our expectations regarding economic trends and analysis of our business as discussed in “Part I-Item 1. Business” and “Part I-Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Forward-looking statements do not reflect: (i) any change in current dividend or repurchase strategies, (ii) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed, or (iii) any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made. See “Forward-Looking Statements” in this Report for more information on forward-looking statements included in this report and “Item 1A. Risk Factors” in our 2012 Form 10-K for factors that could materially influence our results.

Total Company Expectations

Our strategies and actions are designed to deliver and sustain strong returns and capital generation through the acquisition and retention of franchise-enhancing customer relationships across our businesses. We believe that franchise-enhancing customer relationships create and sustain significant long-term value through low credit costs, long and loyal customer relationships and a gradual build in loan balances and revenues over time. Examples of franchise-enhancing customer relationships include rewards customers and new partnerships in our Credit Card business, retail deposit customers in our Consumer Banking business and primary banking relationships with commercial customers in our Commercial Banking business. We intend to grow these customer relationships by continuing to invest in scalable infrastructure and operating platforms that are appropriate for a bank of our size and business mix so that we can meet the rising regulatory and compliance expectations facing all banks and deliver a “brand-defining” customer experience that builds and sustains a valuable, long-term customer franchise. The ING Direct and 2012 U.S. card acquisitions strengthened and expanded our customer base and over time, we expect these acquisitions to expand and deepen our customer relationships with new products and services.

We continue to expect average interest-earning assets to decline in 2013. We also continue to expect average loan balances for full-year 2013 to decline from average loan balances for full-year 2012, as significant run-off of certain mortgage and card loans, principally those we acquired, coupled with the sale of the Best Buy loan portfolio expected to be finalized in the third quarter of 2013, is partially offset by growth in our businesses. We expect run-off and sales to cause ending loan balances in 2013 to decline compared to 2012 year-end balances, primarily due to approximately $9.5 billion in run-off of mortgage loans acquired from ING Direct and CCB, approximately $2 billion in run-off of certain other credit card loans purchased in the 2012 U.S. card acquisition and approximately $7 billion from the expected sale of the Best Buy loan portfolio. We expect this decline to be partially offset by growth in certain of our businesses, including auto and Commercial Banking. We expect intensifying competition in several businesses, particularly auto and commercial and industrial lending.

We expect pre-provision net income of approximately $10 billion in 2013. We continue to expect operating expense of approximately $11 billion and marketing expense of approximately $1.5 billion in 2013. We expect these estimates to vary within a reasonable margin, and they do not contemplate the potential impact of non-recurring items.

We believe our actions have created a well-positioned balance sheet with strong capital and liquidity levels and a strong capital generation trajectory. On July 2, 2013, we announced that our Board of Directors authorized the repurchase of up to $1 billion of shares of our common stock, subject to the closing of the previously announced sale of the Best Buy loan portfolio. The Federal Reserve informed us that, contingent on the closing of the sale of the Best Buy loan portfolio, we may repurchase the shares through March 31, 2014.

Business Segment Expectations

Credit Card Business

As noted above, in Domestic Card, the closing of the 2012 U.S. card acquisition has impacted and will continue to affect quarterly trends in loan growth, revenue margin and credit metrics. We anticipate that the run-off of parts of the portfolio acquired in the 2012 U.S. card acquisition, the sale of the Best Buy loan portfolio as well as anticipated run-off in our installment loan portfolio will result in a decline in full-year average loan balances in 2013 from average loan balances in 2012.

Consumer Banking Business

In our Consumer Banking business, we anticipate that run-off in the acquired home loan portfolios will more than offset growth in auto loans.

Commercial Banking Business

Our Commercial Banking business continues to grow loans, deposits, and revenues as we attract new customers and deepen relationships with existing customers. We expect our Commercial Banking business to continue to deliver growth and profitability.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 2012 Form 10-K.

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

•

Loan loss reserves

•

Asset impairment

•

Fair value

•

Representation and warranty reserve

•

Customer rewards reserve

•

Income taxes

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions. We discuss below changes we made in the first six months of 2013 in estimating the allowance for loan and lease losses and reserve for unfunded lending commitments for our commercial loan portfolio. Management has discussed our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments—Commercial Loans

Our commercial loan portfolio is primarily composed of larger-balance, non-homogeneous loans. We determine the allowance for loan and lease losses (“allowance”) and reserve for unfunded lending commitments for our commercial loan portfolio by evaluating loans with similar risk characteristics and applying internal risk ratings. We use these risk ratings to assess credit quality and derive a total loss estimate based on an estimated probability of default and loss given default. Factors we consider in determining risk ratings and deriving loss estimates include historical loss experience for loans with similar risk characteristics, the financial condition of the borrower, geography, collateral performance and industry-specific information that management believes is relevant in determining the occurrence of a loss event and measuring impairment. Management may also apply judgment to adjust the derived loss factors, taking into consideration both quantitative and qualitative factors, including general economic conditions, specific industry and geographic trends, portfolio concentrations, trends in internal credit quality indicators and current and past underwriting standards that have occurred but are not yet reflected in the historical data underlying our loss estimates.

In the first quarter of 2013, we changed our process for estimating the allowance and reserve for unfunded lending commitments for our commercial loan portfolio. First, we extended our internal historical credit loss experience period back to at least 2008 and incorporated external industry loss data over a longer horizon to derive our loss estimates. We previously had generally used the most recent three-year period of internal historical loss experience to derive our loss estimates. Second, we incorporated more borrower-specific and loan-specific risk factors into our analysis and established a statistically-based internal risk rating system. Based on this statistically-based risk rating system, we now apply an estimated probability of default and loss given default for nearly each loan in our portfolio to derive the total loss estimate for our commercial loan portfolio. These changes, which were supplemented by management judgment, resulted in a net increase in the combined allowance and reserve for unfunded lending commitments of $37 million as of March 31, 2013 and a corresponding increase in the provision for credit losses of $37 million in the first quarter of 2013. The gross impact of these changes resulted in a decrease in the allowance of $2 million and an increase in the reserve for unfunded lending commitments of $39 million as of March 31, 2013. We do not expect these changes to have a material impact on our future allowance and reserve for unfunded lending commitments for our commercial loan portfolio. See “Note 5—Allowance for Loan and Lease Losses” in this Report for additional information.

We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 2012 Form 10-K.

ACCOUNTING CHANGES AND DEVELOPMENTS

See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted in 2013, as well as recently issued accounting standards not yet required to be adopted and the expected impact of these changes in accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our results of operations, financial condition or liquidity, we discuss the impacts in the applicable sections(s) of MD&A.

CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our consolidated financial performance for the second quarter and first six months of 2013 and 2012. 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 primarily include loans held for investment and investment securities, and the interest expense on our interest-bearing liabilities, which include interest-bearing deposits, senior and subordinated notes, securitized debt and other borrowings. We include in interest income any past due fees on loans that we deem collectible. Our net interest margin based on our consolidated results represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities, including the impact of non-interest bearing funding. We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities.

Table 3 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balances, interest income earned or interest expense incurred and average yield or cost for the second quarter and first six months of 2013 and 2012.

