Edgar Filing: CAPITAL ONE FINANCIAL CORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 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 October 31, 2013, there were 576,554,996 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		68
	Condensed Consolidated Statements of Income		69
	Condensed Consolidated Statements of Comprehensive Income		70
	Condensed Consolidated Balance Sheets		71
	Condensed Consolidated Statements of Changes in Stockholders’ Equity		72
	Condensed Consolidated Statements of Cash Flows		73
	Notes to Condensed Consolidated Financial Statements		74
	Note 1 — Summary of Significant Accounting Policies		74
	Note 2 — Discontinued Operations		76
	Note 3 — Investment Securities		77
	Note 4 — Loans		88
	Note 5 — Allowance for Loan and Lease Losses		112
	Note 6 — Variable Interest Entities and Securitizations		116
	Note 7 — Goodwill and Other Intangible Assets		121
	Note 8 — Deposits and Borrowings		122
	Note 9 — Derivative Instruments and Hedging Activities		125
	Note 10 — Stockholders’ Equity		132
	Note 11 — Earnings Per Common Share		135
	Note 12 — Fair Value of Financial Instruments		136
	Note 13 — Business Segments		152
	Note 14 — Commitments, Contingencies and Guarantees		155
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		12
	Consolidated Results of Operations		13
	Business Segment Financial Performance		20
	Consolidated Balance Sheet Analysis		34
	Off-Balance Sheet Arrangements and Variable Interest Entities		40
	Capital Management		40
	Risk Management		44
	Credit Risk Profile		45
	Liquidity Risk Profile		58
	Market Risk Profile		62
	Supervision and Regulation		64
	Forward-Looking Statements		65
	Supplemental Tables		67
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		167
Item 4.	Controls and Procedures		167

PART II—OTHER INFORMATION			168
Item 1.	Legal Proceedings		168
Item 1A.	Risk Factors		168
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		168


		Page
Item 3.	Defaults upon Senior Securities		168
Item 5.	Other Information		168
Item 6.	Exhibits		169

SIGNATURES			170
EXHIBIT INDEX			171

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		27
8	Consumer Banking Business Results		29
9	Commercial Banking Business Results		32
10	“Other” Results		34
11	Investment Securities		36
12	Non-Agency Investment Securities Credit Ratings		37
13	Net Loans Held for Investment		37
14	Changes in Representation and Warranty Reserve		39
15	Capital Ratios Under Basel I		41
16	Estimated Common Equity Tier 1 Ratio Under Basel III Standardized		42
17	Loan Portfolio Composition		46
18	30+ Day Delinquencies		48
19	Aging and Geography of 30+ Days Delinquent Loans		49
20	90+ Day Delinquent Loans Accruing Interest		49
21	Nonperforming Loans and Other Nonperforming Assets		50
22	Net Charge-Offs		52
23	Loan Modifications and Restructurings		54
24	Allowance for Loan and Lease Losses Activity		56
25	Allocation of the Allowance for Loan and Lease Losses		57
26	Liquidity Reserves		58
27	Deposit Composition and Average Deposit Rates		59
28	Short-term Borrowings		60
29	Contractual Maturity Profile of Outstanding Debt		61
30	Senior Unsecured Debt Credit Ratings		62
31	Interest Rate Sensitivity Analysis		64

—	Supplemental Tables:
A	Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I		67

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 September 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.

SUMMARY OF SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data from our results of operations for the third quarter and first nine months of 2013 and 2012, and selected comparative consolidated balance sheet data as of September 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 transactions completed in 2012 and 2013:

•

On February 17, 2012, we completed the acquisition of substantially all of the ING Direct business in the United States (“ING Direct”) from ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp (the “ING Direct acquisition”). The 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.

•

On September 6, 2013, we completed the sale of the Best Buy private label and co-branded credit card portfolio to Citibank, N.A (“Portfolio Sale”). Pursuant to the agreement with Citibank, N.A., we received $6.4 billion for the net portfolio 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 $30.1 billion and $37.1 billion as of September 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 September 30,									Nine Months Ended September 30,
(Dollars in millions, except per share data as noted)	2013			2012			Change			2013			2012			Change
Income statement
Net interest income	$	4,560		$	4,646			(2	)%	$	13,683		$	12,061			13	%
Non-interest income⁽¹⁾		1,091			1,136			(4	)		3,157			3,711			(15	)

Total net revenue⁽²⁾		5,651			5,782			(2	)		16,840			15,772			7
Provision for credit losses		849			1,014			(16	)		2,496			3,264			(24	)
Non-interest expense⁽³⁾		3,147			3,045			3			9,234			8,691			6

Income from continuing operations before income taxes		1,655			1,723			(4	)		5,110			3,817			34
Income tax provision		525			535			(2	)		1,600			931			72

Income from continuing operations, net of tax		1,130			1,188			(5	)		3,510			2,886			22
Loss from discontinued operations, net of tax⁽⁴⁾		(13	)		(10	)		30			(210	)		(212	)		(1	)

Net income		1,117			1,178			(5	)		3,300			2,674			23
Dividends and undistributed earnings allocated to participating securities		(5	)		(5	)		—			(14	)		(12	)		17
Preferred stock dividends		(13	)		—			**			(39	)		—			**

Net income available to common shareholders	$	1,099		$	1,173			(6	)%	$	3,247		$	2,662			22	%

Common share statistics
Earnings per common share:
Basic earnings per common share	$	1.89		$	2.03			(7	)%	$	5.58		$	4.80			16	%
Diluted earnings per common share		1.86			2.01			(7	)		5.51			4.75			16
Weighted average common shares outstanding:
Basic earnings per common share		582.3			578.3			1			581.4			555.0			5
Diluted earnings per common share		591.1			584.1			1			589.0			560.1			5
Dividends per common share		0.30			0.05			500			0.65			0.15			333
Average balances
Loans held for investment⁽⁵⁾	$	191,135		$	202,856			(6	)%	$	192,547		$	182,870			5	%
Interest-earning assets		264,796			266,803			(1	)		267,590			247,462			8
Total assets		294,939			297,154			(1	)		298,356			279,527			7
Interest-bearing deposits		186,752			193,700			(4	)		188,877			180,372			5
Total deposits		208,340			213,323			(2	)		210,170			199,565			5
Borrowings		36,355			36,451			**			38,261			35,956			6
Common equity		40,431			38,079			6			40,423			36,202			12
Total stockholders’ equity		41,284			38,535			7			41,276			36,358			14
Selected performance metrics
Purchase volume⁽⁶⁾	$	50,943		$	48,020			6	%	$	146,829		$	127,746			15	%
Total net revenue margin⁽⁷⁾		8.54	%		8.67	%		(13	)bps		8.39	%		8.50	%		(11	)bps
Net interest margin⁽⁸⁾		6.89			6.97			(8	)		6.82			6.50			32
Net charge-offs	$	917		$	887			3	%	$	2,965		$	2,405			23	%
Net charge-off rate⁽⁹⁾		1.92	%		1.75	%		17	bps		2.05	%		1.75	%		30	bps
Net charge-off rate (excluding acquired loans)⁽¹⁰⁾		2.29			2.18			11			2.48			2.17			31