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


	Three Months Ended June 30,
	2013								2012
(Dollars in millions)	Average Balance			Interest Income/ Expense⁽²⁾⁽³⁾		Yield/ Rate			Average Balance			Interest Income/ Expense⁽²⁾⁽³⁾		Yield/ Rate
Assets:
Interest-earning assets:
Credit card:
Domestic	$	76,125		$	2,782		14.62	%	$	71,768		$	2,381		13.27	%
International		7,980			323		16.19			8,194			291		14.21

Credit card		84,105			3,105		14.77			79,962			2,672		13.37
Consumer banking		73,065			1,093		5.98			77,886			1,200		6.16
Commercial banking		39,530			379		3.84			35,625			376		4.22
Other		174			19		43.68			137			9		26.28

Total loans, including loans held for sale		196,874			4,596		9.34			193,610			4,257		8.80
Investment securities⁽⁴⁾		63,907			391		2.45			56,972			335		2.35
Cash equivalents and other interest-earning assets .		5,763			23		1.60			14,437			24		0.66

Total interest-earning assets	$	266,544		$	5,010		7.52	%	$	265,019		$	4,616		6.97	%

Cash and due from banks		2,677								2,245
Allowance for loan and lease losses		(4,604	)							(4,065	)
Premises and equipment, net		3,784								3,316
Other assets		29,365								28,791

Total assets	$	297,766							$	295,306

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits	$	189,311		$	318		0.67	%	$	195,597		$	373		0.76	%
Securitized debt obligations		10,942			45		1.65			14,948			69		1.85
Senior and subordinated notes		12,692			82		2.58			11,213			87		3.10
Other borrowings		13,281			12		0.36			9,257			86		3.72

Total interest-bearing liabilities	$	226,226		$	457		0.81	%	$	231,015		$	615		1.06	%

Non-interest bearing deposits		21,339								19,316
Other liabilities		8,622								7,442

Total liabilities		256,187								257,773
Stockholders’ equity		41,579								37,533

Total liabilities and stockholders’ equity	$	297,766							$	295,306

Net interest income/spread				$	4,553		6.71	%				$	4,001		5.90	%

Impact of non-interest bearing funding							0.12								0.14

Net interest margin							6.83	%							6.04	%


	Six Months Ended June 30,
	2013								2012
(Dollars in millions)	Average Balance			Interest Income/ Expense⁽²⁾⁽³⁾		Yield/ Rate			Average Balance			Interest Income/ Expense⁽²⁾⁽³⁾		Yield/ Rate
Assets:
Interest-earning assets:
Credit card:
Domestic	$	77,547		$	5,598		14.44	%	$	62,950		$	4,291		13.63	%
International		8,108			652		16.08			8,248			631		15.30

Credit card		85,655			6,250		14.59			71,198			4,922		13.83
Consumer banking		73,756			2,195		5.95			67,184			2,215		6.59
Commercial banking		39,058			756		3.87			34,935			756		4.33
Other		179			44		49.16			155			21		27.10

Total loans, including loans held for sale		198,648			9,245		9.31			173,472			7,914		9.12
Investment securities⁽⁴⁾		63,930			765		2.39			53,757			633		2.36
Cash equivalents and other interest-earning assets		6,430			51		1.59			10,438			48		0.92

Total interest-earning assets	$	269,008		$	10,061		7.48	%	$	237,667		$	8,595		7.23	%

Cash and due from banks		2,475								7,141
Allowance for loan and lease losses		(4,778	)							(4,200	)
Premises and equipment, net		3,733								3,107
Other assets		29,856								27,071

Total assets	$	300,294							$	270,786

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits	$	189,958		$	644		0.68	%	$	173,611		$	684		0.79	%
Securitized debt obligations		11,348			101		1.78			15,567			149		1.91
Senior and subordinated notes		12,340			164		2.66			10,740			175		3.26
Other borrowings		15,544			29		0.37			9,399			172		3.66

Total interest-bearing liabilities	$	229,190		$	938		0.82	%	$	209,317		$	1,180		1.13	%

Non-interest bearing deposits		21,142								18,975
Other liabilities		8,691								7,236

Total liabilities		259,023								235,528
Stockholders’ equity		41,271								35,258

Total liabilities and stockholders’ equity	$	300,294							$	270,786

Net interest income/spread				$	9,123		6.66	%				$	7,415		6.11	%

Impact of non-interest bearing funding							0.12								0.13

Net interest margin							6.78	%							6.24	%

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

⁽²⁾	Past due fees included in interest income totaled approximately $464 million and $944 million in the second quarter and first six months of 2013, respectively, and $369 million and $652 million in the second quarter and first six months of 2012, respectively.

⁽³⁾	Interest income and interest expense and the calculation of average yields on interest-earning assets and average rates on interest-bearing liabilities include the impact of hedge accounting.

⁽⁴⁾

Prior to the second quarter of 2013, average balances for investment securities were calculated based on fair value amounts. Effective beginning in the second quarter of 2013, average balances are calculated based on the amortized cost of investment securities. The impact of this change on prior period yields is not material.

Table 4 displays the change in our net interest income between periods and the extent to which the 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.

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


	Three Months Ended June 30,									Six Months Ended June 30,
	2013 vs 2012									2013 vs 2012
(Dollars in millions)	Total Variance			Volume			Rate			Total Variance			Volume			Rate
Interest income:
Loans:
Credit card	$	433		$	143		$	290		$	1,328		$	1,043		$	285
Consumer banking		(107	)		(73	)		(34	)		(20	)		422			(442	)
Commercial banking		3			152			(149	)		—			169			(169	)
Other		10			3			7			23			4			19

Total loans, including loans held for sale		339			225			114			1,331			1,638			(307	)

Investment securities		56			42			14			132			122			10
Cash equivalents and other interest-earning assets .		(1	)		(81	)		80			3			(47	)		50

Total interest income		394			186			208			1,466			1,713			(247	)

Interest expense:
Deposits		(55	)		(12	)		(43	)		(40	)		138			(178	)
Securitized debt obligations		(24	)		(17	)		(7	)		(48	)		(38	)		(10	)
Senior and subordinated notes		(5	)		49			(54	)		(11	)		53			(64	)
Other borrowings		(74	)		178			(252	)		(143	)		200			(343	)

Total interest expense		(158	)		198			(356	)		(242	)		353			(595	)

Net interest income	$	552		$	(12	)	$	564		$	1,708		$	1,360		$	348

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

Net interest income of $4.6 billion in the second quarter of 2013 increased by $552 million, or 14%, from the second quarter of 2012, driven by a 1% increase in average interest-earning assets and a 13% (79 basis point) expansion of the net interest margin to 6.83%.

Net interest income of $9.1 billion in the first six months of 2013 increased by $1.7 billion, or 23%, from the first six months of 2012, driven by a 13% increase in average interest-earning assets and a 9% (54 basis point) expansion of the net interest margin to 6.78%.

•

Average Interest-Earning Assets: The increase in average interest-earning assets in the second quarter and first six months of 2013 reflects the addition of loans and investment securities from the ING Direct acquisition in the first quarter of 2012 and the addition of loans from the 2012 U.S. card acquisition in the second quarter of 2012. Growth in average-interest earning assets also was driven by strong commercial loan growth and continued growth in auto loans, which was partially offset by the continued run-off of installment loans in our Credit Card business and home loans in our Consumer Banking business, as well as the expected run-off of certain other credit card loans acquired in the 2012 U.S. card acquisition. The run-off of home loans contributed to a reduction in average-interest earning assets in our Consumer Banking business in the second quarter of 2013, compared with the second quarter of 2012.

•

Net Interest Margin: The increase in our net interest margin in the second quarter and first six months of 2013 was primarily attributable to a reduction in our cost of funds, which was due in part to the redemption

on January 2, 2013 of $3.65 billion of our trust preferred securities, which generally carried a higher coupon than other funding sources available to us. Our cost of funds also reflects the continued benefit from the shift in the mix of our funding to lower cost consumer and commercial banking deposits from higher cost wholesale sources and a decline in deposit interest rates as a result of the continued overall low interest rate environment.

Non-Interest Income

Non-interest income primarily consists of service charges and other customer-related fees, interchange income (net of rewards expense), other non-interest income and, in 2012, the bargain purchase gain attributable to the ING Direct acquisition. The “other” component of non-interest income includes the pre-tax provision for mortgage representation and warranty losses related to continuing operations. Other also includes gains and losses from the sale of investment securities, gains and losses on derivatives not accounted for in hedge accounting relationships and hedge ineffectiveness, which we generally do not allocate to our business segments because they relate to centralized asset/liability and market risk management activities undertaken by our Corporate Treasury group.

Table 5 displays the components of non-interest income for the second quarter and first six months of 2013 and 2012.

Table 5: Non-Interest Income


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2013			2012			2013			2012
Service charges and other customer-related fees	$	534		$	539		$	1,084		$	954
Interchange fees, net		486			408			931			736
Bargain purchase gain⁽¹⁾		—			—			—			594
Net other-than-temporary impairment (“OTTI”)		(4	)		(13	)		(29	)		(27	)
Other non-interest income:
Provision for mortgage representation and warranty losses⁽²⁾.		4			(26	)		14			(42	)
Net gains from the sale of investment securities		1			30			3			41
Net fair value gains (losses) on free-standing derivatives⁽³⁾		2			38			(3	)		(48	)
Other		62			78			66			367

Other non-interest income		69			120			80			318

Total non-interest income	$	1,085		$	1,054		$	2,066		$	2,575

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

⁽²⁾

We recorded a total provision for mortgage representation and warranty losses of $183 million and $280 million in the second quarter and first six months of 2013, respectively, and $180 million and $349 million in the second quarter and first six months of 2012, respectively. The remaining portion of the provision for mortgage representation and warranty losses is included, net of tax, in discontinued operations.

⁽³⁾

Excludes changes in cumulative credit risk valuation adjustments related to derivatives in a gain position. Credit risk valuation adjustments for derivative assets totaled $6 million and $9 million as of June 30, 2013 and December 31, 2012, respectively. See “Note 9—Derivative Instruments and Hedging Activities” for additional information.

Non-interest income of $1.1 billion in the second quarter of 2013 increased by $31 million, or 3%, from non-interest income of $1.1 billion in the second quarter of 2012. The increase in non-interest income was primarily attributable to an increase in interchange fees resulting from purchase volume growth, due in part to the 2012 U.S. card acquisition, and a reduction in the provision for mortgage representation and warranty losses from continuing operations recognized in non-interest income. The favorable impact of these items was partially offset by a reduction in gains on the sale of investment securities and fair value gains related to free-standing derivatives.

Non-interest income of $2.1 billion in the first six months of 2013 decreased by $509 million, or 20%, from non-interest income of $2.6 billion in the first six months of 2012. The decrease in non-interest income reflected the combined impact of the absence of both the bargain purchase gain of $594 million recognized at acquisition of ING Direct in the first quarter of 2012 and income of $162 million from the sale of Visa stock shares in the first quarter of 2012. The impact of these items was partially offset by the favorable impact of increased fees from purchase volume growth, a reduction in the provision for mortgage representation and warranty losses recognized in non-interest income and a reduction in fair value losses on free-standing derivatives.

We recorded net OTTI losses of $4 million and $29 million in the second quarter and first six months of 2013, respectively, compared with $13 million and $27 million in the second quarter and first six months of 2012, respectively. The OTTI losses in each period were attributable to deterioration in the credit performance of loans underlying certain non-agency mortgage backed securities. We provide additional information on other-than-temporary impairment recognized on our securities available for sale in “Note 3—Investment Securities.”

Provision for Credit Losses

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

We recorded a provision for credit losses of $762 million and $1.6 billion in the second quarter and first six months of 2013, respectively, compared with $1.7 billion and $2.3 billion in the second quarter and first six months of 2012, respectively. The decrease in each period was primarily driven by the absence of the provision for credit losses of $1.2 billion recorded in the second quarter of 2012 to establish an allowance for credit card loans acquired in the 2012 U.S. card acquisition, the impact of which was partially offset higher provision expense due to growth in auto loan balances and commercial loan originations.

We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses under the “Credit Risk Profile—Summary of Allowance for Loan and Lease Losses” and “Note 5—Allowance for Loan and Lease Losses.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2012 Form 10-K.

Non-Interest Expense

Non-interest expense consists of ongoing operating costs, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing technology expenses, and other miscellaneous expenses. Non-interest expense also includes marketing costs, merger-related expense and amortization of intangibles. Table 6 displays the components of non-interest expense for the second quarter and first six months of 2013 and 2012.

Table 6: Non-Interest Expense


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2013		2012		2013		2012
Salaries and associate benefits	$	1,104	$	971	$	2,184	$	1,835
Occupancy and equipment		356		323		706		593
Marketing		330		334		647		655
Professional services		329		313		636		606
Communications and data processing		233		203		443		375
Amortization of intangibles⁽¹⁾		167		157		344		219
Acquisition-related		50		133		96		219
Other non-interest expense:
Collections		119		141		248		278
Fraud losses		53		37		105		77
Bankcard, regulatory and other fee assessments		142		137		280		247
Other		176		393		398		542

Other non-interest expense		490		708		1,031		1,144

Total non-interest expense	$	3,059	$	3,142	$	6,087	$	5,646

⁽¹⁾

Includes PCCR intangible amortization of $110 million and $226 million in the second quarter and first six months of 2013, respectively, and $88 million and $92 million in the second quarter and first six months of 2012, respectively, the substantial majority of which is attributable to the 2012 U.S. card acquisition. Also includes core deposit intangible amortization of $43 million and $87 million in the second quarter and first six months of 2013, respectively, and $51 million and $97 million in the second quarter and first six months of 2012, respectively.

Non-interest expense of $3.1 billion in the second quarter of 2013 decreased by $83 million, or 3%, from the second quarter of 2012. The decrease in non-interest expense reflected reduced acquisition-related costs, coupled with the absence of the unfavorable impact of charges related to certain other items recorded in the second quarter of 2012, including civil penalties of $60 million attributable to regulatory settlements associated with cross-selling certain other products to credit card customers in our Domestic Card business and legal costs of $98 million related to interchange and other litigation activity during the quarter. The decrease in non-interest expense was offset by higher operating expenses, increased salaries and associate benefits and infrastructure costs attributable to acquired businesses, amortization of intangibles resulting from the ING Direct and 2012 U.S. card acquisitions and expenses related to the growth in our auto loan portfolio.