	Three Months Ended September 30,							Nine Months Ended September 30,
(Dollars in millions, except per share data as noted)	2013		2012		Change			2013		2012		Change
Return on average assets⁽¹¹⁾		1.53		1.60		(7	)		1.57		1.38		19
Return on average tangible assets⁽¹²⁾		1.62		1.69		(7	)		1.66		1.46		20
Return on average common equity⁽¹³⁾		11.00		12.43		(143	)		11.40		10.59		81
Return on average tangible common equity⁽¹⁴⁾		18.08		21.84		(376	)		18.85		18.39		46
Equity-to-assets ratio⁽¹⁵⁾		14.00		12.97		103			13.83		13.01		82
Non-interest expense as a % of average loans held for investment⁽¹⁶⁾		6.59		6.00		59			6.39		6.34		5
Efficiency ratio⁽¹⁷⁾		55.69		52.66		303			54.83		55.10		(27	)
Effective income tax rate from continuing operations		31.7		31.1		60			31.3		24.4		690


(Dollars in millions except per share data as noted)	September 30, 2013			December 31, 2012			Change
Balance sheet (period end)
Loans held for investment⁽⁵⁾	$	191,814		$	205,889			(7	)%
Interest-earning assets		259,152			280,096			(7	)
Total assets		289,888			312,918			(7	)
Interest-bearing deposits		184,553			190,018			(3	)
Total deposits		206,834			212,485			(3	)
Borrowings		31,845			49,910			(36	)
Common equity		40,897			39,646			3
Total stockholders’ equity		41,750			40,499			3
Credit quality metrics (period end)
Allowance for loan and lease losses	$	4,333		$	5,156			(16	)%
Allowance as a % of loans held of investment (“allowance coverage ratio”)		2.26	%		2.50	%		(24	)bps
Allowance as a % of loans held of investment (excluding acquired loans)⁽¹⁰⁾		2.66			3.02			(36	)
30+ days performing delinquency rate		2.54			2.70			(16	)
30+ days performing delinquency rate (excluding acquired loans)⁽¹⁰⁾		3.01			3.29			(28	)
30+ days delinquency rate		2.88			3.09			(21	)
30+ days delinquency rate (excluding acquired loans)⁽¹⁰⁾		3.41			3.77			(36	)
Capital ratios
Tier 1 common ratio⁽¹⁸⁾		12.74	%		10.96	%		178	bps
Tier 1 risk-based capital ratio⁽¹⁹⁾		13.13	%		11.34	%		179
Total risk-based capital ratio⁽²⁰⁾		15.28	%		13.56	%		172
Tangible common equity (“TCE”) ratio⁽²¹⁾		9.17	%		7.89	%		128
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 $154 million and $185 million in the third quarter of 2013 and 2012, respectively, and by $611 million and $619 million in the first nine 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 $183 million and $307 million as of September 30, 2013 and December 31, 2012, respectively.

⁽³⁾

Includes purchased credit card relationship (“PCCR”) intangible amortization of $106 million and $131 million in the third quarter of 2013 and 2012, respectively, and $332 million and $223 million in the first nine 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 $40 million and $49 million in the third quarter of 2013 and 2012, respectively, and $127 million and $146 million in the first nine 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. See “Note 4 —Loans” for additional information on acquired loans.

⁽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 and balance transfer 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⁾

Calculated based on annualized income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I” for additional information.

⁽¹³⁾

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. Our calculation of return on average common equity may not be comparable to similarly titled measures reported by other companies.

⁽¹⁴⁾

Calculated as 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. Our calculation of return on average tangible common equity 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.

⁽¹⁵⁾	Calculated based on average stockholders’ equity for the period divided by average total assets for the period.

⁽¹⁶⁾	Calculated based on annualized non-interest expense, excluding goodwill impairment charges, for the period divided by average loans held for investment for the period.

⁽¹⁷⁾	Calculated based on non-interest expense, excluding goodwill impairment charges, for the period divided by total net revenue for the period.

⁽¹⁸⁾

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.

⁽¹⁹⁾

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.

⁽²⁰⁾

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.

⁽²¹⁾

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 September 30, 2013, our principal subsidiaries included:

•

Capital One Bank (USA), National Association (“COBNA”), which 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 $191.8 billion, deposits of $206.8 billion and stockholders’ equity of $41.8 billion as of September 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 consumer and commercial 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 main 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 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 third quarter and first nine 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 September 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	$	3,591			64	%	$	694			61	%	$	3,817			66	%	$	741			62	%
Consumer Banking		1,665			29			345			31			1,761			30			376			32
Commercial Banking		567			10			174			15			519			9			228			19
Other⁽³⁾		(172	)		(3	)		(83	)		(7	)		(315	)		(5	)		(157	)		(13	)

Total from continuing operations	$	5,651			100	%	$	1,130			100	%	$	5,782			100	%	$	1,188			100	%


	Nine Months Ended September 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	$	10,878			64	%	$	2,099			60	%	$	9,528			60	%	$	1,010		35	%
Consumer Banking		4,991			30			1,172			33			4,906			31			1,038		36
Commercial Banking		1,655			10			567			16			1,544			10			666		23
Other⁽³⁾		(684	)		(4	)		(328	)		(9	)		(206	)		(1	)		172		6

Total from continuing operations	$	16,840			100	%	$	3,510			100	%	$	15,772			100	%	$	2,886		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

In the third quarter of 2013, we delivered strong earnings performance across all three business segments. Our business continued to deliver growth in our total net revenues for the first nine months of 2013, putting us in what we believe is a strong position to continue to generate and distribute capital, and to deliver sustained shareholder value.

On July 2, 2013, our Board of Directors authorized the repurchase of up to $1 billion of shares of our common stock upon the closing of the Portfolio Sale. During the third quarter of 2013, we repurchased $256 million of shares of our common stock and expect to complete the share repurchase of the remaining stock authorized to be repurchased by the end of the year.

On August 16, 2013, we signed an agreement to acquire Beech Street Capital, a privately-held, national originator and servicer of Fannie Mae, Freddie Mac and Federal Housing Authority (FHA) multifamily commercial real estate loans. The acquisition expands and enhances our existing multifamily capabilities and product offerings. The acquisition closed on November 1, 2013.

Financial Highlights

We reported net income of $1.1 billion ($1.86 per diluted share) on total net revenue of $5.7 billion for the third quarter of 2013, with each of our three business segments contributing to our earnings. In comparison, we

reported net income of $1.2 billion ($2.01 per diluted share) on total net revenue of $5.8 billion for the third quarter of 2012. Net income totaled $3.3 billion ($5.51 per diluted share) on total net revenue of $16.8 billion for the first nine months of 2013, compared with net income of $2.7 billion ($4.75 per diluted share) on total net revenue of $15.8 billion for the first nine months of 2012.

Our Tier 1 common ratio, as calculated under Basel I, increased to 12.7% as of September 30, 2013, up 60 basis points from 12.1% as of June 30, 2013, and up 170 basis points from 11.0% as of December 31, 2012. The increase in our Tier I common ratio reflects strong internal capital generation from earnings. It was also temporarily impacted by the full benefit of the decline in risk weighted assets from the Portfolio Sale while we have only completed $256 million of the associated and previously announced $1 billion common stock repurchase program. See “Capital Management” below for additional information.

Below are additional highlights of our performance in the third quarter and first nine months of 2013. These highlights generally are based on a comparison between the third quarter of 2013 and 2012 results and the first nine 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 September 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 third quarter of 2013 decreased $61 million from the third quarter of 2012, while our net income of $3.3 billion for the first nine months of 2013 increased by $626 million as compared to the first nine months of 2012. A significant driver of the increase in earnings in the first nine months of 2013 versus the first nine months of 2012 was the absence of the provision for credit losses of $1.2 billion related to the credit card receivables acquired in the 2012 U.S. card acquisition recorded in the second quarter of 2012. This 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 and an increase in intangible amortization expense.