Non-interest expense of $6.1 billion in the first six months of 2013 increased by $441 million, or 8%, from the first six months of 2012. The increase reflected higher operating expenses, increased salaries and associate benefits and infrastructure costs attributable to acquired businesses, amortization of intangibles resulting from the ING Direct and 2012 U.S. card acquisitions and expenses related to the growth in our auto loan portfolio, which was partially offset by a reduction in acquisition-related costs and the absence of civil penalties of $60 million attributable to regulatory settlements associated with cross-selling certain other products to credit card customers in our Domestic Card business and legal costs of $98 million related to interchange and other litigation activity, both of which were recorded in the first six months of 2012.

Income Taxes

We recorded an income tax provision on income from continuing operations of $581 million (32.0% effective income tax rate) in the second quarter of 2013, compared with an income tax provision of $43 million (18.2% effective income tax rate) in the second quarter of 2012. The increase in our effective tax rate in the second quarter of 2013 from the second quarter of 2012 was primarily due to the relative reduction of benefits from tax credits and tax-exempt income and the difference in discrete tax expense recorded in each period. We recorded a net discrete tax expense of $7 million for state law changes and the resolution of certain tax issues and audits in

the second quarter of 2013. In comparison, we recorded $32 million of discrete tax benefits for changes in our state tax position resulting from the 2012 U.S. card acquisition and the resolution of certain tax issues and audits in the second quarter of 2012.

We recorded an income tax provision of $1.1 billion (31.1% effective income tax rate) in the first six months of 2013, compared with an income tax provision of $396 million (18.9% effective income tax rate) in the first six months of 2012. The increase in our effective tax rate in the first six months of 2013 from the first six months of 2012 was primarily attributable to the absence of discrete tax benefits of $211 million recorded in the first quarter of 2012 for the non-taxable bargain purchase gain of $594 million related to the acquisition of ING Direct, a deferred tax benefit for changes in our state tax position resulting from the 2012 U.S. card acquisition and the resolution of certain tax issues and audits. In comparison, we recorded $1 million of discrete tax expense in the first six months of 2013.

Our effective income tax rate, excluding the impact of the discrete tax items discussed above, was 31.5% in both the second quarter of 2013 and 2012. Our effective income tax rate, excluding the impact of the discrete tax items discussed above, was 31.1% and 28.9% in the first six months of 2013 and 2012, respectively. The increase in the effective tax rate was primarily due to higher pre-tax earnings recorded in the first six months of 2013 over the first six months of 2012, which diluted the relative tax benefit of tax credits and tax-exempt income.

We provide additional information on items affecting our income taxes and effective tax rate in our 2012 Form 10-K under “Note 18—Income Taxes.”

Loss from Discontinued Operations, Net of Tax

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

We recorded a loss from discontinued operations, net of tax, of $119 million and $197 million in the second quarter and first six months of 2013, respectively. In comparison, we recorded a loss from discontinued operations, net of tax, of $100 million and $202 million in the second quarter and first six months of 2012 , respectively. The variance in the loss from discontinued operations between the second quarter and first six months of 2013 and 2012 is attributable to the provision for mortgage representation and warranty losses. We recorded a total pre-tax provision for mortgage representation and warranty losses of $183 million and $280 million in the second quarter and first six months of 2013, respectively, compared with a total pre-tax provision of $180 million and $349 million in the second quarter and first six months of 2012, respectively. The portion of these amounts included in loss from discontinued operations totaled $187 million ($117 million, net of tax) and $294 million ($184 million, net of tax) in the second quarter and first six months of 2013, respectively, compared with $154 million ($97 million, net of tax) and $307 million ($194 million, net of tax) the second quarter and first six months of 2012, respectively.

We provide additional information on the provision for mortgage representation and warranty losses and the related reserve for potential representation and warranty claims in “Consolidated Balance Sheet Analysis—Potential Mortgage Representation and Warranty Liabilities” and “Note 14—Commitments, Contingencies and Guarantees.”

BUSINESS SEGMENT FINANCIAL PERFORMANCE

The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. Our business segment results are intended to reflect each segment as if it were a stand-alone business.

We use an internal management accounting and reporting process to derive our business segment results. Our internal management accounting and reporting process employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenue and expenses directly or indirectly attributable to each business segment. Total interest income and net fees are directly attributable to the segment in which they are reported. The net interest income of each segment reflects the results of our funds transfer pricing process, which is primarily based on a matched maturity method that takes into consideration market rates. Our funds transfer pricing process provides a funds credit for sources of funds, such as deposits generated by our Consumer Banking and Commercial Banking businesses, and a funds charge for the use of funds by each segment. The allocation process is unique to each business segment and acquired businesses. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 20—Business Segments” in our 2012 Form 10-K.

We refer to the business segment results derived from our internal management accounting and reporting process as our “managed” presentation, which differs in some cases from our reported results prepared based on U.S. GAAP. There is no comprehensive, authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our business segment results may not be comparable to similar information provided by other financial service companies. In addition, our individual business segment results should not be used as a substitute for comparable results determined in accordance with U.S. GAAP. See “Note 13—Business Segments” of this Report for a reconciliation of our total business segment results to our reported consolidated results.

Below we summarize our business segment results for the second quarter and first six months of 2013 and 2012 and provide a comparative discussion of these results. We also discuss changes in our financial condition and credit performance statistics as of June 30, 2013, compared with December 31, 2012. Information on the outlook for each of our business segments is presented above under “Executive Summary and Business Outlook.”

Credit Card Business

Our Credit Card business generated net income from continuing operations of $719 million and $1.4 billion in the second quarter and first six months of 2013, respectively, compared with a net loss from continuing operations of $297 million in the second quarter of 2012 and net income from continuing operations of $269 million for the first six months of 2012. The primary sources of revenue for our Credit Card business are interest income and non-interest income from customers and interchange fees. Expenses primarily consist of the provision for credit losses, operating costs such as salaries and associate benefits, occupancy and equipment, professional services, communications and data processing technology expenses, as well as marketing expenses.

On February 1, 2013, we transferred the Best Buy loan portfolio, which had loan balances of approximately $7 billion as of the date of the transfer, to held for sale from held for investment. While the transfer of this portfolio contributed to a reduction in loans held for investment for Domestic Card, the accounting for held for sale loans has had a favorable impact on Domestic Card total net revenue and the provision for credit losses, as charge-offs of finance charges, fees and principal are reflected in the carrying value of loans classified as held for sale.

Table 7 summarizes the financial results of our Credit Card business, which is comprised of Domestic Card, including installment loans, and International Card, and displays selected key metrics for the periods indicated.

Table 7: Credit Card Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change
Selected income statement data:
Net interest income	$	2,804		$	2,350			19	%	$	5,634		$	4,342			30	%
Non-interest income		832			771			8			1,653			1,369			21

Total net revenue⁽¹⁾		3,636			3,121			17			7,287			5,711			28
Provision for credit losses		713			1,711			(58	)		1,456			2,169			(33	)
Non-interest expense		1,819			1,863			(2	)		3,667			3,131			17

Income from continuing operations before income taxes		1,104			(453	)		344			2,164			411			427
Income tax provision		385			(156	)		347			759			142			435

Income from continuing operations, net of tax	$	719		$	(297	)		342	%	$	1,405		$	269			422	%

Selected performance metrics:
Average loans held for investment⁽²⁾	$	77,946		$	79,662			(2	)%	$	80,435		$	71,048			13	%
Average yield on loans held for investment⁽³⁾		15.94	%		13.42	%		252	bps		15.54	%		13.86	%		168	bps
Total net revenue margin⁽⁴⁾		18.66			15.67			299			18.12			16.08			204
Net charge-offs	$	850		$	622			37	%	$	1,772		$	1,268			40	%
Net charge-off rate⁽⁵⁾		4.36	%		3.13	%		123	bps		4.41	%		3.57	%		84	bps
Card loan premium amortization and other intangible accretion⁽⁶⁾	$	57		$	59			(3	)%	$	114		$	59			93	%
PCCR intangible amortization		110			88			25			226			92			146
Purchase volume⁽⁷⁾		50,788			45,228			12			95,886			79,726			20

(Dollars in millions)	June 30, 2013			December 31, 2012			Change
Selected period-end data:
Loans held for investment⁽²⁾	$	78,310		$	91,755			(15	)%
30+ days performing delinquency rate⁽⁸⁾		3.13	%		3.61	%		(48	)bps
30+ days delinquency rate⁽⁹⁾		3.22			3.69			(47	)
Nonperforming loan rate⁽¹⁰⁾		0.12			0.11			1
Allowance for loan and lease losses	$	3,349		$	3,979			(16	)%
Allowance coverage ratio⁽¹¹⁾		4.28	%		4.34	%		(6	)bps

⁽¹⁾

We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs. Total net revenue was reduced by $192 million and $457 million in the second quarter and first six months of 2013, respectively, and by $311 million and $434 million in the second quarter and first six months of 2012, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled $197 million and $307 million as of June 30, 2013 and December 31, 2012, respectively.

⁽²⁾	Credit card period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the estimated uncollectible amount.

⁽³⁾

Calculated by dividing annualized interest income for the period by average loans held for investment during the period for the specified loan category. Annualized interest income includes interest income on loans held for sale. Therefore, the transfer of the Best Buy loan portfolio to held for sale resulted in an increase in the average yield for Total Credit Card of 152 and 124 basis points in the second quarter and first six months of 2013, respectively.

⁽⁴⁾

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period for the specified loan category. Annualized interest income includes interest income on loans held for sale. Therefore, the transfer of the Best Buy loan portfolio to held for sale resulted in an increase in the net revenue margin for Total Card of 169 and 139 basis points in the second quarter and first six months of 2013, respectively.

⁽⁵⁾	Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category.

⁽⁶⁾	Represents the net reduction in interest income attributable to the amortization of premiums on purchased loans accounted for based on contractual cash flows and the accretion of other intangibles intangible associated with the 2012 U.S. card acquisition.

⁽⁷⁾	Consists of purchase transactions for the period, net of returns. Excludes cash advance transactions.

⁽⁸⁾	Calculated by loan category by dividing 30+ day performing delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

⁽⁹⁾	Calculated by loan category by dividing 30+ day delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

⁽¹⁰⁾	Calculated by loan category by dividing nonperforming loans as of the end of the period by period-end loans held for investment for the specified loan category. Nonperforming credit card loans generally include international card loans that are 90 or 120 days delinquent.

⁽¹¹⁾	Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

The completion of the 2012 U.S. card acquisition in May 2012 was the most significant driver of changes in the financial performance of our Credit Card business between the second quarter and first six months of 2013 versus the same prior year periods. Our Credit Card business results for the second quarter and first six months of 2013 reflect the full impact of the addition of loans from the acquisition, while the same prior year periods in 2012 reflect only a partial period impact of loans acquired from 2012 U.S. card acquisition. In addition, our Credit Card business results for the second quarter and first six months of 2013 reflect the absence of charges recorded in the second quarter of 2012 to establish reserves for certain loans acquired in the 2012 U.S. card acquisition, which consisted of a provision for credit losses of $1.2 billion and a finance charge and fee contra-revenue expense of $174 million.

Other key factors affecting the results of our Credit Card business for the second quarter and first six months of 2013, compared with the second quarter and first six months of 2012, and changes in financial condition and credit performance between June 30, 2013 and December 31, 2012 include the following:

•

Net Interest Income: Net interest income increased by $454 million, or 19%, in the second quarter of 2013 to $2.8 billion and by $1.3 billion, or 30%, in the first six months of 2013 to $5.6 billion. The increase in net interest income for the first six months of 2013 is primarily driven by the significant increase in average loans held for investment resulting from the U.S. card acquisition of receivables in the second quarter of 2012. The increase for each period also was due in part to the absence of the charge recorded in the second quarter of 2012 to establish the finance charge and fee reserve for the acquired loans.

•

Non-Interest Income: Non-interest income increased by $61 million, or 8%, in the second quarter of 2013 to $832 million and by $284 million, or 21% in the first six months of 2013 to $1.7 billion. The increase was primarily driven by higher net interchange fees generated from growth in purchase volume due in part to the 2012 U.S. card acquisition. Purchase volume increased by $5.6 billion, or 12%, in the second quarter of 2013 and by $16.2 billion, or 20%, in the first six months of 2013, attributable to both the addition of customer accounts associated with the 2012 U.S. card acquisition and higher purchase volume in our legacy card business. Non-interest income was also higher due to increased customer-related fees from the addition of acquired credit card accounts and the absence of charges incurred in the comparable prior year periods for expected refunds to customers affected by certain cross-sell sale practices in our Domestic Card business. Non-interest income also includes a loss of $10 million recognized in the second quarter of 2013 to adjust the carrying value of the Best Buy loan portfolio to fair value.

•

Provision for Credit Losses: The provision for credit losses related to our Credit Card business decreased to $713 million and $1.5 billion in the second quarter and first six months of 2013, respectively, from $1.7 billion and $2.2 billion in the second quarter and first six months of 2012, respectively. The decrease was primarily driven by the absence of the provision for credit losses of $1.2 billion recorded in the second quarter of 2012 to establish an allowance for credit card loans acquired in the 2012 U.S. card acquisition. This impact was

partially offset by an increase in the provision related to higher net charge-offs in the second quarter and first six months of 2013, largely attributable to the addition of loans from the 2012 U.S. card acquisition.

•

Non-Interest Expense: Non-interest expense decreased by $44 million, or 2%, in the second quarter of 2013 to $1.8 billion and increased by $536 million, or 17%, in the first six months of 2013 to $3.7 billion. The decrease in the second quarter of 2013 reflected the absence of charges for regulatory fines related to cross-sell activities in the Domestic Card business of $60 million and net litigation reserves to cover interchange and other settlements of $98 million recorded in the second quarter of 2012, which was partially offset by a full quarter of operating expenses in the second quarter of 2013 related to operations of the 2012 U.S. card acquisition. The increase in the first six months of 2013 was largely due to higher operating expenses resulting from the 2012 U.S. card acquisition and the amortization of intangibles and other assets associated with the acquisition, including Purchased Credit Card Relationships (“PCCR”) intangible amortization expense of $226 million in the first six months of 2013, compared with $92 million in the first six months of 2012.