•

Loans Held for Investment: Period-end loans held for investment decreased by $14.1 billion, or 7%, in the first nine months of 2013, to $191.8 billion as of September 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 loans held for sale in the first quarter of 2013. The Portfolio Sale was completed on September 6, 2013. In addition to the transfer of the Best Buy loan portfolio, period-end loans held for investment also decreased due to the expected run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, installment loans in our Credit Card business and home loans in our Consumer Banking business. This run-off was partially offset by increased purchase volume in our Credit Card business, 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 1.92% for the third quarter of 2013, compared with 1.75% for the third quarter of 2012. The net-charge off rate was 2.05% for the first nine months of 2013, compared with 1.75% for the first nine months of 2012. The increases in our reported net charge-offs and net charge-off rates were largely due to the lag in the inclusion of the impact of charge-offs from the 2012 U.S. card acquisition in the numerator in calculating our net charge-off rates, which was recorded at fair value at acquisition. Our reported 30+ day delinquency rate declined to 2.88% as of September 30, 2013, from 3.09% as of December 31, 2012. The improvement in our card delinquency rates in the third quarter of 2013 was better than normal seasonal patterns. We provide information on our credit quality metrics, below under “Business Segments” and “Credit Risk Profile.”

•

Allowance for Loan and Lease Losses: We reduced our allowance by $823 million to $4.3 billion as of September 30, 2013, from $5.2 billion as of December 31, 2012. The reduction in the allowance was mainly due to a reduction in loans balances and improved credit outlook and an allowance release of $289 million related to the Portfolio Sale. The allowance coverage ratio declined to 2.26% as of September 30, 2013, from 2.50% as of December 31, 2012.

•

Representation and Warranty Reserve: We recorded a mortgage representation and warranty benefit of $4 million and provision of $276 million in the third quarter and first nine months of 2013, respectively, compared with a mortgage representation and warranty provision of zero and $349 million in the third quarter and first nine months of 2012, respectively. Our mortgage representation and warranty reserve increased to $1.1 billion as of September 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 $694 million and $2.1 billion in the third quarter and first nine months of 2013, respectively, compared with a net income from continuing operations of $741 million and $1.0 billion in the third quarter and first nine months of 2012, respectively. The net income for the third quarter of 2013 decreased by $47 million compared to net income for the third quarter of 2012 mainly due to the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, an increase to net litigation reserves of $101 million and the Portfolio Sale, partially offset by a lower provision for credit losses. The increase in net income from continuing operations of $1.1 billion in the first nine months of 2013 compared to the first nine months of 2012 was driven by 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 the charge of $174 million to establish a reserve for estimated uncollectible billed finance charges and fees related to those loans, both of which were recorded in the first nine months of 2012. The improvement also reflects higher revenue attributable to the 2012 U.S. card acquisition coupled with increased purchase volume in our Credit 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 $13.8 billion, in the first nine months of 2013 to $78.0 billion as of September 30, 2013, from $91.8 billion as of December 31, 2012. The decrease was due to the Portfolio Sale, typical seasonal paydown patterns and continued run-off of our installment loan portfolio and 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 $345 million and $1.2 billion in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $376 million and $1.0 billion in the third quarter and first nine months of 2012, respectively. Net income for the third quarter of 2013 decreased by $31 million compared to net income for the third quarter of 2012, attributable to lower home loans and deposit volumes, partially offset by growth in auto. Net income increased by $134 million in the first nine months of 2013 compared to the first nine months of 2012 due to increased net interest income attributable to higher loan balances and consumer deposits from the ING Direct acquisition. Period-end loans held for investment in our Consumer Banking business declined by $3.8 billion, or 5%, in the first nine months of 2013 to $71.3 billion as of September 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 loan balances.

•

Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $174 million and $567 million in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $228 million and $666 million in the third quarter and first nine months of 2012, respectively. Growth in commercial real estate and commercial and industrial loans and higher deposit balances contributed to an increase in revenue. The favorable impact from a higher revenue was offset by a higher provision for credit losses in the third quarter and first nine months of 2013. The higher provision for credit losses was driven by lower allowance releases in both the third quarter and first nine months of 2013 compared to the same prior year periods. Period-end loans held for investment in

our Commercial Banking business increased by $3.6 billion, or 9%, in the first nine months of 2013 to $42.4 billion as of September 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. Except as otherwise disclosed, 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 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, 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.

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 home and card loans, principally those we acquired, coupled with the Portfolio Sale, is 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, to put pressure on pricing and drive declining margins in those businesses.

In 2013, we expect operating expenses of approximately $11 billion and pre-provision net revenue of approximately $10 billion. These estimates are expected to vary within reasonable margins and do not contemplate non-recurring items including $101 million of litigation related expenses incurred in the quarter ended September 30, 2013, expected cost of certain restructurings in the fourth quarter of 2013 or the impact of the acquisition of Beech Street Capital on November 1, 2013.

In 2014, we expect approximately $5 billion in total portfolio run-off, comprised of $1 billion in card loans and $4 billion in home loans, primarily driven by mortgage prepayments. We expect operating expenses for 2014 to be approximately $10.5 billion, excluding 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. In the third quarter, we began executing our previously announced $1 billion share repurchase program. We expect to complete the share repurchase program in the fourth quarter. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, our capital position, and internal capital generation. Our share repurchase program does not include specific price targets, may be executed through open market purchases or privately negotiated transactions, including utilizing Rule 10b5-1 programs, and may be suspended at any time. We expect to request capital distribution in the 2014 Comprehensive Capital Analysis and Review (“CCAR”) cycle that, if approved, would result in a total payout ratio well above the industry norm of 50%. See “Capital Management—Capital Planning and Regulatory Stress Testing” for more information.

Business Segment Expectations

Credit Card Business

We expect Domestic Card loan growth in the coming quarters to be muted as planned run-off and other strategic choices we have made continue to mask strong underlying growth in areas we are emphasizing. We expect loan growth in Domestic Card to resume sometime around the second half of 2014, when underlying loan growth will begin to more than offset shrinkage in other parts of our business.

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. We expect auto finance losses will continue to increase gradually from their recent historic lows as industry wide underwriting normalizes following significant tightening during the recession and as used car values decline from historic high levels. We also expect that auto finance yields will continue to decline from recent exceptionally high levels but will continue to support an attractive and resilient business.

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 focused and specialized approach to the Commercial Banking business to deliver strong results.

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 of financial instruments

•

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. Below we discuss changes that we made in the first nine 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. These changes 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. These changes did not have a material impact on the allowance and reserve for unfunded lending commitments for our commercial loan portfolio in subsequent quarters. 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 section(s) of MD&A.

CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our consolidated financial performance for the third quarter and first nine 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 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, interest expense incurred, average yield and rate for the third quarter and first nine months of 2013 and 2012.