•

Loans Held for Investment: Period-end loans held for investment in our Credit Card business decreased by $13.5 billion, or 15%, in the first six months of 2013 to $78.3 billion as of June 30, 2013, from $91.8 billion as of December 31, 2012. The decrease was due in part to the transfer of the Best Buy loan portfolio of approximately $7 billion to the held for sale category in the first quarter of 2013. Excluding the transfer of the Best Buy loan portfolio to held for sale, period-end loans held for investment decreased due to typical seasonally lower purchase volumes and higher pay downs in the first half of the year, as well as the expected continued run-off of our installment loan portfolio and the expected run-off of certain other credit card loans acquired in the 2012 U.S. card acquisition.

•

Charge-off and Delinquency Statistics: Our reported net charge-off rate increased to 4.36% and 4.41% in the second quarter and first six months of 2013, respectively, from 3.13% and 3.57% in the second quarter and first six months of 2012, respectively. The 30+ day delinquency rate decreased to 3.22% as of June 30, 2013, from 3.69% as of December 31, 2012. The increase in reported net charge-off rates in the second quarter and first six months of 2013 was largely due to the inclusion in the second quarter and first six months of 2012 of the addition of acquired loans from the 2012 U.S. card acquisition in the denominator in calculating our reported net charge-off rates, coupled with a lag in initial charge-offs related to this portfolio because we typically do not charge-off credit card loans until the account is 180 days past due.

Domestic Card Business

Domestic Card generated net income from continuing operations of $638 million and $1.3 billion in the second quarter and first six months of 2013, respectively, compared with a net loss from continuing operations of $264 million in the second quarter of 2012 and net income from continuing operations of $251 million in the first six months of 2012. Domestic Card accounted for 90% of total net revenues for our Credit Card business in both the second quarter and first six months of 2013, compared with 91% and 88% in the second quarter and first six months of 2012, respectively. Income attributable to Domestic Card represented 89% and 91% of income for our Credit Card business in the second quarter and first six months of 2013, respectively, compared with 89% and 93% in the second quarter and first six months of 2012, respectively.

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

Table 7.1: Domestic Card Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change
Selected income statement data:
Net interest income	$	2,536		$	2,118			20	%	$	5,092		$	3,831			33	%
Non-interest income		737			708			4			1,461			1,205			21

Total net revenue		3,273			2,826			16			6,553			5,036			30
Provision for credit losses		647			1,600			(60	)		1,294			1,961			(34	)
Non-interest expense		1,635			1,634			**			3,268			2,686			22

Income from continuing operations before income taxes		991			(408	)		343			1,991			389			412
Income tax provision		353			(144	)		345			709			138			414

Income from continuing operations, net of tax	$	638		$	(264	)		342	%	$	1,282		$	251			411	%

Selected performance metrics:
Average loans held for investment⁽¹⁾	$	69,966		$	71,468			(2	)%	$	72,327		$	62,800			15	%
Average yield on loans held for investment⁽²⁾		15.91	%		13.33	%		258	bps		15.48	%		13.67	%		181	bps
Total net revenue margin⁽³⁾		18.71			15.82			289			18.12			16.04			208
Net charge-offs	$	749		$	510			47	%	$	1,576		$	1,041			51	%
Net charge-off rate⁽⁴⁾		4.28	%		2.86	%		142	bps		4.36	%		3.32	%		104	bps
Card loan premium amortization and other intangible accretion⁽⁵⁾	$	57		$	59			(3	)%	$	114		$	59			93	%
PCCR intangible amortization	$	110		$	88			25		$	226		$	92			146
Purchase volume⁽⁶⁾		47,273			41,807			13			89,104			73,224			22

(Dollars in millions)	June 30, 2013			December 31, 2012			Change
Selected period-end data:
Loans held for investment⁽¹⁾	$	70,490		$	83,141			(15	)%
30+ days delinquency rate⁽⁷⁾		3.05	%		3.61	%		(56	)bps
Allowance for loan and lease losses	$	2,955		$	3,526			(16	)%

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

⁽¹⁾	Credit card period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the estimated uncollectible amount.

⁽²⁾

Calculated by dividing annualized interest income for the period by average loans held for investment during the period for the specified loan category. Annualized interest income includes interest income on loans held for sale. Therefore, the transfer of the Best Buy loan portfolio to held for sale resulted in an increase in the average yield for Domestic Card of 168 and 136 basis points in the second quarter and first six months of 2013, respectively.

⁽³⁾

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period for the specified loan category. Annualized interest income includes interest income on loans held for sale. Therefore, the transfer of the Best Buy loan portfolio to held for sale resulted in an increase in the net revenue margin for Domestic Card of 188 and 154 basis points in the second quarter and first six months of 2013, respectively.

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

⁽⁵⁾	Represents the net reduction in interest income attributable to the amortization of premiums on purchased loans accounted for based on contractual cash flows and the accretion of other intangibles associated with the 2012 U.S. card acquisition

⁽⁶⁾	Consists of credit card purchase transactions, net of returns, for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance transactions.

⁽⁷⁾	Calculated by loan category by dividing 30+ day delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results for this division are similar to the key factors affecting our total Credit Card business. The increase in Domestic Card net income from continuing operations in the second quarter of 2013 from the second quarter of 2012 reflected the impact of the following items: (i) an increase in net interest income and non-interest income, primarily attributable to higher average loan yields and higher net interchange fees generated from purchase volume growth; (ii) the absence of the $1.2 billion provision for credit losses recorded in the second quarter of 2012 established as an allowance for the credit card receivables acquired in the 2012 U.S. acquisition; (iii) an increase in non-interest income due to the absence of charges for expected refunds to customers affected by certain cross-sell sale practices in our Domestic Card business recorded in the second quarter of 2012; and (iv) relatively flat non-interest expense reflecting the absence of charges for regulatory fines related to cross-sell activities in the Domestic Card business and net litigation reserves to cover interchange and other settlements recorded in the second quarter of 2012, which were offset by increased operating expenses related to the 2012 U.S. card acquisition.

International Card Business

International Card generated net income from continuing operations of $81 million and $123 million in the second quarter and first six months of 2013, respectively, compared with a net loss from continuing operations of $33 million in the second quarter of 2012 and net income from continuing operations of $18 million in the first six months of 2012. International Card accounted for 10% of total net revenues for our Credit Card business in both the second quarter and first six months of 2013, compared with 9% and 12% in the second quarter and first six months of 2012, respectively. Income attributable to International Card represented 11% and 9% of income for our Credit Card business in the second quarter and first six months of 2013, respectively, compared with 11% of the net loss in the second quarter of 2012 and 7% of the net income in the first six months of 2012.

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

Table 7.2: International Card Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change
Selected income statement data:
Net interest income	$	268		$	232			16	%	$	542		$	511			6	%
Non-interest income		95			63			51			192			164			17

Total net revenue		363			295			23			734			675			9
Provision for credit losses		66			111			(41	)		162			208			(22	)
Non-interest expense		184			229			(20	)		399			445			(10	)

Income from continuing operations before income taxes		113			(45	)		351			173			22			686
Income tax provision		32			(12	)		367			50			4			1,150

Income from continuing operations, net of tax	$	81		$	(33	)		345	%	$	123		$	18			583	%

Selected performance metrics:
Average loans held for investment⁽¹⁾	$	7,980		$	8,194			(3	)%	$	8,108		$	8,248			(2	)%
Average yield on loans held for investment⁽²⁾		16.19	%		14.18	%		201	bps		16.08	%		15.29	%		79	bps
Total net revenue margin⁽³⁾		18.20			14.40			380			18.11			16.37			174
Net charge-offs	$	101		$	112			(10	)%	$	196		$	227			(14	)%
Net charge-off rate⁽⁴⁾		5.08	%		5.49	%		(41	)bps		4.83	%		5.51	%		(68	)bps
Purchase volume⁽⁵⁾	$	3,515		$	3,421			3	%	$	6,782		$	6,502			4	%


(Dollars in millions)	June 30, 2013			December 31, 2012			Change
Selected period-end data:
Loans held for investment⁽¹⁾	$	7,820		$	8,614			(9	)%
30+ days performing delinquency rate⁽⁶⁾		3.84	%		3.58	%		26	bps
30+ days delinquency rate⁽⁷⁾		4.79			4.49			30
Nonperforming loan rate⁽⁸⁾		1.20			1.16			4
Allowance for loan and lease losses	$	394		$	453			(13	)%

⁽¹⁾	Credit card period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the estimated uncollectible amount.

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

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

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

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

⁽⁶⁾	Calculated by loan category by dividing 30+ day performing delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

⁽⁷⁾	Calculated by loan category by dividing 30+ day delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

⁽⁸⁾	Calculated by loan category by dividing nonperforming loans as of the end of the period by period-end loans held for investment for the specified loan category. Nonperforming credit card loans include international card loans that are generally 90 or 120 days delinquent.

The primary drivers of the improvement in results for our International Card business in the second quarter and first six months of 2013, compared with the second quarter and first six months of 2012 included: (i) the absence of charges recorded in the second quarter of 2012 associated with refunds to U.K. customers due to retrospective regulatory requirements pertaining to Payment Protection Insurance, which had an unfavorable impact on total net revenue and non-interest expense, and (ii) a reduction in the provision for credit losses attributable to lower net charge-offs, reflecting the improvement in the credit environment in Canada and the U.K.

Consumer Banking Business

Our Consumer Banking business generated net income from continuing operations of $444 million and $827 million in the second quarter and first six months of 2013, respectively, compared with net income from continuing operations of $438 million and $662 million in the second quarter and first six months of 2012, respectively. The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits and non-interest income from customer fees. Expenses primarily consist of the provision for credit losses, ongoing operating costs, such as salaries and associate benefits, occupancy and equipment, professional services, communications and data processing technology expenses, as well as marketing expenditures.

On February 17, 2012, we acquired ING Direct, which resulted in the addition of loans with carrying value of $40.4 billion and deposits of $84.4 billion at acquisition. The substantial majority of the lending and retail deposit businesses acquired are reported in our Consumer Banking business; however, the results of our Consumer Banking business for the first quarter of 2012 reflect only a partial-quarter impact from the operations of ING Direct.

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

Table 8: Consumer Banking Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change
Selected income statement data:
Net interest income	$	1,478		$	1,496			(1	)%	$	2,956		$	2,784			6	%
Non-interest income		189			185			2			370			361			2

Total net revenue		1,667			1,681			(1	)		3,326			3,145			6
Provision for credit losses		67			44			52			242			218			11
Non-interest expense		910			959			(5	)		1,800			1,902			(5	)

Income from continuing operations before income taxes		690			678			2			1,284			1,025			25
Income tax provision		246			240			3			457			363			26

Income from continuing operations, net of tax	$	444		$	438			1	%	$	827		$	662			25	%


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change
Selected performance metrics:
Average loans held for investment:⁽¹⁾
Auto	$	28,677		$	24,487			17	%	$	28,080		$	23,535			19	%
Home loan		40,532			48,966			(17	)		41,771			39,234			6
Retail banking		3,721			4,153			(10	)		3,753			4,166			(10	)

Total consumer banking	$	72,930		$	77,606			(6	)%	$	73,604		$	66,935			10	%

Average yield on loans held for investment⁽²⁾		5.99	%		6.17	%		(18	)bps		5.96	%		6.61	%		(65	)bps
Average deposits	$	170,733		$	174,416			(2	)%	$	170,910		$	152,166			12	%
Average deposit interest rate		0.64	%		0.70	%		(6	)bps		0.64	%		0.72	%		(8	)bps
Core deposit intangible amortization	$	35		$	42			(17	)%	$	72		$	79			(9	)%
Net charge-offs		110			93			18			253			201			26
Net charge-off rate⁽³⁾		0.60	%		0.48	%		12	bps		0.69	%		0.60	%		9	bps
Net charge-off rate (excluding acquired loans)⁽⁴⁾		1.08			1.02			6			1.27			1.15			12
Automobile loan originations	$	4,525		$	4,306			5	%	$	8,314		$	8,576			(3	)%

(Dollars in millions)	June 30, 2013			December 31, 2012			Change
Selected period-end data:
Loans held for investment:⁽¹⁾
Auto	$	29,369		$	27,123			8	%
Home loan		39,163			44,100			(11	)
Retail banking		3,686			3,904			(6	)

Total consumer banking	$	72,218		$	75,127			(4	)%

30+ days performing delinquency rate⁽⁵⁾		2.55	%		2.65	%		(10	)bps
30+ days performing delinquency rate (excluding acquired loans)⁽⁴⁾		4.56			5.14			(58	)
30+ days delinquency rate⁽⁶⁾		3.15			3.34			(19	)
30+ days delinquency rate (excluding acquired loans)⁽⁴⁾		5.63			6.49			(86	)


(Dollars in millions)	June 30, 2013			December 31, 2012			Change
Nonperforming loans rate⁽⁷⁾		0.78			0.85			(7	)
Nonperforming loans rate (excluding acquired loans)⁽⁴⁾		1.40			1.66			(26	)
Nonperforming asset rate⁽⁸⁾		0.84			0.91			(7	)
Nonperforming asset rate (excluding acquired loans)⁽⁴⁾		1.51			1.76			(25	)
Allowance for loan and lease losses	$	702		$	711			(1	)%
Allowance coverage ratio⁽⁹⁾		0.97	%		0.95	%		2	bps
Deposits	$	169,789		$	172,396			(2	)%
Loans serviced for others		14,313			15,333			(7	)

⁽¹⁾

Loans held for investment includes loans acquired in the ING Direct and CCB acquisitions. The carrying value of consumer banking acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected was $31.8 billion and $36.5 billion as of June 30, 2013 and December 31, 2012, respectively. The average balance of consumer banking loans held for investment, excluding the carrying value of acquired loans, was $40.2 billion and $36.2 billion in the second quarter of 2013 and 2012, respectively and $39.7 billion and $35.0 billion in the first six months of 2013 and 2012, respectively.