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


	Three Months Ended September 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	$	74,421		$	2,738		14.72	%	$	80,614		$	2,995		14.86	%
International		7,782			318		16.35			8,154			336		16.48

Credit card		82,203			3,056		14.87			88,768			3,331		15.01
Consumer banking		71,886			1,112		6.19			77,488			1,170		6.04
Commercial banking		41,584			402		3.87			37,045			381		4.11
Other		166			9		21.69			162			21		51.85

Total loans, including loans held for sale		195,839			4,579		9.35			203,463			4,903		9.64
Investment securities⁽⁴⁾		63,317			396		2.50			57,928			335		2.31
Cash equivalents and other interest-earning assets		5,640			23		1.63			5,412			16		1.18

Total interest-earning assets	$	264,796		$	4,998		7.55	%	$	266,803		$	5,254		7.88	%

Cash and due from banks		2,553								2,285
Allowance for loan and lease losses		(4,408	)							(5,003	)
Premises and equipment, net		3,784								3,561
Other assets		28,214								29,508

Total assets	$	294,939							$	297,154

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits	$	186,752		$	309		0.66	%	$	193,700		$	371		0.77	%
Securitized debt obligations		10,243			42		1.64			13,331			64		1.92
Senior and subordinated notes		12,314			76		2.47			11,035			85		3.08
Other borrowings		13,798			11		0.32			12,085			88		2.91

Total interest-bearing liabilities	$	223,107		$	438		0.79	%	$	230,151		$	608		1.06	%

Non-interest bearing deposits		21,588								19,623
Other liabilities		8,960								8,845

Total liabilities		253,655								258,619
Stockholders’ equity		41,284								38,535

Total liabilities and stockholders’ equity	$	294,939							$	297,154

Net interest income/spread				$	4,560		6.76	%				$	4,646		6.82	%

Impact of non-interest bearing funding							0.13								0.15

Net interest margin							6.89	%							6.97	%


	Nine Months Ended September 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	$	76,493		$	8,336		14.53	%	$	68,882		$	7,286		14.10	%
International		7,998			970		16.17			8,216			966		15.68

Credit card		84,491			9,306		14.69			77,098			8,252		14.27
Consumer banking		73,127			3,309		6.03			70,643			3,385		6.39
Commercial banking		39,909			1,158		3.87			35,643			1,137		4.25
Other		174			51		39.08			158			43		36.29

Total loans, including loans held for sale		197,701			13,824		9.32			183,542			12,817		9.31
Investment securities⁽⁴⁾		63,725			1,161		2.43			55,158			968		2.34
Cash equivalents and other interest-earning assets		6,164			74		1.60			8,762			64		0.97

Total interest-earning assets	$	267,590		$	15,059		7.50	%	$	247,462		$	13,849		7.46	%

Cash and due from banks		2,401								5,413
Allowance for loan and lease losses		(4,653	)							(4,470	)
Premises and equipment, net		3,750								3,259
Other assets		29,268								27,863

Total assets	$	298,356							$	279,527

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits	$	188,877		$	953		0.67	%	$	180,372		$	1,055		0.78	%
Securitized debt obligations		10,975			143		1.74			14,816			213		1.92
Senior and subordinated notes		12,331			240		2.60			10,839			260		3.20
Other borrowings		14,955			40		0.36			10,301			260		3.37

Total interest-bearing liabilities	$	227,138		$	1,376		0.81	%	$	216,328		$	1,788		1.10	%

Non-interest bearing deposits		21,293								19,193
Other liabilities		8,649								7,648

Total liabilities		257,080								243,169
Stockholders’ equity		41,276								36,358

Total liabilities and stockholders’ equity	$	298,356							$	279,527

Net interest income/spread				$	13,683		6.69	%				$	12,061		6.36	%

Impact of non-interest bearing funding							0.13								0.14

Net interest margin							6.82	%							6.50	%

⁽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 $440 million and $1.4 billion in the third quarter and first nine months of 2013, respectively, and $530 million and $1.2 billion in the third quarter and first nine 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 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 related to these assets and liabilities.

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


	Three Months Ended September 30,									Nine Months Ended September 30,
	2013 vs 2012									2013 vs 2012
(Dollars in millions)	Total Variance			Volume			Rate			Total Variance			Volume			Rate
Interest income:
Loans:
Credit card	$	(275	)	$	(244	)	$	(31	)	$	1,054		$	809		$	245
Consumer banking		(58	)		(215	)		157			(76	)		165			(241	)
Commercial banking		21			137			(116	)		21			168			(147	)
Other		(12	)		3			(15	)		8			5			3

Total loans, including loans held for sale		(324	)		(319	)		(5	)		1,007			1,147			(140	)

Investment securities		61			33			28			193			155			38
Cash equivalents and other interest-earning assets		7			1			6			10			(31	)		41

Total interest income		(256	)		(285	)		29			1,210			1,271			(61	)

Interest expense:
Deposits		(62	)		(13	)		(49	)		(102	)		73			(175	)
Securitized debt obligations		(22	)		(13	)		(9	)		(70	)		(51	)		(19	)
Senior and subordinated notes		(9	)		46			(55	)		(20	)		47			(67	)
Other borrowings		(77	)		76			(153	)		(220	)		134			(354	)

Total interest expense		(170	)		96			(266	)		(412	)		203			(615	)

Net interest income	$	(86	)	$	(381	)	$	295		$	1,622		$	1,068		$	554

⁽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 third quarter of 2013 decreased by $86 million, or 2%, from the third quarter of 2012, driven by a 1% decrease in average interest-earning assets and a 1% (8 basis point) decrease of the net interest margin to 6.89%.

Net interest income of $13.7 billion in the first nine months of 2013 increased by $1.6 billion, or 13%, from the first nine months of 2012, driven by an 8% increase in average interest-earning assets and a 5% (32 basis point) increase of the net interest margin to 6.82%.

•

Average Interest-Earning Assets: Average interest-earning assets were relatively flat in the third quarter of 2013 as compared to the third quarter of 2012. The increase in average interest-earning assets in the first nine months of 2013 compared to the first nine months of 2012 reflects the full year impact of loans and investment securities from the ING Direct acquisition and the addition of loans from the 2012 U.S. card acquisition. 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 and other loans as well as the Portfolio Sale in the third quarter of 2013.

•

Net Interest Margin: Net interest margin also stayed relatively flat in the third quarter of 2013 as compared to the third quarter of 2012. The increase in our net interest margin in the first nine months of 2013 was primarily attributable to a reduction in our cost of funds, which was due in part to the redemption of $3.65 billion of our trust preferred securities on January 2, 2013, which generally carried a higher coupon than

other funding sources available to us. Our lowered 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 in the amount of $594 million. Other non-interest income includes the pre-tax provision for home loan representation and warranty losses related to continuing operations. It 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 third quarter and first nine months of 2013 and 2012, respectively.

Table 5: Non-Interest Income


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	2013			2012			2013			2012
Service charges and other customer-related fees	$	530		$	557		$	1,614		$	1,511
Interchange fees, net		476			452			1,407			1,188
Bargain purchase gain⁽¹⁾		—			—			—			594
Net other-than-temporary impairment (“OTTI”)		(11	)		(13	)		(40	)		(40	)
Other non-interest income:
Provision (benefit) for mortgage representation and warranty losses⁽²⁾		13			—			27			(42	)
Net gains from the sale of investment securities		—			1			3			42
Net fair value gains (losses) on free-standing derivatives⁽³⁾		(8	)		3			(11	)		(45	)
Other		91			136			157			503

Other non-interest income		96			140			176			458

Total non-interest income	$	1,091		$	1,136		$	3,157		$	3,711

⁽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⁾

Represents representation and warranty provision related to continuing operations. We recorded a total benefit of $4 million for mortgage representation and warranty losses and a provision of $276 million for the third quarter and first nine months ended September 30, 2013, respectively, and a total provision of $349 million for the first nine months ended September 30, 2012. We did not record any provision for the three months ended September 30, 2012. 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 $9 million as of both September 30, 2013 and December 31, 2012. See “Note 9—Derivative Instruments and Hedging Activities” for additional information.

Non-interest income in the third quarter of 2013 decreased by $45 million from the third quarter of 2012. Non-interest income of $3.2 billion in the first nine months of 2013 decreased by $554 million, or 15%, from non-

interest income of $3.7 billion in the first nine months of 2012. The decrease in non-interest income reflected the combined impact of the absence of the bargain purchase gain of $594 million recognized at acquisition of ING Direct and income of $162 million from the sale of Visa shares, both of which were recorded in the first nine months of 2012. The impact of these items was partially offset by the favorable impact of increased customer related fees and interchange fees from purchase volume growth, a reduction in the provision for mortgage representation and warranty losses and a reduction in fair value losses on free-standing derivatives.

We recorded net OTTI losses of $11 million and $40 million in the third quarter and first nine months of 2013, respectively, compared with $13 million and $40 million in the third quarter and first nine months of 2012, respectively. The OTTI losses for the third quarter of 2013 were mainly attributable to decreasing prices resulting from rising interest rates. The decrease in prices resulted in a considerable population of our impaired securities shifting from an unrealized gain position to an unrealized loss position this quarter. In accordance with the accounting guidance for OTTI, we do not recognize credit losses until securities are in an unrealized loss position. We provide additional information on other-than-temporary impairment recognized on our investment securities in “Note 3—Investment Securities.”

Provision for Credit Losses

We build our allowance for loan and lease losses and reserve for unfunded lending commitments 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 $849 million and $2.5 billion in the third quarter and first nine months of 2013, respectively, compared with $1.0 billion and $3.3 billion in the third quarter and first nine months of 2012, respectively. The decrease in the third quarter of 2013 was primarily due to an allowance release of $113 million in our Domestic Card business, compared with an allowance build of $199 million in the third quarter of 2012. This change was partially offset by the activity in our Commercial Banking business, which recorded a provision for credit losses of $31 million in the third quarter of 2013, compared with benefits of $87 million in the third quarter of 2012. The decrease in the first nine months of 2013 was 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 by (i) a higher provision in the credit card loan portfolio due to higher net charge-offs in the first nine months of 2013, largely attributable to the addition of loans from the 2012 U.S. card acquisition, and (ii) a lower allowance release in our Commercial Banking business due to the stabilization of the credit outlook in the current period when compared to the prior period. The combined allowance in commercial loans and reserve for unfunded lending commitments increased by $23 million in the third quarter of 2013 and decreased by $38 million in the first nine months of 2013, compared with reductions of $87 million and $283 million in the third quarter and first nine months of 2012, respectively.

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 third quarter and first nine months of 2013 and 2012.

Table 6: Non-Interest Expense


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2013		2012		2013		2012
Salaries and associate benefits	$	1,145	$	1,002	$	3,329	$	2,837
Occupancy and equipment		369		354		1,075		947
Marketing		299		316		946		971
Professional services		320		310		956		916
Communications and data processing		224		198		667		573
Amortization of intangibles		161		199		505		418
Acquisition-related		37		48		133		267
Other non-interest expense:
Collections		114		139		362		417
Fraud losses		56		52		161		129
Bankcard, regulatory and other fee assessments		151		149		431		396
Other		271		278		669		820

Other non-interest expense		592		618		1,623		1,762

Total non-interest expense	$	3,147	$	3,045	$	9,234	$	8,691

Non-interest expense of $3.1 billion in the third quarter of 2013 increased by $102 million, or 3%, from the third quarter of 2012. The increase in non-interest expense was primarily attributable to the increased salaries and associate benefits and additional litigation reserves, partially offset by a decline in marketing expense and amortization of intangible assets.

Non-interest expense of $9.2 billion in the first nine months of 2013 increased by $543 million, or 6%, from the first nine months of 2012. The increase reflected higher operating expenses, increased salaries and associate benefits and infrastructure cost attributable to the acquired businesses, amortization of intangible assets resulting from the ING Direct and 2012 U.S. card acquisitions, higher expenses related to the growth in our auto loan portfolio and an increase to net litigation reserves of $101 million recorded in the first nine months of 2013. These increases were partially offset by a reduction in acquisition-related costs and legal costs primarily due to the absence of (i) civil penalties of $60 million attributable to a regulatory settlement associated with cross-selling certain products to credit card customers in our Domestic Card business and (ii) legal costs of $98 million related to interchange and other litigation activity, both of which were recorded in the first nine months of 2012.

Income Taxes

We recorded an income tax provision on income from continuing operations of $525 million (31.7% effective income tax rate) in the third quarter of 2013, compared with an income tax provision of $535 million (31.1% effective income tax rate) in the third quarter of 2012. The increase in our effective tax rate in the third quarter of 2013 from the third quarter of 2012 was primarily due to additional discrete tax expense of $19 million in the third quarter of 2013 for adjustments to acquired tax attributes based upon the final filed tax returns and changes to enacted statutory tax rates, partially offset by the increased relative benefit of tax credits and tax-exempt income.

We recorded an income tax provision of $1.6 billion (31.3% effective income tax rate) in the first nine months of 2013, compared with an income tax provision of $931 million (24.4% effective income tax rate) in the first nine months of 2012. The increase in our effective tax rate in the first nine months of 2013 from the first nine months of 2012 was attributable to the absence of discrete tax benefits of $211 million recorded in the first quarter of 2012 primarily 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 $20 million of discrete tax expense in the first nine months of 2013 primarily related to adjustments to acquired tax attributes based upon the final filed tax returns and changes to enacted statutory tax rates.

Our effective income tax rate, excluding the impact of the discrete tax items discussed above, was 30.6% and 31.1% in the third quarter of 2013 and 2012, respectively. The decrease in the effective tax rate was primarily due to the increased relative benefit of tax credits and tax-exempt income. Our effective income tax rate, excluding the impact of the discrete tax items discussed above, was 30.9% and 30.0% in the first nine 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 nine months of 2013 over the first nine 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 $13 million and $210 million in the third quarter and first nine months of 2013, respectively. In comparison, we recorded a loss from discontinued operations, net of tax, of $10 million and $212 million in the third quarter and first nine months of 2012, respectively. The variance in the loss from discontinued operations between the third quarter and first nine months of 2013 and 2012 is attributable to the provision for mortgage representation and warranty losses.

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. 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 third quarter and first nine 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 September 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

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. Rewards costs are generally netted against interchange fees.

Our Credit Card business generated net income from continuing operations of $694 million and $2.1 billion in the third quarter and first nine months of 2013, respectively, compared with a net income from continuing operations of $741 million and $1.0 billion in the third quarter and first nine months of 2012, respectively.

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. On September 6, 2013, we completed Portfolio Sale. Pursuant to the agreement with Citibank, N.A we received $6.4 billion for the net portfolio assets.

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 September 30,									Nine Months Ended September 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change
Selected income statement data:
Net interest income	$	2,757		$	2,991			(8	)%	$	8,391		$	7,333			14	%
Non-interest income		834			826			1			2,487			2,195			13

Total net revenue⁽¹⁾		3,591			3,817			(6	)		10,878			9,528			14
Provision for credit losses		617			892			(31	)		2,073			3,061			(32	)
Non-interest expense		1,904			1,790			6			5,571			4,921			13

Income from continuing operations before income taxes		1,070			1,135			(6	)		3,234			1,546			109
Income tax provision		376			394			(5	)		1,135			536			112

Income from continuing operations, net of tax	$	694		$	741			(6	)%	$	2,099		$	1,010			108	%

Selected performance metrics:
Average loans held for investment⁽²⁾	$	77,729		$	88,656			(12	)%	$	79,523		$	76,960			3	%
Average yield on loans held for investment⁽³⁾		15.72	%		15.03	%		69	bps		15.60	%		14.30	%		130	bps
Total net revenue margin⁽⁴⁾		18.48			17.22			126			18.24			16.51			173
Net charge-offs	$	734		$	713			3	%	$	2,506		$	1,981			27	%
Net charge-off rate⁽⁵⁾		3.78	%		3.22	%		56	bps		4.20	%		3.43	%		77	bps
Card loan premium amortization and other intangible accretion⁽⁶⁾	$	45		$	82			(45	)%	$	159		$	141			13	%
PCCR intangible amortization		106			131			(19	)		332			223			49
Purchase volume⁽⁷⁾		50,943			48,020			6			146,829			127,746			15

(Dollars in millions)	September 30, 2013			December 31, 2012			Change
Selected period-end data:
Loans held for investment⁽²⁾	$	77,967		$	91,755			(15	)%
30+ days performing delinquency rate⁽⁸⁾		3.51	%		3.61	%		(10	)bps
30+ days delinquency rate⁽⁹⁾		3.60			3.69			(9	)
Nonperforming loan rate⁽¹⁰⁾		0.12			0.11			1
Allowance for loan and lease losses	$	3,245		$	3,979			(18	)%
Allowance coverage ratio⁽¹¹⁾		4.16	%		4.34	%		(18	)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 $154 million and $611 million in the third quarter and first nine months of 2013, respectively, and by $185 million and $619 million in the third quarter and first nine months of 2012, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled $183 million and $307 million as of September 30, 2013 and December 31, 2012, respectively. The decrease was due to the absence of a finance charge and fee reserve recorded in 2012 for the acquired loans from the 2012 U.S. card acquisition.

⁽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 also 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 the Credit Card business of 110 and 119 basis points in the third quarter and first nine 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 also 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 the Credit Card business of 123 and 134 basis points in the third quarter and first nine 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 associated with the 2012 U.S. card acquisition.

⁽⁷⁾	Consists of 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 and balance transfer transactions.

⁽⁸⁾	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.

⁽⁹⁾	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.

⁽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 for the first nine months of 2013 compared to the first nine months of 2012. Our Credit Card business results for the first nine months of 2013 reflect the full impact of the addition of loans from the acquisition, while the first nine months of 2012 reflect only a partial period impact of the loans acquired in the 2012 U.S. card acquisition. In addition, our Credit Card business results for the first nine months of 2013 reflects 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 the 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 first half of 2012.

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

•

Net Interest Income: Net interest income decreased by $234 million, or 8%, in the third quarter of 2013 to $2.8 billion and increased by $1.1 billion, or 14%, in the first nine months of 2013 to $8.4 billion. The decrease in the third quarter of 2013 was mainly due to the Portfolio Sale and expected continued run-off of our installment loan portfolio and other credit card loans acquired in the 2012 U.S. card acquisition. The increase in net interest income for the first nine months of 2013 is primarily driven by the significant increase in average loans held for investment resulting from the 2012 U.S. card acquisition in the second quarter of 2012, as well as the absence of the charge recorded in the second quarter of 2012 to establish the finance charge and fee reserve for the acquired loans. Higher average yield on loans held for investment was driven largely by the transfer of the Best Buy loan portfolio to the held for sale category in the first quarter of 2013.

•

Non-Interest Income: Non-interest income increased by $8 million, or 1%, in the third quarter of 2013 to $834 million and by $292 million, or 13% in the first nine months of 2013 to $2.5 billion. The increase in the first nine months of 2013 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 $19.1 billion, or 15%, in the first nine months of 2013, attributable to higher purchase volume and the addition of customer accounts associated with the 2012 U.S. card acquisition. 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 first and second quarters of 2012 for expected refunds to customers affected by certain cross-sell sale practices in our Domestic Card business.

•

Provision for Credit Losses: The provision for credit losses related to our Credit Card business decreased by $275 million to $617 million in the third quarter of 2013 and by $1.0 billion to $2.1 billion in the first nine

months of 2013, from $892 million and $3.1 billion in the third quarter and first nine months of 2012, respectively. The decrease in the third quarter of 2013 was mainly due to an improved credit outlook of our portfolio in the third quarter of 2013 compared to the third quarter of 2012. The decrease in the first nine months of 2013 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 first nine months of 2013, largely attributable to the addition of loans from the 2012 U.S. card acquisition.

•

Non-Interest Expense: Non-interest expense increased by $114 million, or 6%, in the third quarter of 2013 to $1.9 billion and increased by $650 million, or 13%, in the first nine months of 2013 to $5.6 billion. The increase in the third quarter of 2013 was due to recognition of net litigation reserves of $101 million recorded in the quarter. The increase in the first nine months of 2013 was largely due to higher operating expenses resulting from the 2012 U.S. card acquisition, the amortization of intangibles and other assets associated with the acquisition, and net litigation reserves of $101 million recorded in the third quarter of 2013. This includes Purchased Credit Card Relationships (“PCCR”) intangible amortization expense of $332 million in the first nine months of 2013, compared with $223 million in the first nine months of 2012.

•

Loans Held for Investment: Period-end loans held for investment in our Credit Card business decreased by $13.8 billion, or 15%, in the first nine months of 2013 to $78.0 billion as of September 30, 2013, from $91.8 billion as of December 31, 2012. The decrease was due in part to the Portfolio Sale in the third quarter of 2013. In addition to the Portfolio Sale, period-end loans held for investment also decreased due to typical seasonal patterns, 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 3.78% and 4.20% in the third quarter and first nine months of 2013, respectively, from 3.22% and 3.43% in the third quarter and first nine months of 2012, respectively. The 30+ day delinquency rate decreased to 3.60% as of September 30, 2013, from 3.69% as of December 31, 2012. The increase in reported net charge-off rates in the third quarter and first nine months of 2013 was largely due to the lag in the inclusion of the impact of charge-offs from the 2012 U.S. card acquisition in the numerator in calculating our net charge-off rates, which was recorded at fair value at acquisition.

Domestic Card Business

Domestic Card generated net income from continuing operations of $644 million and $1.9 billion in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $673 million and $924 million in the third quarter and first nine months of 2012, respectively. Domestic Card accounted for 90% of revenues for our Credit Card business in both the third quarter and first nine months of 2013, respectively, compared with 90% and 89% in the third quarter and first nine months of 2012, respectively. Income attributable to Domestic Card represented 93% and 92% of income for our Credit Card business in the third quarter and first nine months of 2013, respectively, compared with 91% in both the third quarter and first nine months of 2012.

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 September 30,									Nine Months Ended September 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change
Selected income statement data:
Net interest income	$	2,492		$	2,715			(8	)%	$	7,584		$	6,546			16	%
Non-interest income		749			722			4			2,210			1,927			15

Total net revenue		3,241			3,437			(6	)		9,794			8,473			16
Provision for credit losses		529			811			(35	)		1,823			2,772			(34	)
Non-interest expense		1,713			1,584			8			4,981			4,270			17

Income from continuing operations before income taxes		999			1,042			(4	)		2,990			1,431			109
Income tax provision		355			369			(4	)		1,064			507			110

Income from continuing operations, net of tax	$	644		$	673			(4	)%	$	1,926		$	924			108	%

Selected performance metrics:
Average loans held for investment⁽¹⁾	$	69,947		$	80,502			(13	)%	$	71,525		$	68,744			4	%
Average yield on loans held for investment⁽²⁾		15.65	%		14.88	%		77	bps		15.54	%		14.13	%		141	bps
Total net revenue margin⁽³⁾		18.53			17.08			145			18.26			16.43			183
Net charge-offs	$	642		$	612			5	%	$	2,218		$	1,653			34	%
Net charge-off rate⁽⁴⁾		3.67	%		3.04	%		63	bps		4.14	%		3.21	%		93	bps
Card loan premium amortization and other intangible accretion⁽⁵⁾	$	45		$	82			(45	)%	$	159		$	141			13	%
PCCR intangible amortization		106			131			(19	)		332			223			49
Purchase volume⁽⁶⁾		47,420			44,552			6			136,524			117,776			16

(Dollars in millions)	September 30, 2013			December 31, 2012			Change
Selected period-end data:
Loans held for investment⁽¹⁾	$	69,936		$	83,141			(16	)%
30+ days delinquency rate⁽⁷⁾		3.46	%		3.61	%		(15	)bps
Allowance for loan and lease losses	$	2,842		$	3,526			(19	)%

⁽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 121 and 131 basis points in the third quarter and first nine 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 136 and 148 basis points in the third quarter and first nine 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 and balance transfer transactions.

⁽⁷⁾	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.

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 decrease in Domestic Card net income from continuing operations in the third quarter of 2013 from the third quarter of 2012 reflected the impact of the following items: (i) a decrease in net interest income, primarily attributable to lower average loans held for investment and the portfolio assets; (ii) an increase in non-interest expense due to recognition of net litigation reserves of $101 million recorded in the third quarter of 2013; and (iii) partially offset by an allowance release of $113 million in the third quarter of 2013, compared with an allowance build of $199 million in the third quarter of 2012.

The primary drivers of the improvement in results for our Domestic Card business in the first nine months of 2013, compared with the first nine months of 2012 included: (i) higher interest income primarily driven by the significant increase in average loans held for investment resulting from the 2012 U.S. card acquisition; (ii) the absence of provision for credit losses of $1.2 billion recorded in the second quarter of 2012 to establish an allowance for acquired credit card loans; (iii) higher non-interest income due to increased customer-related fees from the addition of acquired credit card accounts; (iv) absence of charges incurred in 2012 for expected refunds to customers affected by certain cross-sell sale practices; and (v) absence of the charge recorded in the second quarter of 2012 to establish the finance charge and fee reserve for the acquired loans. This impact was partially offset by an increase in the provision related to higher net charge-offs and operation expenses attributable to the addition of loans and increased amortization of intangibles and other assets associated with the 2012 U.S. card acquisition.

International Card Business

International Card generated net income from continuing operations of $50 million and $173 million in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $68 million and $86 million in the third quarter and first nine months of 2012, respectively. International Card accounted for 10% of total net revenues for our Credit Card business in both the third quarter and first nine months of 2013, respectively, compared with 10% and 11% in the third quarter and first nine months of 2012, respectively. Income attributable to International Card represented 7% and 8% of income for our Credit Card business in the third quarter and first nine months of 2013, respectively, compared with 9% of the net income for both the third quarter and first nine months of 2012, respectively.

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 September 30,									Nine Months Ended September 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change
Selected income statement data:
Net interest income	$	265		$	276			(4	)%	$	807		$	787			3	%
Non-interest income		85			104			(18	)		277			268			3

Total net revenue		350			380			(8	)		1,084			1,055			3
Provision for credit losses		88			81			9			250			289			(13	)
Non-interest expense		191			206			(7	)		590			651			(9	)

Income from continuing operations before income taxes		71			93			(24	)		244			115			112
Income tax provision		21			25			(16	)		71			29			145

Income from continuing operations, net of tax	$	50		$	68			(26	)%	$	173		$	86			101	%

Selected performance metrics:
Average loans held for investment⁽¹⁾	$	7,782		$	8,154			(5	)%	$	7,998		$	8,216			(3	)%
Average yield on loans held for investment⁽²⁾		16.35	%		16.47	%		(12	)bps		16.17	%		15.68	%		49	bps
Total net revenue margin⁽³⁾		17.99			18.64			(65	)		18.07			17.12			95
Net charge-offs	$	92		$	101			(9	)%	$	288		$	328			(12	)%
Net charge-off rate⁽⁴⁾		4.71	%		4.95	%		(24	)bps		4.79	%		5.32	%		(53	)bps
Purchase volume⁽⁵⁾	$	3,523		$	3,468			2	%	$	10,305		$	9,970			3	%


(Dollars in millions)	September 30, 2013			December 31, 2012			Change
Selected period-end data:
Loans held for investment⁽¹⁾	$	8,031		$	8,614			(7	)%
30+ days performing delinquency rate⁽⁶⁾		3.86	%		3.58	%		28	bps
30+ days delinquency rate⁽⁷⁾		4.78			4.49			29
Nonperforming loan rate⁽⁸⁾		1.16			1.16			—
Allowance for loan and lease losses	$	403		$	453			(11	)%

⁽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, net of returns for the period. Excludes cash advance and balance transfer transactions.

⁽⁶⁾	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.

⁽⁷⁾	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.

⁽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 decrease in International Card net income from continuing operations in the third quarter of 2013 from the third quarter of 2012 was largely driven by lower revenues from a decrease in average loans held for investment, partially offset by lower non-interest expense from a decrease in marketing expense.

The primary drivers of the improvement in results for our International Card business in the first nine months of 2013, compared with the first nine 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 in 2012, 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

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 expenses.

Our Consumer Banking business generated net income from continuing operations of $345 million and $1.2 billion in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $376 million and $1.0 billion in the third quarter and first nine months of 2012, respectively. Our results primarily reflect the impact of the following items: (i) declining average balances in our home loan portfolio partially offset by an increase in yields due to higher than estimated cash flows that we expect to collect on acquired loans and (ii) increasing average balances in our auto finance portfolio offset by lower yields.

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 September 30,									Nine Months Ended September 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change
Selected income statement data:
Net interest income	$	1,481		$	1,501			(1	)%	$	4,437		$	4,285			4	%
Non-interest income		184			260			(29	)		554			621			(11	)

Total net revenue		1,665			1,761			(5	)		4,991			4,906			2
Provision for credit losses		202			202			—			444			420			6
Non-interest expense		927			977			(5	)		2,727			2,879			(5	)

Income from continuing operations before income taxes		536			582			(8	)		1,820			1,607			13
Income tax provision		191			206			(7	)		648			569			14

Income from continuing operations, net of tax	$	345		$	376			(8	)%	$	1,172		$	1,038			13	%

Selected performance metrics:
Average loans held for investment:⁽¹⁾
Auto	$	30,157		$	25,923			16	%	$	28,780		$	24,336			18	%
Home loan		37,852			47,262			(20	)		40,450			41,930			(4	)
Retail banking		3,655			4,086			(11	)		3,721			4,139			(10	)

Total consumer banking	$	71,664		$	77,271			(7	)%	$	72,951		$	70,405			4	%

Average yield on loans held for investment⁽²⁾		6.21	%		6.05	%		16	bps		6.04	%		6.40	%		(36	)bps
Average deposits	$	169,082		$	173,334			(2	)%	$	170,294		$	159,273			7	%
Average deposit interest rate		0.63	%		0.71	%		(8	)bps		0.64	%		0.71	%		(7	)bps
Core deposit intangible amortization	$	34		$	41			(17	)%	$	106		$	120			(12	)%
Net charge-offs		170			161			6			423			362			17
Net charge-off rate⁽³⁾		0.95	%		0.83	%		12	bps		0.77	%		0.69	%		8	bps
Net charge-off rate (excluding acquired loans)⁽⁴⁾		1.64			1.70			(6	)		1.40			1.34			6
Automobile loan originations	$	4,752		$	3,905			22	%	$	13,066		$	12,481			5	%

(Dollars in millions)	September 30, 2013			December 31, 2012			Change
Selected period-end data:
Loans held for investment:⁽¹⁾
Auto	$	30,803		$	27,123			14	%
Home loan		36,817			44,100			(17	)
Retail banking		3,665			3,904			(6	)

Total consumer banking	$	71,285		$	75,127			(5	)%

30+ days performing delinquency rate⁽⁵⁾		2.82	%		2.65	%		17	bps
30+ days performing delinquency rate (excluding acquired loans)⁽⁴⁾		4.83			5.14			(31	)
30+ days delinquency rate⁽⁶⁾		3.46			3.34			12
30+ days delinquency rate (excluding acquired loans)⁽⁴⁾		5.92			6.49			(57	)
Nonperforming loans rate⁽⁷⁾		0.79			0.85			(6	)


(Dollars in millions)	September 30, 2013			December 31, 2012			Change
Nonperforming loans rate (excluding acquired loans)⁽⁴⁾		1.36			1.66			(30	)
Nonperforming asset rate⁽⁸⁾		1.01			1.02			(1	)
Nonperforming asset rate (excluding acquired loans)⁽⁴⁾		1.73			1.98			(25	)
Allowance for loan and lease losses	$	733		$	711			3	%
Allowance coverage ratio⁽⁹⁾		1.03	%		0.95	%		8	bps
Deposits	$	168,437		$	172,396			(2	)%
Loans serviced for others		14,043			15,333			(8	)

⁽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 $29.7 billion and $36.5 billion as of September 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 $41.4 billion and $38.0 billion in the third quarter of 2013 and 2012, respectively and $40.3 billion and $36.0 billion in the first nine 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, real estate owned (“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 third quarter and first nine months of 2013, compared with the third quarter and first nine months of 2012, and changes in financial condition and credit performance between September 30, 2013 and December 31, 2012 include the following:

•

Net Interest Income: Net interest income decreased slightly by $20 million, or 1%, in the third quarter of 2013 to $1.5 billion and increased by $152 million, or 4%, in the first nine months of 2013 to $4.4 billion. The increase in net interest income in the first nine months of 2013 was primarily attributable to a significant increase in average loans held for investment due to the ING Direct acquisition and higher auto loan originations over the past twelve months.

•

Non-Interest Income: Non-interest income decreased by $76 million, or 29%, in the third quarter of 2013 to $184 million and decreased by $67 million, or 11%, in the first nine months of 2013 to $554 million.

•

Provision for Credit Losses: The provision for credit losses was flat from the third quarter of 2012 to the third quarter of 2013 and increased slightly by $24 million in the first nine months of 2013, reflecting modestly higher auto loan charge-offs attributable to auto portfolio growth and an increase in the auto charge-off rate from historically low levels. 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 $50 million, or 5%, in the third quarter of 2013 to $927 million and by $152 million, or 5%, in the first nine months of 2013 to $2.7 billion. The decrease was largely due to the absence of ING Direct acquisition-related costs incurred in the first nine 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 $3.8 billion, or 5%, in the first nine months of 2013, to $71.3 billion as of September 30, 2013, due to the continued expected run-off of acquired home loans and small business banking, 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 $4.0 billion, or 2%, in the first nine months of 2013 to $168.4 billion as of September 30, 2013, primarily due to the anticipated run-off of our legacy National Direct Bank deposits.

•

Charge-off and Delinquency Statistics: The reported net charge-off rate of 0.95% and 0.77% in the third quarter and first nine months of 2013, respectively, increased from 0.83% and 0.69% in the third quarter and first nine months of 2012, respectively. The 30+ days delinquency rate increased to 3.46% as of September 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 delinquency rates increased moderately largely due to the run-off of the acquired home loans, which were included in the denominator in calculating the delinquency rates, from $36.4 billion as of December 31, 2012 to $29.6 billion as of September 30, 2013. The credit performance of our consumer loan portfolios continued to improve, resulting in lower delinquency rates, excluding acquired loans, as presented in the Table 8.

Commercial Banking Business

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 expenses.

Our Commercial Banking business generated net income from continuing operations of $174 million and $567 million in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $228 million and $666 million in the third quarter and first nine months of 2012, respectively.

On August 16, 2013, we announced the signing of a definitive agreement to acquire Beech Street Capital, a privately-held, national originator and servicer of Fannie Mae, Freddie Mac and FHA multifamily commercial real estate loans. The acquisition closed on November 1, 2013. The Beech Street Capital results will be reported within the Commercial Banking business.

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 September 30,									Nine Months Ended September 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change
Selected income statement data:
Net interest income	$	480		$	432			11	%	$	1,391		$	1,290			8	%
Non-interest income		87			87			—			264			254			4

Total net revenue		567			519			9			1,655			1,544			7
Provision (benefit) for credit losses		31			(87	)		136			(18	)		(250	)		93
Non-interest expense		266			253			5			793			765			4

Income from continuing operations before income taxes		270			353			(24	)		880			1,029			(14	)
Income tax provision		96			125			(23	)		313			363			(14	)

Income from continuing operations, net of tax	$	174		$	228			(24	)%	$	567		$	666			(15	)%

Selected performance metrics:
Average loans held for investment:⁽¹⁾
Commercial and multifamily real estate	$	19,047		$	16,654			14	%	$	18,201		$	16,004			14	%
Commercial and industrial		21,491			18,817			14			20,596			17,955			15

Total commercial lending		40,538			35,471			14			38,797			33,959			14
Small-ticket commercial real estate		1,038			1,296			(20	)		1,102			1,388			(21	)

Total commercial banking	$	41,576		$	36,767			13	%	$	39,899		$	35,347			13	%

Average yield on loans held for investment⁽²⁾		3.87	%		4.14	%		(27	)bps		3.87	%		4.29	%		(42	)bps
Average deposits	$	30,685		$	28,063			9	%	$	30,590		$	27,859			10	%
Average deposit interest rate		0.27	%		0.31	%		(4	)bps		0.27	%		0.34	%		(7	)bps
Core deposit intangible amortization	$	6		$	8			(25	)%	$	21		$	26			(19	)%
Net charge-offs		8			1			700			19			34			(44	)
Net charge-off rate⁽³⁾		0.07	%		—	%		7	bps		0.06	%		0.13	%		(7	)bps

(Dollars in millions)	September 30, 2013			December 31, 2012			Change
Selected period-end data:
Loans held for investment:
Commercial and multifamily real estate	$	19,523		$	17,732			10	%
Commercial and industrial		21,848			19,892			10

Total commercial lending		41,371			37,624			10
Small-ticket commercial real estate		1,028			1,196			(14	)

Total commercial banking	$

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