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

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

⁽⁴⁾

Calculation of ratio adjusted to exclude from the denominator acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected. See “Credit Risk Profile” and “Note 4—Loans—Credit Quality” for additional information on the impact of acquired loans on our credit quality metrics.

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

⁽⁶⁾	Calculated by loan category by dividing 30+ days delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

⁽⁷⁾	Calculated by loan category by dividing nonperforming loans as of the end of the period by period-end loans held for investment.

⁽⁸⁾	Calculated by loan category by dividing nonperforming assets as of the end of the period by period-end loans held for investment, REO, and other foreclosed assets for the specified loan category.

⁽⁹⁾	Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

Key factors affecting the results of our Consumer Banking business for the second quarter and first six months of 2013, compared with the second quarter and first six months of 2012, and changes in financial condition and credit performance between June 30, 2013 and December 31, 2012 include the following:

•

Net Interest Income: Net interest income decreased by $18 million, or 1%, in the second quarter of 2013 to $1.5 billion and increased by $172 million, or 6%, in the first six months of 2013 to $3.0 billion. The modest decrease in net interest income in the second quarter of 2013 was largely attributable to a decrease in average loans due to the expected run-off of certain acquired home loans. The increase in net interest income in the first six months of 2013 was primarily attributable to a significant increase in average loans held for investment and consumer deposits due to the ING Direct acquisition and higher auto loan originations over the past twelve months, which was partially offset by the continued expected run-off of acquired home loans. The favorable impact of the increase in average loan and deposit balances more than offset the decrease in average loans yields due to the shift in the composition of our consumer loan portfolio from the addition of the acquired ING Direct loans, which generally had lower yields.

•

Non-Interest Income: Non-interest income increased slightly by $4 million, or 2%, in the second quarter of 2013 to $189 million and increased by $9 million, or 2%, in the first six months of 2013 to $370 million, largely attributable to fees associated with the addition of the ING Direct business.

•

Provision for Credit Losses: The provision for credit losses increased by $23 million and $24 million in the second quarter and first six months of 2013, respectively, reflecting modestly higher auto loan charge-offs attributable to the continued high volume of auto loan originations. As discussed above under “Summary of Selected Financial Data,” the substantial majority of the ING Direct home loan portfolio is accounted for based on estimated cash flows expected to be collected over the life of the loans. Because the credit mark

established at acquisition for these loans takes into consideration future credit losses expected to be incurred, there are no charge-offs or an allowance associated with these loans unless the estimated cash flows expected to be collected decrease subsequent to acquisition.

•

Non-Interest Expense: Non-interest expense decreased by $49 million, or 5%, in the second quarter of 2013 to $910 million and decreased by $102 million, or 5%, in the first six months of 2013 to $1.8 billion. The decrease was largely due to the absence of ING Direct acquisition-related costs incurred in the first six months of 2012, which was partially offset by increased expenses related to the growth in our auto loan portfolio.

•

Loans Held for Investment: Period-end loans held for investment in our Consumer Banking business declined by $2.9 billion, or 4%, in the first six months of 2013, to $72.2 billion as of June 30, 2013, due to the continued expected run-off of acquired home loans, which was partially offset by higher period-end auto balances due to the continued high volume of auto loan originations.

•

Deposits: Period-end deposits in our Consumer Banking business declined by $2.6 billion, or 2%, in the first six months of 2013 to $169.8 billion as of June 30, 2013, reflecting our disciplined pricing and scaling back of deposit growth in the current environment of relatively low overall loan growth.

•

Charge-off and Delinquency Statistics: The reported net charge-off rate of 0.60% and 0.69% in the second quarter and first six months of 2013, respectively, increased from 0.48% and 0.60% in the second quarter and first six months of 2012, respectively. However, the 30+ day delinquency rate decreased to 3.15% as of June 30, 2013, from 3.34% as of December 31, 2012. The increase in the net charge-off rates reflect moderately higher auto loan charge-offs, partially offset by improved home loan performance. As discussed above under “Summary of Selected Financial Data,” the addition of the ING Direct home loan portfolio affects our reported credit metrics, as the credit mark established at acquisition for these loans takes into consideration future credit losses expected to be incurred. Accordingly, there are no charge-offs or an allowance associated with these loans unless the estimated cash flows expected to be collected decrease subsequent to acquisition. In addition, these loans are not classified as delinquent or nonperforming even though the customer may be contractually past due because we expect that we will fully collect the carrying value of these loans. The overall improvement in delinquency rates reflects improved credit performance in our legacy consumer loan portfolios.

Commercial Banking Business

Our Commercial Banking business generated net income from continuing operations of $190 million and $393 million in the second quarter and first six months of 2013, respectively, compared with net income from continuing operations of $228 million and $438 million in the second quarter and first six months of 2012, respectively. The primary sources of revenue for our Commercial Banking business are net interest income from loans and deposits and non-interest income from customer fees. Because we have some affordable housing tax-related investments that generate tax-exempt income or tax credits, we make certain reclassifications to our Commercial Banking business results to present revenues on a taxable-equivalent basis. Expenses primarily consist of the provision for credit losses, ongoing operating costs, such as salaries and associate benefits, occupancy and equipment, professional services, communications and data processing technology expenses, as well as marketing expenditures.

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

Table 9: Commercial Banking Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change
Selected income statement data:
Net interest income	$	457		$	427			7	%	$	911		$	858			6	%
Non-interest income		93			82			13			177			167			6

Total net revenue		550			509			8			1,088			1,025			6
Provision for credit losses		(14	)		(94	)		85			(49	)		(163	)		70
Non-interest expense		269			251			7			527			512			3

Income from continuing operations before income taxes		295			352			(16	)		610			676			(10	)
Income tax provision		105			124			(15	)		217			238			(9	)

Income from continuing operations, net of tax	$	190		$	228			(17	)%	$	393		$	438			(10	)%

Selected performance metrics:
Average loans held for investment:⁽¹⁾
Commercial and multifamily real estate	$	18,084		$	15,838			14	%	$	17,771		$	15,676			13	%
Commercial and industrial		20,332			18,001			13			20,142			17,520			15

Total commercial lending		38,416			33,839			14			37,913			33,196			14
Small-ticket commercial real estate		1,096			1,388			(21	)		1,134			1,434			(21	)

Total commercial banking	$	39,512		$	35,227			12	%	$	39,047		$	34,630			13	%

Average yield on loans held for investment⁽²⁾		3.84	%		4.27	%		(43	)bps		3.87	%		4.37	%		(50	)bps
Average deposits	$	30,746		$	27,943			10	%	$	30,542		$	27,756			10	%
Average deposit interest rate		0.26	%		0.33	%		(7	)bps		0.27	%		0.35	%		(8	)bps
Core deposit intangible amortization	$	8		$	9			(11	)%	$	15		$	18			(17	)%
Net charge-offs		4			17			(76	)		11			33			(67	)
Net charge-off rate⁽³⁾		0.04	%		0.19	%		(15	)bps		0.06	%		0.19	%		(13	)bps

(Dollars in millions)	June 30, 2013			December 31, 2012			Change
Selected period-end data:
Loans held for investment:
Commercial and multifamily real estate	$	18,570		$	17,732			5	%
Commercial and industrial

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents