USB 10-Q Quarterly Report Sept. 30, 2011 | Alphaminr

USB 10-Q Quarter ended Sept. 30, 2011

US BANCORP \DE\
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10-Q 1 c66223e10vq.htm FORM 10-Q e10vq
Table of Contents

[FORM 10-Q]
[USBANCORP LOGO]


Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from (not applicable)
Commission file number 1-6880
U.S. BANCORP
(Exact name of registrant as specified in its charter)
Delaware 41-0255900
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
800 Nicollet Mall
Minneapolis, Minnesota 55402
(Address of principal executive offices, including zip code)
651-466-3000
(Registrant’s telephone number, including area code)
(not applicable)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding as of October 31, 2011
Common Stock, $.01 Par Value
1,908,404,050 shares


Table of Contents and Form 10-Q Cross Reference Index
Part I — Financial Information
1) Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
3
4
6
30
31
31
2) Quantitative and Qualitative Disclosures About Market Risk/Corporate Risk Profile (Item 3)
8
9
21
21
21
22
23
24
24
32
72
72
72
73
74
EX-12
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.
This quarterly report on Form 10-Q contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are based on the information available to, and assumptions and estimates made by, management as of the date made. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. Global and domestic economies could fail to recover from the recent economic downturn or could experience another severe contraction, which could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities. Global financial markets could experience a recurrence of significant turbulence, which could reduce the availability of funding to certain financial institutions and lead to a tightening of credit, a reduction of business activity, and increased market volatility. Continued stress in the commercial real estate markets, as well as a delay or failure of recovery in the residential real estate markets, could cause additional credit losses and deterioration in asset values. In addition, U.S. Bancorp’s business and financial performance is likely to be negatively impacted by effects of recently enacted and future legislation and regulation. U.S. Bancorp’s results could also be adversely affected by continued deterioration in general business and economic conditions; changes in interest rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in its investment securities portfolio; legal and regulatory developments; increased competition from both banks and non-banks; changes in customer behavior and preferences; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, residual value risk, market risk, operational risk, interest rate risk, and liquidity risk.
For discussion of these and other risks that may cause actual results to differ from expectations, refer to U.S. Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2010, on file with the Securities and Exchange Commission, including the sections entitled “Risk Factors” and “Corporate Risk Profile” contained in Exhibit 13, and all subsequent filings with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. Forward-looking statements speak only as of the date they are made, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.
U.S. Bancorp
1


Table of Contents


Table 1 Selected Financial Data
Three Months Ended
Nine Months Ended
September 30, September 30,
Percent
Percent
(Dollars and Shares in Millions, Except Per Share Data) 2011 2010 Change 2011 2010 Change
Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)
$ 2,624 $ 2,477 5.9 % $ 7,675 $ 7,289 5.3 %
Noninterest income
2,180 2,119 2.9 6,351 6,202 2.4
Securities gains (losses), net
(9 ) (9 ) (22 ) (64 ) 65.6
Total net revenue
4,795 4,587 4.5 14,004 13,427 4.3
Noninterest expense
2,476 2,385 3.8 7,215 6,898 4.6
Provision for credit losses
519 995 (47.8 ) 1,846 3,444 (46.4 )
Income before taxes
1,800 1,207 49.1 4,943 3,085 60.2
Taxable-equivalent adjustment
58 53 9.4 169 156 8.3
Applicable income taxes
490 260 88.5 1,314 620 *
Net income
1,252 894 40.0 3,460 2,309 49.8
Net (income) loss attributable to noncontrolling interests
21 14 50.0 62 34 82.4
Net income attributable to U.S. Bancorp
$ 1,273 $ 908 40.2 $ 3,522 $ 2,343 50.3
Net income applicable to U.S. Bancorp common shareholders
$ 1,237 $ 871 42.0 $ 3,407 $ 2,381 43.1
Per Common Share
Earnings per share
$ .65 $ .46 41.3 % $ 1.78 $ 1.25 42.4 %
Diluted earnings per share
.64 .45 42.2 1.77 1.24 42.7
Dividends declared per share
.125 .050 * .375 .150 *
Book value per share
16.01 14.19 12.8
Market value per share
23.54 21.62 8.9
Average common shares outstanding
1,915 1,913 .1 1,918 1,911 .4
Average diluted common shares outstanding
1,922 1,920 .1 1,926 1,920 .3
Financial Ratios
Return on average assets
1.57 % 1.26 % 1.50 % 1.11 %
Return on average common equity
16.1 12.8 15.5 12.3
Net interest margin (taxable-equivalent basis) (a)
3.65 3.91 3.67 3.90
Efficiency ratio (b)
51.5 51.9 51.4 51.1
Net charge-offs as a percent of average loans outstanding
1.31 2.05 1.49 2.26
Average Balances
Loans
$ 202,169 $ 192,541 5.0 % $ 199,533 $ 192,192 3.8 %
Loans held for sale
3,946 6,465 (39.0 ) 4,382 4,824 (9.2 )
Investment securities
66,252 47,870 38.4 61,907 47,080 31.5
Earning assets
286,269 251,916 13.6 279,305 249,408 12.0
Assets
321,581 286,060 12.4 314,079 283,056 11.0
Noninterest-bearing deposits
58,606 39,732 47.5 50,558 39,223 28.9
Deposits
215,369 182,660 17.9 209,735 182,837 14.7
Short-term borrowings
30,597 36,303 (15.7 ) 30,597 33,727 (9.3 )
Long-term debt
31,609 29,422 7.4 31,786 30,696 3.6
Total U.S. Bancorp shareholders’ equity
33,087 28,887 14.5 31,699 27,582 14.9
September 30,
December 31,

2011 2010
Period End Balances
Loans
$ 204,768 $ 197,061 3.9 %
Investment securities
68,378 52,978 29.1
Assets
330,141 307,786 7.3
Deposits
222,632 204,252 9.0
Long-term debt
30,624 31,537 (2.9 )
Total U.S. Bancorp shareholders’ equity
33,230 29,519 12.6
Asset Quality
Nonperforming assets
$ 4,339 $ 5,048 (14.0 )%
Allowance for credit losses
5,190 5,531 (6.2 )
Allowance for credit losses as a percentage of period-end loans
2.53 % 2.81 %
Capital Ratios
Tier 1 capital
10.8 % 10.5 %
Total risk-based capital
13.5 13.3
Leverage
9.0 9.1
Tier 1 common equity to risk-weighted assets using Basel I definition (c)
8.5 7.8
Tier 1 common equity to risk-weighted assets using anticipated Basel III definition (c)
8.2 7.3
Tangible common equity to tangible assets (c)
6.6 6.0
Tangible common equity to risk-weighted assets (c)
8.1 7.2
* Not meaningful.
(a) Presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding net securities gains (losses).
(c) See Non-Regulatory Capital Ratios on page 30.
2
U.S. Bancorp


Table of Contents

OVERVIEW
Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income attributable to U.S. Bancorp of $1.3 billion for the third quarter of 2011, or $.64 per diluted common share, compared with $908 million, or $.45 per diluted common share for the third quarter of 2010. Return on average assets and return on average common equity were 1.57 percent and 16.1 percent, respectively, for the third quarter of 2011, compared with 1.26 percent and 12.8 percent, respectively, for the third quarter of 2010. The provision for credit losses for the third quarter of 2011 was $150 million lower than net charge-offs. The provision for credit losses equaled net charge-offs in the third quarter of 2010.
Total net revenue, on a taxable-equivalent basis, for the third quarter of 2011 was $208 million (4.5 percent) higher than the third quarter of 2010, reflecting a 5.9 percent increase in net interest income and a 2.9 percent increase in total noninterest income. The increase in net interest income over a year ago was largely the result of an increase in average earning assets and continued growth in lower cost core deposit funding. Noninterest income increased over a year ago, primarily due to higher payments-related revenue, deposit service charges and commercial products revenue, partially offset by lower mortgage banking revenue.
Total noninterest expense in the third quarter of 2011 was $91 million (3.8 percent) higher than the third quarter of 2010, primarily due to higher total compensation and employee benefits expense, including higher pension costs, higher professional services expense and other business initiatives.
The provision for credit losses for the third quarter of 2011 was $519 million, or $476 million (47.8 percent) lower than the third quarter of 2010. Net charge-offs in the third quarter of 2011 were $669 million, compared with $995 million in the third quarter of 2010. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
The Company reported net income attributable to U.S. Bancorp of $3.5 billion for the first nine months of 2011, or $1.77 per diluted common share, compared with $2.3 billion, or $1.24 per diluted common share for the first nine months of 2010. Return on average assets and return on average common equity were 1.50 percent and 15.5 percent, respectively, for the first nine months of 2011, compared with 1.11 percent and 12.3 percent, respectively, for the first nine months of 2010. The Company’s results for the first nine months of 2011 included a $46 million gain related to the acquisition of First Community Bank of New Mexico (“FCB”) in a transaction with the Federal Deposit Insurance Corporation (“FDIC”) during the first quarter of 2011. Results for the first nine months of 2011 also included net securities losses of $22 million and a provision for credit losses lower than net charge-offs by $375 million. Diluted earnings per common share for the first nine months of 2010 included a non-recurring $.05 benefit in the second quarter related to an exchange of perpetual preferred stock for outstanding income trust securities. The first nine months of 2010 also included $200 million of provision for credit losses in excess of net charge-offs and $64 million of net securities losses.
Total net revenue, on a taxable-equivalent basis, for the first nine months of 2011 was $577 million (4.3 percent) higher than the first nine months of 2010, reflecting a 5.3 percent increase in net interest income and a 3.1 percent increase in total noninterest income. The increase in net interest income over a year ago was largely the result of an increase in average earning assets and continued growth in lower cost core deposit funding. Noninterest income increased over a year ago, primarily due to higher payments-related revenue, commercial products revenue and other income, as well as lower net securities losses, partially offset by lower mortgage banking revenue.
Total noninterest expense in the first nine months of 2011 was $317 million (4.6 percent) higher than the first nine months of 2010, primarily due to higher total compensation and employee benefits expense, including higher pension costs, higher professional services expense and other business initiatives.
The provision for credit losses for the first nine months of 2011 was $1.8 billion, or $1.6 billion (46.4 percent) lower than the first nine months of 2010. Net charge-offs in the first nine months of 2011 were $2.2 billion, compared with $3.2 billion in the first nine months of 2010. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
U.S. Bancorp
3


Table of Contents

Net Interest Income Net interest income, on a taxable-equivalent basis, was $2.6 billion in the third quarter of 2011, compared with $2.5 billion in the third quarter of 2010. Net interest income, on a taxable-equivalent basis, was $7.7 billion in the first nine months of 2011, compared with $7.3 billion in the first nine months of 2010. The increases were primarily the result of growth in average earning assets and lower cost core deposit funding. Average earning assets increased $34.4 billion (13.6 percent) in the third quarter and $29.9 billion (12.0 percent) in the first nine months of 2011, compared with the same periods of 2010, driven by increases in investment securities, loans and other earning assets, which included cash balances held at the Federal Reserve. The net interest margin in the third quarter and first nine months of 2011 was 3.65 percent and 3.67 percent, respectively, compared with 3.91 percent and 3.90 percent in the third quarter and first nine months of 2010, respectively. The decreases in the net interest margin reflected higher balances in lower yielding investment securities and growth in cash balances held at the Federal Reserve. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tables for further information on net interest income.
Total average loans for the third quarter and first nine months of 2011 were $9.6 billion (5.0 percent) and $7.3 billion (3.8 percent) higher, respectively, than the same periods of 2010, driven by growth in residential mortgages, commercial loans, commercial real estate loans and other retail loans, partially offset by decreases in credit card balances and loans covered by loss sharing agreements with the FDIC (“covered” loans). The increases were driven by demand for loans and lines by new and existing credit-worthy borrowers and the impact of the FCB acquisition. Average covered loans decreased for the third quarter and first nine months of 2011, by $3.5 billion (18.2 percent) and $3.7 billion (18.1 percent), respectively, compared with the same periods of 2010.
Average investment securities in the third quarter and first nine months of 2011 were $18.4 billion (38.4 percent) and $14.8 billion (31.5 percent) higher, respectively, than the same periods of 2010, primarily due to purchases of U.S. Treasury and government agency-related securities, as the Company increased its on-balance sheet liquidity in response to anticipated regulatory requirements.
Average total deposits for the third quarter and first nine months of 2011 were $32.7 billion (17.9 percent) and $26.9 billion (14.7 percent) higher, respectively, than the same periods of 2010. Excluding deposits from acquisitions, third quarter 2011 average total deposits increased $24.2 billion (13.2 percent) over the third quarter of 2010. Average noninterest-bearing deposits for the third quarter and first nine months of 2011 were $18.9 billion (47.5 percent) and $11.3 billion (28.9 percent) higher, respectively, than the same periods of 2010, with growth in Wholesale Banking and Commercial Real Estate, Wealth Management and Securities Services, and Consumer and Small Business Banking balances. Average total savings deposits for the third quarter and first nine months of 2011 were $13.4 billion (13.5 percent) and $14.4 billion (14.5 percent) higher, respectively, than the same periods of 2010, primarily due to growth in corporate and institutional trust balances, including the impact of the December 30, 2010 acquisition of the securitization trust administration business of Bank of America, N.A. (“securitization trust administration acquisition”), as well as increases in Consumer and Small Business Banking balances, partially offset by lower broker-dealer balances. Average time certificates of deposit less than $100,000 were lower in the third quarter and first nine months of 2011 by $773 million (4.8 percent) and $1.8 billion (10.6 percent), respectively, compared with the same periods of 2010, as a result of expected decreases in acquired certificates of deposit and decreases in Consumer and Small Business Banking balances. Average time deposits greater than $100,000 were $1.2 billion (4.4 percent) and $3.0 billion (11.0 percent) higher in the third quarter and first nine months of 2011, respectively, compared with the same periods of 2010, principally due to higher balances in Wholesale Banking and Commercial Real Estate and institutional and corporate trust, including the impact of the securitization trust administration and FCB acquisitions.
Provision for Credit Losses The provision for credit losses for the third quarter and first nine months of 2011 decreased $476 million (47.8 percent) and $1.6 billion (46.4 percent), respectively, from the same periods of 2010. Net charge-offs decreased $326 million (32.8 percent) and $1.0 billion (31.5 percent) in the third quarter and first nine months of 2011, respectively, compared with the same periods of 2010, principally due to improvement in the commercial, commercial real estate, credit card and other retail loan portfolios. The provision for credit losses was lower than net charge-offs by $150 million in the third quarter and $375 million in the first nine months of 2011, equaled net charge-offs in the third quarter of 2010, and exceeded net charge-offs by $200 million in the first nine months of 2010. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
4
U.S. Bancorp


Table of Contents


Table 2 Noninterest Income
Three Months Ended
Nine Months Ended
September 30, September 30,
Percent
Percent
(Dollars in Millions) 2011 2010 Change 2011 2010 Change
Credit and debit card revenue
$ 289 $ 274 5.5 % $ 842 $ 798 5.5 %
Corporate payment products revenue
203 191 6.3 563 537 4.8
Merchant processing services
338 318 6.3 977 930 5.1
ATM processing services
115 105 9.5 341 318 7.2
Trust and investment management fees
241 267 (9.7 ) 755 798 (5.4 )
Deposit service charges
183 160 14.4 488 566 (13.8 )
Treasury management fees
137 139 (1.4 ) 418 421 (.7 )
Commercial products revenue
212 197 7.6 621 563 10.3
Mortgage banking revenue
245 310 (21.0 ) 683 753 (9.3 )
Investment products fees and commissions
31 27 14.8 98 82 19.5
Securities gains (losses), net
(9 ) (9 ) (22 ) (64 ) 65.6
Other
186 131 42.0 565 436 29.6
Total noninterest income
$ 2,171 $ 2,110 2.9 % $ 6,329 $ 6,138 3.1 %
Noninterest Income Noninterest income in the third quarter and first nine months of 2011 was $2.2 billion and $6.3 billion, respectively, compared with $2.1 billion and $6.1 billion in the same periods of 2010, or increases of $61 million (2.9 percent) and $191 million (3.1 percent), respectively. Payments-related revenues and ATM processing services income were higher largely due to increased transaction volumes. Commercial products revenue increased due to higher commercial leasing revenue, syndication fees and other commercial loan fees. Investment products fees and commissions also increased due to business initiatives. Deposit service charges increased in the third quarter of 2011, compared with the third quarter of 2010, primarily due to new account growth, higher transaction volumes and recent product redesign initiatives, partially offset by 2010 legislative and pricing changes. Deposit service charges were lower in the first nine months of 2011, compared with the same period of the prior year, due to the 2010 legislative and pricing changes, partially offset by account growth. Other income increased in the third quarter and first nine months of 2011, compared with the same periods of the prior year, primarily due to higher retail lease residual revenue and customer-related derivative revenue. In addition, other income for the first nine months of 2011 also increased over the same period of the prior year due to a gain recognized on the FCB acquisition in the first quarter of 2011. Trust and investment management fees decreased as a result of the sale of the Company’s long-term asset management business in the fourth quarter of 2010 and increased money market investment fee waivers, partially offset by the positive impact of the securitization trust administration acquisition and improved market conditions. In addition, mortgage banking revenue decreased due to lower origination and sales revenue.
The Company anticipates the implementation of recently passed legislation, under the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, will reduce future noninterest income by approximately $300 million on an annualized basis beginning in the fourth quarter of 2011, based on anticipated transaction volume excluding any mitigating actions the Company may take.
Noninterest Expense Noninterest expense was $2.5 billion in the third quarter and $7.2 billion in the first nine months of 2011, compared with $2.4 billion in the third quarter and $6.9 billion in the first nine months of 2010, or increases of $91 million (3.8 percent) and $317 million (4.6 percent), respectively. The increase in noninterest expense from a year ago was principally due to increased total compensation, employee benefits, net occupancy and equipment expense, and professional services expense, partially offset by decreases in other intangibles expense and other expense. Total compensation increased primarily due to an increase in staffing related to branch expansion and other business initiatives, and merit increases. Employee benefits expense increased due to higher pension costs and the impact of additional staff. Net occupancy and equipment expense increased principally due to business expansion and technology initiatives. Professional services expense increased due to mortgage servicing-related and other projects across multiple business lines. These increases were partially offset by decreases in other intangibles expense due to the reduction or completion of the amortization of certain intangibles. Other expense was also lower due to lower costs related to other real estate owned, insurance and litigation matters.
U.S. Bancorp
5


Table of Contents


Table 3 Noninterest Expense
Three Months Ended
Nine Months Ended
September 30, September 30,
Percent
Percent
(Dollars in Millions) 2011 2010 Change 2011 2010 Change
Compensation
$ 1,021 $ 973 4.9 % $ 2,984 $ 2,780 7.3 %
Employee benefits
203 171 18.7 643 523 22.9
Net occupancy and equipment
252 229 10.0 750 682 10.0
Professional services
100 78 28.2 252 209 20.6
Marketing and business development
102 108 (5.6 ) 257 254 1.2
Technology and communications
189 186 1.6 563 557 1.1
Postage, printing and supplies
76 74 2.7 226 223 1.3
Other intangibles
75 90 (16.7 ) 225 278 (19.1 )
Other
458 476 (3.8 ) 1,315 1,392 (5.5 )
Total noninterest expense
$ 2,476 $ 2,385 3.8 % $ 7,215 $ 6,898 4.6 %
Efficiency ratio (a)
51.5 % 51.9 % 51.4 % 51.1 %
(a) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.

Income Tax Expense The provision for income taxes was $490 million (an effective rate of 28.1 percent) for the third quarter and $1.3 billion (an effective rate of 27.5 percent) for the first nine months of 2011, compared with $260 million (an effective rate of 22.5 percent) and $620 million (an effective rate of 21.2 percent) for the same periods of 2010. The increases in the effective tax rates for the third quarter and first nine months of 2011, compared with the same periods of the prior year, principally reflected the marginal impact of higher pretax earnings year-over-year. For further information on income taxes, refer to Note 11 of the Notes to Consolidated Financial Statements.
BALANCE SHEET ANALYSIS
Loans The Company’s total loan portfolio was $204.8 billion at September 30, 2011, compared with $197.1 billion at December 31, 2010, an increase of $7.7 billion (3.9 percent). The increase was driven by increases in most major loan categories, partially offset by lower credit card and covered loans. The $5.4 billion (11.2 percent) increase in commercial loans was primarily driven by higher loan demand from new and existing customers, and the $908 million (2.6 percent) increase in commercial real estate loans was primarily due to the FCB acquisition.
Residential mortgages held in the loan portfolio increased $4.4 billion (14.3 percent) at September 30, 2011, compared with December 31, 2010, as a result of mortgage originations exceeding prepayments and paydowns in the portfolio. Most loans retained in the portfolio are to customers with prime or near-prime credit characteristics at the date of origination.
Total credit card loans decreased $471 million (2.8 percent) at September 30, 2011, compared with December 31, 2010. Other retail loans, which include retail leasing, home equity and other consumer loans, were essentially unchanged at September 30, 2011, compared with December 31, 2010.
Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were $5.4 billion at September 30, 2011, compared with $8.4 billion at December 31, 2010. The decrease in loans held for sale was principally due to a high level of mortgage loan origination and refinancing activity in the second half of 2010.
Most of the Company’s residential mortgage loans are originated to guidelines that allow the loans to be sold into existing, highly liquid secondary markets; in particular in government agency transactions and to government sponsored enterprises (“GSEs”). The Company also originates residential mortgages that follow its own investment guidelines with the intent to hold such loans in the loan portfolio, primarily well secured jumbo mortgages to borrowers with high credit quality, as well as near-prime non-conforming mortgages. The Company generally retains portfolio loans through maturity; however, the Company’s intent may change over time based upon various factors such as ongoing asset/liability management activities, assessment of product profitability, credit risk, liquidity needs, and capital implications. If the Company’s intent or ability to hold an existing portfolio loan changes, it is transferred to loans held for sale.
Investment Securities Investment securities totaled $68.4 billion at September 30, 2011, compared with $53.0 billion at December 31, 2010. The $15.4 billion (29.1 percent) increase primarily reflected $14.1 billion of net investment purchases, primarily in the held-to-maturity investment portfolio, as well as a $1.0 billion favorable change in unrealized gains (losses) on available-for-sale investment securities. Held-to-maturity securities were $16.3 billion at September 30, 2011, compared with $1.5 billion at December 31, 2010, primarily reflecting increases in U.S. Treasury and agency mortgage-backed securities, as the Company increased its on-balance sheet liquidity in response to anticipated regulatory requirements.
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MDA Tables Throw Away Note and Keep Tables


Table 4 Investment Securities
Available-for-Sale Held-to-Maturity
Weighted-
Weighted-
Average
Weighted-
Average
Weighted-
Amortized
Fair
Maturity in
Average
Amortized
Fair
Maturity in
Average
September 30, 2011 (Dollars in Millions) Cost Value Years Yield (e) Cost Value Years Yield (e)
U.S. Treasury and Agencies
Maturing in one year or less
$ 852 $ 853 .3 1.73 % $ $ %
Maturing after one year through five years
556 562 2.2 .92 2,501 2,537 2.4 .99
Maturing after five years through ten years
49 53 8.5 4.24
Maturing after ten years
20 21 11.8 3.42 122 122 12.0 1.74
Total
$ 1,477 $ 1,489 1.4 1.53 % $ 2,623 $ 2,659 2.9 1.02 %
Mortgage-Backed Securities (a)
Maturing in one year or less
$ 679 $ 680 .6 2.53 % $ 200 $ 198 .7 1.48 %
Maturing after one year through five years
30,646 31,508 3.4 2.92 10,884 11,168 3.6 2.57
Maturing after five years through ten years
7,863 7,730 6.6 2.02 1,801 1,843 5.5 2.07
Maturing after ten years
1,788 1,728 12.3 1.69 522 530 11.9 1.42
Total
$ 40,976 $ 41,646 4.4 2.69 % $ 13,407 $ 13,739 4.2 2.44 %
Asset-Backed Securities (a)
Maturing in one year or less
$ 6 $ 15 .5 13.56 % $ 2 $ 2 .3 1.01 %
Maturing after one year through five years
179 185 3.5 13.01 44 44 2.9 .95
Maturing after five years through ten years
689 695 8.0 2.81 14 17 6.3 .87
Maturing after ten years
8 9 15.9 7.80 24 25 23.0 .82
Total
$ 882 $ 904 7.1 5.01 % $ 84 $ 88 9.1 .90 %
Obligations of State and Political Subdivisions (b)(c)
Maturing in one year or less
$ 16 $ 16 .4 6.08 % $ $ .5 7.62 %
Maturing after one year through five years
3,083 3,145 4.1 6.59 5 6 3.3 8.38
Maturing after five years through ten years
2,888 2,946 5.7 6.79 4 4 6.0 5.38
Maturing after ten years
422 392 20.4 7.19 15 14 15.4 5.53
Total
$ 6,409 $ 6,499 5.9 6.72 % $ 24 $ 24 11.2 6.17 %
Other Debt Securities
Maturing in one year or less
$ 122 $ 112 .4 6.24 % $ 1 $ 1 .5 .84 %
Maturing after one year through five years
12 10 2.0 1.29
Maturing after five years through ten years
31 28 6.0 6.33 118 92 7.0 1.17
Maturing after ten years
1,282 1,091 30.3 4.07
Total
$ 1,435 $ 1,231 27.2 4.30 % $ 131 $ 103 6.5 1.18 %
Other Investments
$ 313 $ 340 17.3 3.99 % $ $ %
Total investment securities (d)
$ 51,492 $ 52,109 5.3 3.25 % $ 16,269 $ 16,613 4.0 2.20 %
(a) Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
(b) Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if purchased at par or a discount.
(c) Maturity calculations for obligations of state and politicial subdivisions are based on the first optional call date for securities with a fair value above par and contractual maturity for securities with a fair value equal to or below par.
(d) The weighted-average maturity of the available-for-sale investment securities was 7.4 years at December 31, 2010, with a corresponding weighted-average yield of 3.41 percent. The weighted-average maturity of the held-to-maturity investment securities was 6.3 years at December 31, 2010, with a corresponding weighted-average yield of 2.07 percent.
(e) Average yields are presented on a fully-taxable equivalent basis under a tax rate of 35 percent. Yields on available-for-sale and held-to-maturity securities are computed based on historical cost balances. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity.
September 30, 2011 December 31, 2010
Amortized
Percent
Amortized
Percent
(Dollars in Millions) Cost of Total Cost of Total
U.S. Treasury and agencies
$ 4,100 6.1 % $ 2,724 5.1 %
Mortgage-backed securities
54,383 80.2 40,654 76.2
Asset-backed securities
966 1.4 1,197 2.3
Obligations of state and political subdivisions
6,433 9.5 6,862 12.9
Other debt securities and investments
1,879 2.8 1,887 3.5
Total investment securities
$ 67,761 100.0 % $ 53,324 100.0 %
The Company conducts a regular assessment of its investment portfolio to determine whether any securities are other-than-temporarily impaired. At September 30, 2011, the Company’s net unrealized gain on available-for-sale securities was $617 million, compared with a net unrealized loss of $346 million at December 31, 2010. The favorable change in net unrealized gains (losses) was primarily due to increases in the fair value of state and
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political securities and agency mortgage-backed securities. Unrealized losses on available-for-sale securities in an unrealized loss position totaled $646 million at September 30, 2011, compared with $1.2 billion at December 31, 2010. When assessing unrealized losses for other-than-temporary impairment, the Company considers the nature of the investment, the financial condition of the issuer, the extent and duration of unrealized loss, expected cash flows of underlying assets and market conditions. At September 30, 2011, the Company had no plans to sell securities with unrealized losses and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost.
There is limited market activity for non-agency mortgage-backed securities held by the Company. As a result, the Company estimates the fair value of these securities using estimates of expected cash flows, discount rates and management’s assessment of various other market factors, which are judgmental in nature. The Company recorded $9 million and $24 million of impairment charges in earnings during the third quarter and first nine months of 2011, respectively, predominately on non-agency mortgage-backed securities. These impairment charges were due to changes in expected cash flows primarily resulting from increases in defaults in the underlying mortgage pools. Further adverse changes in market conditions may result in additional impairment charges in future periods. Refer to Notes 4 and 13 in the Notes to Consolidated Financial Statements for further information on investment securities.
Deposits Total deposits were $222.6 billion at September 30, 2011, compared with $204.3 billion at December 31, 2010, the result of increases in noninterest-bearing and savings account deposits, partially offset by decreases in money market and time deposits greater than $100,000. Noninterest-bearing deposits increased $18.9 billion (41.7 percent), primarily due to increases in Wholesale Banking and Commercial Real Estate, and corporate trust balances. Savings account balances increased $3.0 billion (12.5 percent), primarily due to continued strong participation in a savings product offered by Consumer and Small Business Banking. Money market balances decreased $2.0 billion (4.3 percent) primarily due to lower Consumer and Small Business Banking, and broker-dealer balances, partially offset by higher corporate trust balances. Time deposits greater than $100,000, which are managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing, decreased $1.5 billion (5.0 percent) at September 30, 2011, compared with December 31, 2010. Interest checking balances decreased $160 million (.4 percent) primarily due to lower institutional trust balances, partially offset by higher Consumer and Small Business Banking, and corporate trust balances.
Borrowings The Company utilizes both short-term and long-term borrowings as part of its asset/liability management and funding strategies. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $32.0 billion at September 30, 2011, compared with $32.6 billion at December 31, 2010. The $528 million (1.6 percent) decrease in short-term borrowings was primarily due to lower repurchase agreements, partially offset by higher commercial paper and other borrowed funds balances. Long-term debt was $30.6 billion at September 30, 2011, compared with $31.5 billion at December 31, 2010. The $913 million (2.9 percent) decrease was primarily due to $1.7 billion of medium-term note and subordinated debt repayments and maturities, $.8 billion of extinguishments of junior subordinated debentures, and a $.6 billion decrease in Federal Home Loan Bank advances, partially offset by $1.0 billion of medium-term note issuances and a $1.0 billion increase in long-term debt related to certain consolidated variable interest entities. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.
CORPORATE RISK PROFILE
Overview Managing risks is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit, residual value, operational, interest rate, market and liquidity risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Residual value risk is the potential reduction in the end-of-term value of leased assets. Operational risk includes risks related to fraud, legal and compliance, processing errors, technology, breaches of internal controls and business continuation and disaster recovery. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates, which can affect the re-pricing of assets and liabilities differently. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, mortgage servicing rights (“MSRs”) and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. In addition, corporate strategic decisions, as well as the risks
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described above, could give rise to reputation risk. Reputation risk is the risk that negative publicity or press, whether true or not, could result in costly litigation or cause a decline in the Company’s stock value, customer base, funding sources or revenue.
Credit Risk Management The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors, such as changes in unemployment rates, gross domestic product and consumer bankruptcy filings. In addition, credit quality ratings as defined by the Company, are an important part of the Company’s overall credit risk management and evaluation of its allowance for credit losses. Loans with a pass rating represent those not classified on the Company’s rating scale for problem credits, as minimal risk has been identified. Loans with a special mention or classified rating, including all of the Company’s loans that are 90 days or more past due and still accruing, nonaccrual loans, and those considered troubled debt restructurings (“TDRs”), encompass all loans held by the Company that it considers to have a potential or well-defined weakness that may put full collection of contractual cash flows at risk. Refer to Note 5 in the Notes to Consolidated Financial Statements for further discussion of the Company’s loan portfolios including internal credit quality ratings. In addition, Refer to “Management’s Discussion and Analysis — Credit Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for a more detailed discussion on credit risk management processes.
The Company manages its credit risk, in part, through diversification of its loan portfolio and limit setting by product type criteria and concentrations. As part of its normal business activities, the Company offers a broad array of lending products. The Company categorizes its loan portfolio into three segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s three loan portfolio segments are commercial lending, consumer lending and covered loans. The commercial lending segment includes loans and leases made to small business, middle market, large corporate, commercial real estate, financial institution, and public sector customers. Key risk characteristics relevant to commercial lending segment loans include the industry and geography of the borrower’s business, purpose of the loan, repayment source, borrower’s debt capacity and financial flexibility, loan covenants, and nature of pledged collateral, if any. These risk characteristics, among others, are considered in determining estimates about the likelihood of default by the borrowers and the severity of loss in the event of default. The Company considers these risk characteristics in assigning internal risk ratings to these loans which is the primary factor in determining the allowance for credit losses for loans in the commercial lending segment.
The consumer lending segment represents loans and leases made to consumer customers including residential mortgages, credit cards, and other retail loans such as revolving consumer lines, auto loans and leases, student loans, and home equity loans and lines. Home equity or second mortgage loans are junior lien closed-end accounts fully disbursed at origination. These loans typically are fixed rate loans with a 10 or 15 year fixed payment amortization schedule. Home equity lines are revolving accounts originated giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines are variable rates benchmarked to the prime rate, with a 15 year draw period during which a minimum payment is equivalent to the monthly interest, followed by a 10 year amortization period. At September 30, 2011, substantially all of the Company’s home equity lines were in the draw period. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers’ capacity and willingness to repay and include unemployment rates and other economic factors, and customer payment history. These risk characteristics, among others, are reflected in forecasts of delinquency levels, bankruptcies and losses which are the primary factors in determining the allowance for credit losses for the consumer lending segment.
The covered loan segment represents loans acquired in FDIC-assisted transactions that are covered by loss sharing agreements with the FDIC that greatly reduce the risk of future credit losses to the Company. Key risk characteristics for covered segment loans are consistent with the segment they would otherwise be included in had the loss share coverage not been in place but consider the indemnification provided by the FDIC.
The Company further disaggregates its loan portfolio segments into various classes based on their underlying risk characteristics. The two classes within the commercial lending segment are commercial loans and commercial real estate loans. The three classes within the consumer lending segment are residential
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mortgages, credit card loans and other retail loans. The covered loan segment consists of only one class.
The Company’s consumer lending segment utilizes several distinct business processes and channels to originate consumer credit, including traditional branch lending, indirect lending, portfolio acquisitions and a consumer finance division. Generally, loans managed by the Company’s consumer finance division exhibit higher credit risk characteristics, but are priced commensurate with the differing risk profile. With respect to residential mortgages originated through these channels, the Company may either retain the loans on its balance sheet or sell its interest in the balances into the secondary market while retaining the servicing rights and customer relationships. For residential mortgages that are retained in the Company’s portfolio and for home equity and second mortgages, credit risk is also diversified by geography and managed by adherence to loan-to-value and borrower credit criteria during the underwriting process.
The following tables provide summary information of the loan-to-values of residential mortgages and home equity and second mortgages by distribution channel and type at September 30, 2011:
Residential mortgages
Interest
Percent
(Dollars in Millions) Only Amortizing Total of Total
Consumer Finance
Less than or equal to 80%
$ 1,350 $ 5,753 $ 7,103 56.6 %
Over 80% through 90%
405 2,912 3,317 26.4
Over 90% through 100%
376 1,578 1,954 15.6
Over 100%
180 180 1.4
Total
$ 2,131 $ 10,423 $ 12,554 100.0 %
Other
Less than or equal to 80%
$ 1,867 $ 19,155 $ 21,022 93.1 %
Over 80% through 90%
43 779 822 3.7
Over 90% through 100%
57 669 726 3.2
Over 100%
Total
$ 1,967 $ 20,603 $ 22,570 100.0 %
Total Company
Less than or equal to 80%
$ 3,217 $ 24,908 $ 28,125 80.1 %
Over 80% through 90%
448 3,691 4,139 11.8
Over 90% through 100%
433 2,247 2,680 7.6
Over 100%
180 180 .5
Total
$ 4,098 $ 31,026 $ 35,124 100.0 %
Note: Loan-to-values determined as of the date of origination and adjusted for cumulative principal payments, and consider mortgage insurance, as applicable.
Home equity and second mortgages
Percent
(Dollars in Millions) Lines Loans Total of Total
Consumer Finance (a)
Less than or equal to 80%
$ 1,077 $ 193 $ 1,270 52.2 %
Over 80% through 90%
455 122 577 23.7
Over 90% through 100%
299 190 489 20.1
Over 100%
46 50 96 4.0
Total
$ 1,877 $ 555 $ 2,432 100.0 %
Other
Less than or equal to 80%
$ 11,381 $ 1,014 $ 12,395 77.6 %
Over 80% through 90%
2,176 425 2,601 16.3
Over 90% through 100%
608 308 916 5.7
Over 100%
42 24 66 .4
Total
$ 14,207 $ 1,771 $ 15,978 100.0 %
Total Company
Less than or equal to 80%
$ 12,458 $ 1,207 $ 13,665 74.2 %
Over 80% through 90%
2,631 547 3,178 17.3
Over 90% through 100%
907 498 1,405 7.6
Over 100%
88 74 162 .9
Total
$ 16,084 $ 2,326 $ 18,410 100.0 %
(a) Consumer finance category includes credit originated and managed by the consumer finance division, as well as the majority of home equity and second mortgages with a loan-to-value greater than 100 percent that were originated in the branches.
Note: Loan-to-values determined on original appraisal value of collateral and the current amortized loan balance, or maximum of current commitment or current balance on lines.
Within the consumer finance division, at September 30, 2011, approximately $1.9 billion of residential mortgages were to customers that may be defined as sub-prime borrowers based on credit scores from independent credit rating agencies at loan origination, compared with $2.1 billion at December 31, 2010.
The following table provides further information on the loan-to-values of residential mortgages specifically for the consumer finance division at September 30, 2011:
Interest
Percent of
(Dollars in Millions) Only Amortizing Total Division
Sub-Prime Borrowers
Less than or equal to 80%
$ 4 $ 924 $ 928 7.4 %
Over 80% through 90%
2 439 441 3.5
Over 90% through 100%
12 505 517 4.1
Over 100%
34 34 .3
Total
$ 18 $ 1,902 $ 1,920 15.3 %
Other Borrowers
Less than or equal to 80%
$ 1,346 $ 4,829 $ 6,175 49.2 %
Over 80% through 90%
403 2,473 2,876 22.9
Over 90% through 100%
364 1,073 1,437 11.4
Over 100%
146 146 1.2
Total
$ 2,113 $ 8,521 $ 10,634 84.7 %
Total Consumer Finance
$ 2,131 $ 10,423 $ 12,554 100.0 %
Note: Loan-to-values determined as of the date of origination and adjusted for cumulative principal payments, and consider mortgage insurance, as applicable.
In addition to residential mortgages, at September 30, 2011, the consumer finance division had $.5 billion of home equity and second mortgage loans to customers that may be defined as sub-prime borrowers, unchanged from December 31, 2010.
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Table 5 Delinquent Loan Ratios as a Percent of Ending Loan Balances
September 30,
December 31,
90 days or more past due excluding nonperforming loans 2011 2010
Commercial
Commercial
.09 % .15 %
Lease financing
.02 .02
Total commercial
.08 .13
Commercial Real Estate
Commercial mortgages
.09
Construction and development
.03 .01
Total commercial real estate
.08
Residential Mortgages (a)
1.03 1.63
Credit Card
1.28 1.86
Other Retail
Retail leasing
.02 .05
Other
.40 .49
Total other retail (b)
.36 .45
Total loans, excluding covered loans
.43 .61
Covered Loans
5.14 6.04
Total loans
.78 % 1.11 %
September 30,
December 31,
90 days or more past due including nonperforming loans 2011 2010
Commercial
.79 % 1.37 %
Commercial real estate
3.51 3.73
Residential mortgages (a)
2.88 3.70
Credit card
2.81 3.22
Other retail (b)
.50 .58
Total loans, excluding covered loans
1.79 2.19
Covered loans
11.70 12.94
Total loans
2.53 % 3.17 %
(a) Delinquent loan ratios exclude $2.5 billion at September 30, 2011, and $2.6 billion at December 31, 2010, of loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Including the guaranteed amounts, the ratio of residential mortgages 90 days or more past due including all nonperforming loans was 10.09 percent at September 30, 2011, and 12.28 percent at December 31, 2010.
(b) Delinquent loan ratios exclude student loans that are guaranteed by the federal government. Including the guaranteed amounts, the ratio of total other retail loans 90 days or more past due including nonperforming loans was .95 percent at September 30, 2011, and 1.04 percent at December 31, 2010.
The following table provides further information on the loan-to-values of home equity and second mortgages specifically for the consumer finance division at September 30, 2011:
Percent
(Dollars in Millions) Lines Loans Total of Total
Sub-Prime Borrowers
Less than or equal to 80%
$ 61 $ 113 $ 174 7.1 %
Over 80% through 90%
39 66 105 4.3
Over 90% through 100%
6 115 121 5.0
Over 100%
30 42 72 3.0
Total
$ 136 $ 336 $ 472 19.4 %
Other Borrowers
Less than or equal to 80%
$ 1,016 $ 80 $ 1,096 45.1 %
Over 80% through 90%
416 56 472 19.4
Over 90% through 100%
293 75 368 15.1
Over 100%
16 8 24 1.0
Total
$ 1,741 $ 219 $ 1,960 80.6 %
Total Consumer Finance
$ 1,877 $ 555 $ 2,432 100.0 %
Note: Loan-to-values determined on original appraisal value of collateral and the current amortized loan balance, or maximum of current commitment or current balance on lines.
The total amount of consumer lending segment residential mortgage, home equity and second mortgage loans to customers that may be defined as sub-prime borrowers represented only .7 percent of total assets at September 30, 2011, compared with .9 percent at December 31, 2010. Covered loans included $1.6 billion in loans with negative-amortization payment options at September 30, 2011, unchanged from December 31, 2010. The Company does not have any residential mortgages with payment schedules that would cause balances to increase over time other than certain covered loans.
Loan Delinquencies Trends in delinquency ratios are an indicator, among other considerations, of credit risk within the Company’s loan portfolios. The Company measures delinquencies, both including and excluding nonperforming loans, to enable comparability with other companies. Accruing loans 90 days or more past due
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totaled $1.6 billion ($814 million excluding covered loans) at September 30, 2011, compared with $2.2 billion ($1.1 billion excluding covered loans) at December 31, 2010. These balances exclude loans purchased from Government National Mortgage Association mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. The $280 million (25.6 percent) decrease, excluding covered loans, reflected a moderation in the level of stress in economic conditions in the first nine months of 2011. These loans are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, are in the process of collection and are reasonably expected to result in repayment or restoration to current status, or are managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines. The ratio of accruing loans 90 days or more past due to total loans was .78 percent (.43 percent excluding covered loans) at September 30, 2011, compared with 1.11 percent (.61 percent excluding covered loans) at December 31, 2010.
The following table provides summary delinquency information for residential mortgages, credit card and other retail loans included in the consumer lending segment:
As a Percent of Ending
Amount Loan Balances
September 30,
December 31,
September 30,
December 31,
(Dollars in Millions) 2011 2010 2011 2010
Residential mortgages (a)
30-89 days
$ 385 $ 456 1.09 % 1.48 %
90 days or more
361 500 1.03 1.63
Nonperforming
650 636 1.85 2.07
Total
$ 1,396 $ 1,592 3.97 % 5.18 %
Credit card
30-89 days
$ 225 $ 269 1.38 % 1.60 %
90 days or more
209 313 1.28 1.86
Nonperforming
250 228 1.53 1.36
Total
$ 684 $ 810 4.19 % 4.82 %
Other retail
Retail leasing
30-89 days
$ 10 $ 17 .19 % .37 %
90 days or more
1 2 .02 .05
Nonperforming
Total
$ 11 $ 19 .21 % .42 %
Home equity and second mortgages
30-89 days
$ 153 $ 175 .83 % .93 %
90 days or more
123 148 .67 .78
Nonperforming
36 36 .19 .19
Total
$ 312 $ 359 1.69 % 1.90 %
Other (b)
30-89 days
$ 166 $ 212 .67 % .85 %
90 days or more
50 66 .20 .26
Nonperforming
30 29 .12 .12
Total
$ 246 $ 307 .99 % 1.23 %
(a) Excludes $2.5 billion and $2.6 billion at September 30, 2011, and December 31, 2010, respectively, of loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest.
(b) Includes revolving credit, installment, automobile and student loans.
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The following table provides information on delinquent and nonperforming consumer lending loans as a percent of ending loan balances, by channel:
Consumer Finance (a) Other Consumer Lending
September 30,
December 31,
September 30,
December 31,
2011 2010 2011 2010
Residential mortgages (b)
30-89 days
1.75 % 2.38 % .74 % .95 %
90 days or more
1.63 2.26 .69 1.24
Nonperforming
2.53 2.99 1.47 1.52
Total
5.91 % 7.63 % 2.90 % 3.71 %
Credit card
30-89 days
% % 1.38 % 1.60 %
90 days or more
1.28 1.86
Nonperforming
1.53 1.36
Total
% % 4.19 % 4.82 %
Other retail
Retail leasing
30-89 days
% % .19 % .37 %
90 days or more
.02 .05
Nonperforming
Total
% % .21 % .42 %
Home equity and second mortgages
30-89 days
1.73 % 1.98 % .70 % .76 %
90 days or more
1.23 1.82 .58 .62
Nonperforming
.17 .20 .20 .19
Total
3.13 % 4.00 % 1.48 % 1.57 %
Other (c)
30-89 days
4.73 % 4.42 % .59 % .77 %
90 days or more
.83 .68 .19 .25
Nonperforming
.12 .12
Total
5.56 % 5.10 % .90 % 1.14 %
(a) Consumer finance category includes credit originated and managed by the consumer finance division, as well as the majority of home equity and second mortgages with a loan-to-value greater than 100 percent that were originated in the branches.
(b) Excludes loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest.
(c) Includes revolving credit, installment, automobile and student loans.
Within the consumer finance division at September 30, 2011, approximately $340 million and $58 million of these delinquent and nonperforming residential mortgages and home equity and other retail loans, respectively, were to customers that may be defined as sub-prime borrowers, compared with $412 million and $75 million, respectively, at December 31, 2010.
The following table provides summary delinquency information for covered loans:
As a Percent of Ending
Amount Loan Balances
September 30,
December 31,
September 30,
December 31,
(Dollars in Millions) 2011 2010 2011 2010
30-89 days
$ 581 $ 757 3.78 % 4.19 %
90 days or more
792 1,090 5.14 6.04
Nonperforming
1,010 1,244 6.56 6.90
Total
$ 2,383 $ 3,091 15.48 % 17.13 %
Restructured Loans In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or reduction in the principal balance that would otherwise not be considered. Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in the payments to be received. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.
Troubled Debt Restructurings The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties, including those acquired through FDIC-assisted acquisitions. Many of the Company’s TDRs are determined on a case-by-case basis in connection with ongoing loan collection processes. The modifications vary within each of the Company’s loan classes. Commercial lending segment TDRs generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate. The Company may also work with the borrower to make other changes to the loan to mitigate losses, such as obtaining additional collateral and/or guarantees to support the loan.
The Company has also implemented certain residential mortgage loan restructuring programs that
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may result in TDRs. The Company participates in the U.S. Department of the Treasury Home Affordable Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to permanently modify their loan and achieve more affordable monthly payments, with the U.S. Department of the Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. The Company also modifies residential mortgage loans under Federal Housing Administration, Department of Veterans Affairs, or other internal programs. Under these programs, the Company provides concessions to qualifying borrowers experiencing financial difficulties. The concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extensions of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement and the loan documents are not modified until that time. Loans in trial period arrangements are not reported as TDRs. Loans permanently modified are reported as TDRs. Loans in trial period arrangements were $96 million at September 30, 2011.
Modifications in the credit card class are generally part of a workout program providing customers modification solutions over a specified time period, generally up to 60 months. The Company also provides modification programs to qualifying customers experiencing a temporary financial hardship in which reductions are made to monthly required minimum payments for up to 12 months.
Modifications to loans in the covered segment are similar in nature to that described above for non-covered loans, and the evaluation and determination of TDR status is similar, except that acquired loans restructured after acquisition are not considered TDRs for purposes of the Company’s accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. Losses associated with modifications on covered loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss sharing agreements.
The following table provides a summary of TDRs by loan class, including the delinquency status for TDRs that continue to accrue interest and TDRs included in nonperforming assets:
As a Percent of Performing TDRs
September 30, 2011
Performing
30-89 Days
90 Days or more
Nonperforming
Total
(Dollars in Millions) TDRs Past Due Past Due TDRs TDRs
Commercial
$ 255 2.3 % 1.1 % $ 106 (a) $ 361
Commercial real estate
459 4.5 365 (b) 824
Residential mortgages
1,938 5.4 4.4 151 2,089
Credit card
330 11.4 7.3 250 (c) 580
Other retail
113 8.5 6.2 30 (c) 143
TDRs, excluding GNMA and covered loans
3,095 5.8 3.9 902 3,997
Loans purchased from GNMA mortgage pools
866 12.6 7.4 866
Covered loans
159 17.2 10.1 251 410
Total
$ 4,120 7.6 % 4.9 % $ 1,153 $ 5,273
(a) Primarily represents loans less than six months from the modification date that have not met the performance period required to return to accrual status (generally six months) and small business credit cards with a modified rate equal to 0 percent.
(b) Primarily represents loans less than six months from the modification date that have not met the performance period required to return to accrual status (generally six months).
(c) Primarily represents loans with a modified rate equal to 0 percent.
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During the third quarter of 2011, the Company adopted new accounting guidance that provided clarification to the scope of determining whether loan modifications should be considered TDRs. The adoption of this guidance resulted in additional restructurings considered to be TDRs, but did not have a material impact on the Company’s allowance for credit losses.
Short-term Modifications The Company makes short-term modifications that it does not consider to be TDRs in limited circumstances to assist borrowers experiencing temporary hardships. Consumer lending programs include payment reductions, deferrals of up to three past due payments, and the ability to return to current status if the borrower makes required payments. The Company may also make short-term modifications to commercial lending loans, with the most common modification being an extension of the maturity date of three months or less. Such extensions generally are used when the maturity date is imminent and the borrower is experiencing some level of financial stress, but the Company believes the borrower will pay all contractual amounts owed.
Nonperforming Assets The level of nonperforming assets represents another indicator of the potential for future credit losses. Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms, other real estate and other nonperforming assets owned by the Company, and are generally either originated by the Company or acquired under FDIC loss sharing agreements that substantially reduce the risk of credit losses to the Company. At September 30, 2011, total nonperforming assets were $4.3 billion, compared with $5.0 billion at December 31, 2010. Excluding covered assets, nonperforming assets were $3.0 billion at September 30, 2011, compared with $3.4 billion at December 31, 2010. The $315 million (9.4 percent) decline was principally in the commercial portfolio, reflecting the stabilizing economy. However, stress continued in the commercial real estate and residential mortgage portfolios due to the overall duration of the economic slowdown. Nonperforming covered assets at September 30, 2011, were $1.3 billion, compared with $1.7 billion at December 31, 2010. The ratio of total nonperforming assets to total loans and other real estate was 2.11 percent (1.60 percent excluding covered assets) at September 30, 2011, compared with 2.55 percent (1.87 percent excluding covered assets) at December 31, 2010.
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Table 6 Nonperforming Assets (a)
September 30,
December 31,
(Dollars in Millions) 2011 2010
Commercial
Commercial
$ 342 $ 519
Lease financing
40 78
Total commercial
382 597
Commercial real estate
Commercial mortgages
600 545
Construction and development
620 748
Total commercial real estate
1,220 1,293
Residential mortgages (b)
650 636
Credit card
250 228
Other retail
Retail leasing
Other
66 65
Total other retail
66 65
Total nonperforming loans, excluding covered loans
2,568 2,819
Covered loans
1,010 1,244
Total nonperforming loans
3,578 4,063
Other real estate (c)(d)
452 511
Covered other real estate (d)
293 453
Other assets
16 21
Total nonperforming assets
$ 4,339 $ 5,048
Total nonperforming assets, excluding covered assets
$ 3,036 $ 3,351
Excluding covered assets:
Accruing loans 90 days or more past due (b)
$ 814 $ 1,094
Nonperforming loans to total loans
1.36 % 1.57 %
Nonperforming assets to total loans plus other real estate (c)
1.60 % 1.87 %
Including covered assets:
Accruing loans 90 days or more past due (b)
$ 1,606 $ 2,184
Nonperforming loans to total loans
1.75 % 2.06 %
Nonperforming assets to total loans plus other real estate (c)
2.11 % 2.55 %
Changes in Nonperforming Assets
Credit Card,
Commercial and
Other Retail
Commercial
and Residential
(Dollars in Millions) Real Estate Mortgages (f) Covered Assets Total
Balance December 31, 2010
$ 2,204 $ 1,147 $ 1,697 $ 5,048
Additions to nonperforming assets
New nonaccrual loans and foreclosed properties
1,251 539 461 2,251
Advances on loans
62 3 65
Total additions
1,313 539 464 2,316
Reductions in nonperforming assets
Paydowns, payoffs
(417 ) (241 ) (359 ) (1,017 )
Net sales
(282 ) (45 ) (299 ) (626 )
Return to performing status
(147 ) (65 ) (202 ) (414 )
Net charge-offs (e)
(760 ) (210 ) 2 (968 )
Total reductions
(1,606 ) (561 ) (858 ) (3,025 )
Net additions to (reductions in) nonperforming assets
(293 ) (22 ) (394 ) (709 )
Balance September 30, 2011
$ 1,911 $ 1,125 $ 1,303 $ 4,339
(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Excludes $2.5 billion and $2.6 billion at September 30, 2011, and December 31, 2010, respectively, of loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest, as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.
(c) Foreclosed GNMA loans of $627 million at September 30, 2011, and $575 million at December 31, 2010, continue to accrue interest and are recorded as other assets and excluded from nonperforming assets because they are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.
(d) Includes equity investments in entities whose principal assets are other real estate owned.
(e) Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.
(f) Residential mortgage information excludes changes related to residential mortgages serviced by others.

The Company expects total nonperforming assets to trend lower in the fourth quarter of 2011.
Other real estate, excluding covered assets, was $452 million at September 30, 2011, compared with $511 million at December 31, 2010, and was related to foreclosed properties that previously secured loan balances.
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Table 7 Net Charge-offs as a Percent of Average Loans Outstanding
Three Months Ended
Nine Months Ended
September 30, September 30,
2011 2010 2011 2010
Commercial
Commercial
.77 % 1.49 % .90 % 2.04 %
Lease financing
.61 1.18 .81 1.58
Total commercial
.75 1.45 .89 1.98
Commercial real estate
Commercial mortgages
.93 1.72 .81 1.20
Construction and development
3.43 4.56 4.60 6.25
Total commercial real estate
1.39 2.40 1.56 2.45
Residential mortgages
1.42 1.88 1.51 2.05
Credit card (a)
4.40 7.11 5.35 7.54
Other retail
Retail leasing
(.08 ) .19 .34
Home equity and second mortgages
1.59 1.62 1.66 1.71
Other
1.11 1.65 1.20 1.76
Total other retail
1.16 1.51 1.25 1.61
Total loans, excluding covered loans
1.42 2.26 1.62 2.51
Covered loans
.08 .14 .08 .10
Total loans
1.31 % 2.05 % 1.49 % 2.26 %
(a) Net charge-offs as a percent of average loans outstanding, excluding portfolio purchases where the acquired loans were recorded at fair value at the purchase date, were 4.54 percent and 7.84 percent for the three months ended September 30, 2011 and 2010, respectively, and 5.53 percent and 8.26 percent for the nine months ended September 30, 2011 and 2010, respectively.

The following table provides an analysis of other real estate owned (“OREO”), excluding covered assets, as a percent of their related loan balances, including geographical location detail for residential (residential mortgage, home equity and second mortgage) and commercial (commercial and commercial real estate) loan balances:
As a Percent of Ending
Amount Loan Balances
September 30,
December 31,
September 30,
December 31,
(Dollars in Millions) 2011 2010 2011 2010
Residential
Minnesota
$ 22 $ 28 .40 % .53 %
California
16 21 .23 .34
Illinois
15 16 .49 .57
Washington
8 9 .25 .29
Colorado
8 9 .22 .27
All other states
110 135 .35 .47
Total residential
179 218 .33 .44
Commercial
Nevada
63 58 4.79 3.93
California
38 23 .28 .18
Ohio
20 20 .45 .48
Oregon
19 26 .54 .74
Utah
18 11 .93 .64
All other states
115 155 .18 .26
Total commercial
273 293 .31 .35
Total OREO
$ 452 $ 511 .24 % .29 %
Analysis of Loan Net Charge-Offs Total net charge-offs were $669 million for the third quarter and $2.2 billion for the first nine months of 2011, compared with net charge-offs of $995 million and $3.2 billion for the same periods of 2010. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the third quarter and first nine months of 2011 was 1.31 percent and 1.49 percent, respectively, compared with 2.05 percent and 2.26 percent, for the same periods of 2010. The year-over-year decreases in total net charge-offs were principally due to stabilizing economic conditions. The Company expects the level of net charge-offs to continue to trend lower in the fourth quarter of 2011.
Commercial and commercial real estate loan net charge-offs for the third quarter of 2011 were $224 million (1.01 percent of average loans outstanding on an annualized basis), compared with $378 million (1.85 percent of average loans outstanding on an annualized basis) for the third quarter of 2010. Commercial and commercial real estate loan net charge-offs for the first nine months of 2011 were $748 million (1.17 percent of average loans outstanding on an annualized basis), compared with $1.3 billion (2.18 percent of average loans outstanding on an annualized basis) for the first nine months of 2010. The decreases reflected the impact of efforts to resolve and reduce exposure to problem assets in the Company’s commercial real estate portfolios and improvement in the other commercial portfolios due to the stabilizing economy.
Residential mortgage loan net charge-offs for the third quarter of 2011 were $122 million (1.42 percent of average loans outstanding on an annualized basis), compared with $132 million (1.88 percent of average loans outstanding on an annualized basis) for the third quarter of 2010. Residential mortgage loan net charge-offs for the first nine months of 2011 were $370 million (1.51 percent of average loans outstanding on an annualized basis), compared with $415 million (2.05 percent of average loans outstanding on an annualized basis) for the first nine months of 2010. Credit card loan net charge-offs for the third quarter of 2011 were $178 million (4.40 percent of average loans
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outstanding on an annualized basis), compared with $296 million (7.11 percent of average loans outstanding on an annualized basis) for the third quarter of 2010. Credit card loan net charge-offs for the first nine months of 2011 were $641 million (5.35 percent of average loans outstanding on an annualized basis), compared with $925 million (7.54 percent of average loans outstanding on an annualized basis) for the first nine months of 2010. Other retail loan net charge-offs for the third quarter of 2011 were $142 million (1.16 percent of average loans outstanding on an annualized basis), compared with $182 million (1.51 percent of average loans outstanding on an annualized basis) for the third quarter of 2010. Other retail loan net charge-offs for the first nine months of 2011 were $452 million (1.25 percent of average loans outstanding on an annualized basis), compared with $570 million (1.61 percent of average loans outstanding on an annualized basis) for the first nine months of 2010. The year-over-year decreases in residential mortgage, credit card and other retail loan net charge-offs reflected the impact of more stable economic conditions.
The following table provides an analysis of net charge-offs as a percent of average loans outstanding managed by the consumer finance division, compared with other consumer lending loans:
Three Months Ended September 30, Nine Months Ended September 30,
Percent of
Percent of
Average Loans Average Loans Average Loans Average Loans
(Dollars in Millions) 2011 2010 2011 2010 2011 2010 2011 2010
Consumer Finance (a)
Residential mortgages
$ 12,397 $ 10,805 2.59 % 3.49 % $ 12,127 $ 10,546 2.87 % 3.78 %
Home equity and second mortgages
2,442 2,448 3.57 4.86 2,476 2,461 4.32 5.49
Other
501 608 3.96 3.92 536 607 2.99 3.52
Other Consumer Lending
Residential mortgages
$ 21,629 $ 17,085 .75 % .86 % $ 20,727 $ 16,499 .71 % .95 %
Home equity and second mortgages
16,068 16,841 1.28 1.15 16,172 16,879 1.25 1.16
Other
24,272 23,673 1.05 1.59 24,118 23,057 1.16 1.71
Total Company
Residential mortgages
$ 34,026 $ 27,890 1.42 % 1.88 % $ 32,854 $ 27,045 1.51 % 2.05 %
Home equity and second mortgages
18,510 19,289 1.59 1.62 18,648 19,340 1.66 1.71
Other (b)
24,773 24,281 1.11 1.65 24,654 23,664 1.20 1.76
(a) Consumer finance category included credit originated and managed by the consumer finance division, as well as the majority of home equity and second mortgages with a loan-to-value greater than 100 percent that were originated in the branches.
(b) Includes revolving credit, installment, automobile and student loans.
The following table provides further information on net charge-offs as a percent of average loans outstanding for the consumer finance division:
Three Months Ended September 30, Nine Months Ended September 30,
Percent of
Percent of
Average Loans Average Loans Average Loans Average Loans
(Dollars in Millions) 2011 2010 2011 2010 2011 2010 2011 2010
Residential mortgages
Sub-prime borrowers
$ 1,940 $ 2,266 6.14 % 6.30 % $ 2,009 $ 2,348 6.12 % 6.38 %
Other borrowers
10,457 8,539 1.93 2.74 10,118 8,198 2.22 3.03
Total
$ 12,397 $ 10,805 2.59 % 3.49 % $ 12,127 $ 10,546 2.87 % 3.78 %
Home equity and second mortgages
Sub-prime borrowers
$ 480 $ 553 8.27 % 9.33 % $ 503 $ 581 9.30 % 10.36 %
Other borrowers
1,962 1,895 2.43 3.56 1,973 1,880 3.05 3.98
Total
$ 2,442 $ 2,448 3.57 % 4.86 % $ 2,476 $ 2,461 4.32 % 5.49 %
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Analysis and Determination of the Allowance for Credit Losses The allowance for credit losses reserves for probable and estimable losses incurred in the Company’s loan and lease portfolio and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the FDIC. The allowance for credit losses is increased through provisions charged to operating earnings and reduced by net charge-offs. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses.
The allowance recorded for loans in the commercial lending segment is generally based on quarterly reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. The Company currently uses an 11 year period of historical losses in considering actual loss experience. This timeframe and the results of the analysis are evaluated quarterly to determine the appropriateness. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price, or the fair value of the collateral for collateral-dependent loans. The allowance recorded for all other commercial lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, and historical losses, adjusted for current trends.
The allowance recorded for purchased impaired and TDR loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool. The allowance recorded for all other consumer lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, and historical losses, adjusted for current trends. In addition, when evaluating the appropriateness of the allowance for credit losses for any loans and lines in a junior lien position, the Company considers the default and/or delinquency status of any first lien account serviced by the Company, as well as whether the first lien account has been modified by the Company. At September 30, 2011, the Company serviced the first lien on 30 percent of the home equity loans and lines in a junior lien position. The Company also considers the results of this analysis in evaluating the potential exposure to credit losses for the population of home equity loans and lines in a junior lien position where the Company does not service the first lien.
The allowance for covered segment loans is evaluated each quarter in a manner similar to that described for non-covered loans, and represents any decreases in expected cash flows on those loans after the acquisition date. The provision for credit losses for covered segment loans considers the indemnification provided by the FDIC.
The Company’s methodology for determining the appropriate allowance for credit losses for all the loan segments also considers the imprecision inherent in the methodologies used. As a result, in addition to the amounts determined under the methodologies described above, management also considers the potential impact of other qualitative factors which include, but are not limited to, economic factors; geographic and other concentration risks; delinquency and nonaccrual trends; current business conditions; changes in lending policy, underwriting standards, internal review and other relevant business practices; and the regulatory environment. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each of the above loan segments.
Refer to “Management’s Discussion and Analysis — Analysis and Determination of the Allowance for Credit Losses” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for further discussion on the analysis and determination of the allowance for credit losses.
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Table 8 Summary of Allowance for Credit Losses
Three Months Ended
Nine Months Ended
September 30, September 30,
(Dollars in Millions) 2011 2010 2011 2010
Balance at beginning of period
$ 5,308 $ 5,536 $ 5,531 $ 5,264
Charge-offs
Commercial
Commercial
108 163 348 646
Lease financing
18 28 64 108
Total commercial
126 191 412 754
Commercial real estate
Commercial mortgages
70 114 185 232
Construction and development
61 95 261 405
Total commercial real estate
131 209 446 637
Residential mortgages
124 135 380 422
Credit card
203 314 712 975
Other retail
Retail leasing
2 5 8 21
Home equity and second mortgages
78 84 245 261
Other
95 124 298 375
Total other retail
175 213 551 657
Covered loans (a)
3 7 10 16
Total charge-offs
762 1,069 2,511 3,461
Recoveries
Commercial
Commercial
18 10 50 27
Lease financing
9 10 28 34
Total commercial
27 20 78 61
Commercial real estate
Commercial mortgages
2 1 13 2
Construction and development
4 1 19 9
Total commercial real estate
6 2 32 11
Residential mortgages
2 3 10 7
Credit card
25 18 71 50
Other retail
Retail leasing
3 3 8 10
Home equity and second mortgages
4 5 14 13
Other
26 23 77 64
Total other retail
33 31 99 87
Covered loans (a)
1
Total recoveries
93 74 290 217
Net Charge-offs
Commercial
Commercial
90 153 298 619
Lease financing
9 18 36 74
Total commercial
99 171 334 693
Commercial real estate
Commercial mortgages
68 113 172 230
Construction and development
57 94 242 396
Total commercial real estate
125 207 414 626
Residential mortgages
122 132 370 415
Credit card
178 296 641 925
Other retail
Retail leasing
(1 ) 2 11
Home equity and second mortgages
74 79 231 248
Other
69 101 221 311
Total other retail
142 182 452 570
Covered loans (a)
3 7 10 15
Total net charge-offs
669 995 2,221 3,244
Provision for credit losses
519 995 1,846 3,444
Net change for credit losses to be reimbursed by the FDIC
32 4 34 76
Balance at end of period
$ 5,190 $ 5,540 $ 5,190 $ 5,540
Components
Allowance for loan losses, excluding losses to be reimbursed by the FDIC
$ 4,823 $ 5,245
Allowance for credit losses to be reimbursed by the FDIC
127 76
Liability for unfunded credit commitments
240 219
Total allowance for credit losses
$ 5,190 $ 5,540
Allowance for credit losses as a percentage of
Period-end loans, excluding covered loans
2.66 % 3.10 %
Nonperforming loans, excluding covered loans
196 181
Nonperforming assets, excluding covered assets
166 153
Annualized net charge-offs, excluding covered loans
190 139
Period-end loans
2.53 2.85
Nonperforming loans
145 133
Nonperforming assets
120 102
Annualized net charge-offs
196 140
Note: At September 30, 2011 and 2010, $1.9 billion and $2.2 billion, respectively, of the total allowance for credit losses related to incurred losses on credit card and other retail loans.
(a) Relates to covered loan charge-offs and recoveries not reimbursable by the FDIC.

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At September 30, 2011, the allowance for credit losses was $5.2 billion (2.53 percent of total loans and 2.66 percent of loans excluding covered loans), compared with an allowance of $5.5 billion (2.81 percent of total loans and 3.03 percent of loans excluding covered loans) at December 31, 2010. The Company increased the allowance for credit losses by $32 million and $34 million during the third quarter and first nine months of 2011, respectively, compared with increases of $4 million and $76 million for the same periods of the prior year, to reflect covered loan losses reimbursable by the FDIC. The ratio of the allowance for credit losses to nonperforming loans was 145 percent (196 percent excluding covered loans) at September 30, 2011, compared with 136 percent (192 percent excluding covered loans) at December 31, 2010. The ratio of the allowance for credit losses to annualized loan net charge-offs was 196 percent at September 30, 2011, compared with 132 percent of full year 2010 net charge-offs at December 31, 2010, as net charge-offs continue to decline due to stabilizing economic conditions.
Residual Value Risk Management The Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of September 30, 2011, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2010. Refer to “Management’s Discussion and Analysis — Residual Value Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for further discussion on residual value risk management.
Operational Risk Management The Company manages operational risk through a risk management framework and its internal control processes. Within this framework, the Risk Management Committee of the Company’s Board of Directors provides oversight and assesses the most significant operational risks facing the Company within its business lines. Under the guidance of the Risk Management Committee, enterprise risk management personnel establish policies and interact with business lines to monitor significant operating risks on a regular basis. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. Refer to “Management’s Discussion and Analysis — Operational Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for further discussion on operational risk management.
Interest Rate Risk Management In the banking industry, changes in interest rates are a significant risk that can impact earnings, market valuations and the safety and soundness of an entity. To minimize the volatility of net interest income and the market value of assets and liabilities, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Committee (“ALCO”) and approved by the Board of Directors. The ALCO has the responsibility for approving and ensuring compliance with the ALCO management policies, including interest rate risk exposure. The Company uses net interest income simulation analysis and market value of equity modeling for measuring and analyzing consolidated interest rate risk.
Net Interest Income Simulation Analysis Management estimates the impact on net interest income of changes in market interest rates under a number of scenarios, including gradual shifts, immediate and sustained parallel shifts, and flattening or steepening of the yield curve. The table below summarizes the projected impact to net interest income over the next 12 months of various potential interest rate changes. The ALCO policy limits the estimated change in net interest income in a gradual 200 basis point (“bps”) rate change scenario to a 4.0 percent decline of forecasted net interest income over the next 12 months. At September 30, 2011, and December 31, 2010, the Company was within policy. Refer to “Management’s Discussion and Analysis — Net Interest Income Simulation Analysis” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for further discussion on net interest income simulation analysis.

Sensitivity of Net Interest Income
September 30, 2011 December 31, 2010
Down 50 bps
Up 50 bps
Down 200 bps
Up 200 bps
Down 50 bps
Up 50 bps
Down 200 bps
Up 200 bps
Immediate Immediate Gradual Gradual Immediate Immediate Gradual Gradual
Net interest income
* 1.62 % * 2.09 % * 1.64 % * 3.14 %
* Given the current level of interest rates, a downward rate scenario can not be computed.

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Market Value of Equity Modeling The Company also manages interest rate sensitivity by utilizing market value of equity modeling, which measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. Management measures the impact of changes in market interest rates under a number of scenarios, including immediate and sustained parallel shifts, and flattening or steepening of the yield curve. The ALCO policy limits the change in market value of equity in a 200 bps parallel rate shock to a 15.0 percent decline. A 200 bps increase would have resulted in a 2.5 percent decrease in the market value of equity at September 30, 2011, compared with a 3.6 percent decrease at December 31, 2010. A 200 bps decrease, where possible given current rates, would have resulted in a 6.2 percent decrease in the market value of equity at September 30, 2011, compared with a 5.2 percent decrease at December 31, 2010. Refer to “Management’s Discussion and Analysis — Market Value of Equity Modeling” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for further discussion on market value of equity modeling.
Use of Derivatives to Manage Interest Rate and Other Risks To reduce the sensitivity of earnings to interest rate, prepayment, credit, price and foreign currency fluctuations (“asset and liability management positions”), the Company enters into derivative transactions. The Company uses derivatives for asset and liability management purposes primarily in the following ways:
To convert fixed-rate debt from fixed-rate payments to floating-rate payments;
To convert the cash flows associated with floating-rate loans and debt from floating-rate payments to fixed-rate payments; and
To mitigate changes in value of the Company’s mortgage origination pipeline, funded mortgage loans held for sale and MSRs.
To manage these risks, the Company may enter into exchange-traded and over-the-counter derivative contracts, including interest rate swaps, swaptions, futures, forwards and options. In addition, the Company enters into interest rate and foreign exchange derivative contracts to support the business requirements of its customers (“customer-related positions”). The Company minimizes the market and liquidity risks of customer-related positions by entering into similar offsetting positions with broker-dealers. The Company does not utilize derivatives for speculative purposes.
The Company does not designate all of the derivatives that it enters into for risk management purposes as accounting hedges because of the inefficiency of applying the accounting requirements and may instead elect fair value accounting for the related hedged items. In particular, the Company enters into U.S. Treasury futures, options on U.S. Treasury futures contracts, interest rate swaps and forward commitments to buy residential mortgage loans to mitigate fluctuations in the value of its MSRs, but does not designate those derivatives as accounting hedges.
Additionally, the Company uses forward commitments to sell residential mortgage loans at specified prices to economically hedge the interest rate risk in its residential mortgage loan production activities. At September 30, 2011, the Company had $12.6 billion of forward commitments to sell mortgage loans hedging $5.2 billion of mortgage loans held for sale and $13.2 billion of unfunded mortgage loan commitments. The forward commitments to sell and the unfunded mortgage loan commitments are considered derivatives under the accounting guidance related to accounting for derivative instruments and hedging activities, and the Company has elected the fair value option for the mortgage loans held for sale.
Derivatives are subject to credit risk associated with counterparties to the contracts. Credit risk associated with derivatives is measured by the Company based on the probability of counterparty default. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, entering into master netting agreements where possible with its counterparties, requiring collateral agreements with credit-rating thresholds and, in certain cases, though insignificant, transferring the counterparty credit risk related to interest rate swaps to third-parties through the use of risk participation agreements.
For additional information on derivatives and hedging activities, refer to Note 12 in the Notes to Consolidated Financial Statements.
Market Risk Management In addition to interest rate risk, the Company is exposed to other forms of market risk, principally related to trading activities which support customers’ strategies to manage their own foreign currency, interest rate risk and funding activities. The ALCO established the Market Risk Committee (“MRC”), which oversees market risk management. The MRC monitors and reviews the Company’s trading positions and establishes policies for market risk management, including exposure limits for each portfolio. The Company also manages market risk of non-trading business activities, including its MSRs and loans held for sale. The Company uses a Value at Risk (“VaR”) approach to measure general market risk. Theoretically, VaR represents the statistical risk of loss
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the Company has to adverse market movements over a one-day time horizon. The Company uses the Historical Simulation method to calculate VaR for its trading businesses measured at the ninety-ninth percentile using a one-year look-back period for distributions derived from past market data. The market factors used in the calculations include those pertinent to market risks inherent in the underlying trading portfolios, principally those that affect its investment grade bond trading business, foreign currency transaction business, client derivatives business, loan trading business and municipal securities business. On average, the Company expects the one-day VaR to be exceeded two to three times per year in each business. The Company monitors the effectiveness of its risk programs by back-testing the performance of its VaR models, regularly updating the historical data used by the VaR models and stress testing. If the Company were to experience market losses in excess of the estimated VaR more often than expected, the VaR models and associated assumptions would be analyzed and adjusted. The Company stress tests its market risk measurements to provide management with perspectives on market events that may not be captured by its VaR models, including worst case historical market movement combinations that have not necessarily occurred on the same date.
The average, high and low VaR amounts for the nine months ended September 30, 2011 were $2 million, $4 million and $1 million, respectively, compared with $2 million, $5 million and $1 million, respectively, for the nine months ended September 30, 2010. There have been no incidents where the actual trading losses exceeded the bank-wide one-day VaR during the nine months ended September 30, 2011 and nine months ended September 30, 2010.
Liquidity Risk Management The Company’s liquidity risk management framework is designed to maintain sufficient liquidity in both normal operating environments as well as in periods of severe stress. The ALCO reviews and approves the Company’s liquidity policies and guidelines, and regularly reviews the overall liquidity position of the Company.
The Company maintains a substantial level of total available liquidity in the form of on- and off-balance sheet funding sources. These include cash at the Federal Reserve, unencumbered liquid assets, and capacity to borrow at the Federal Home Loan Bank and Federal Reserve Discount Window. The Company monitors liquidity risk through various metrics and reporting, including analysis of scenarios that estimate the impact of stress events on the Company’s consolidated liquidity position.
In addition to assessing liquidity risk on a consolidated basis, the Company monitors the parent company liquidity and maintains sufficient funding to meet expected parent company obligations, without access to the wholesale funding markets or dividends from subsidiaries, for 12 months when forecasted payments of common stock dividends are included and 24 months assuming dividends were reduced to zero. The parent company currently has available funds considerably greater than the amounts required to satisfy these conditions.
Refer to “Management’s Discussion and Analysis — Liquidity Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for further discussion on liquidity risk management.
At September 30, 2011, parent company long-term debt outstanding was $13.4 billion, compared with $13.0 billion at December 31, 2010. The $.4 billion increase was primarily due to $1.0 billion of medium-term note issuances, partially offset by $.6 billion of extinguishments of junior subordinated debentures. As of September 30, 2011, there was no parent company debt scheduled to mature in the remainder of 2011.
Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. The amount of dividends available to the parent company from its banking subsidiaries after meeting the regulatory capital requirements for well-capitalized banks was approximately $7.1 billion at September 30, 2011.
Off-Balance Sheet Arrangements Off-balance sheet arrangements include any contractual arrangements to which an unconsolidated entity is a party under which the Company has an obligation to provide credit or liquidity enhancements or market risk support. In the ordinary course of business, the Company enters into an array of commitments to extend credit, letters of credit and various forms of guarantees that may be considered off-balance sheet arrangements. Refer to Note 14 of the Notes to Consolidated Financial Statements for further
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Table 9 Regulatory Capital Ratios
September 30,
December 31,
(Dollars in Millions) 2011 2010
Tier 1 capital
$ 28,081 $ 25,947
As a percent of risk-weighted assets
10.8 % 10.5 %
As a percent of adjusted quarterly average assets (leverage ratio)
9.0 % 9.1 %
Total risk-based capital
$ 35,369 $ 33,033
As a percent of risk-weighted assets
13.5 % 13.3 %

information on these arrangements. The Company has not significantly utilized private label asset securitizations or conduits as a source of funding. Off-balance sheet arrangements also include any obligation related to a variable interest held in an unconsolidated entity that provides financing, liquidity, credit enhancement or market risk support. Refer to Note 6 of the Notes to Consolidated Financial Statements for further information related to the Company’s interests in variable interest entities.
Capital Management The Company is committed to managing capital to maintain strong protection for depositors and creditors and for maximum shareholder benefit. The Company also manages its capital to exceed regulatory capital requirements for well-capitalized bank holding companies. Table 9 provides a summary of regulatory capital ratios as of September 30, 2011, and December 31, 2010. All regulatory ratios exceeded regulatory “well-capitalized” requirements. Total U.S. Bancorp shareholders’ equity was $33.2 billion at September 30, 2011, compared with $29.5 billion at December 31, 2010. The increase was primarily the result of corporate earnings, the issuance of $.7 billion of perpetual preferred stock in exchange for the extinguishment of income trust securities and changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income, partially offset by dividends and common share repurchases. Refer to “Management’s Discussion and Analysis — Capital Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for further discussion on capital management.
The Company believes certain capital ratios in addition to regulatory capital ratios are useful in evaluating its capital adequacy. The Company’s Tier 1 common equity (using Basel I definition) and tangible common equity, as a percent of risk-weighted assets, were 8.5 percent and 8.1 percent, respectively, at September 30, 2011, compared with 7.8 percent and 7.2 percent, respectively, at December 31, 2010. The Company’s tangible common equity divided by tangible assets was 6.6 percent at September 30, 2011, compared with 6.0 percent at December 31, 2010. Additionally, the Company’s Tier 1 common as a percent of risk-weighted assets, under anticipated Basel III guidelines, was 8.2 percent at September 30, 2011, compared with 7.3 percent at December 31, 2010. Refer to “Non-Regulatory Capital Ratios” for further information regarding the calculation of these measures.
On March 18, 2011, the Company announced its Board of Directors had approved an authorization to repurchase 50 million shares of common stock through December 31, 2011. All shares repurchased during the third quarter of 2011 were repurchased under this authorization.
The following table provides a detailed analysis of all shares repurchased by the Company during the third quarter of 2011:
Total Number
Maximum Number
of Shares
of Shares that May
Purchased as
Average
Yet Be Purchased
Part of the
Price Paid
Under the
Time Period Program per Share Program
July
4,560,115 $ 26.30 42,914,405
August
190 20.56 42,914,215
September
8,518,511 23.46 34,395,704
Total
13,078,816 $ 24.45 34,395,704
LINE OF BUSINESS FINANCIAL REVIEW
The Company’s major lines of business are Wholesale Banking and Commercial Real Estate, Consumer and Small Business Banking, Wealth Management and Securities Services, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is prepared and is evaluated regularly by management in deciding how to allocate resources and assess performance.
Basis for Financial Presentation Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. Refer to “Management’s Discussion and Analysis — Line of Business Financial Review” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for further discussion on the business lines’ basis for financial presentation.
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Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2011, certain organization and methodology changes were made and, accordingly, 2010 results were restated and presented on a comparable basis.
Wholesale Banking and Commercial Real Estate Wholesale Banking and Commercial Real Estate offers lending, equipment finance and small-ticket leasing, depository, treasury management, capital markets, foreign exchange, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution and public sector clients. Wholesale Banking and Commercial Real Estate contributed $304 million of the Company’s net income in the third quarter and $781 million in the first nine months of 2011, or increases of $160 million and $526 million, respectively, compared with the same periods of 2010. The increases were primarily driven by higher net revenue and lower provision for credit losses, partially offset by higher noninterest expense.
Total net revenue increased $69 million (8.7 percent) in the third quarter and $220 million (9.5 percent) in the first nine months of 2011, compared with the same periods of 2010. Net interest income, on a taxable-equivalent basis, increased $26 million (5.0 percent) in the third quarter and $111 million (7.5 percent) in the first nine months of 2011, compared with the same periods of 2010. The year-over-year increases in net interest income were primarily due to higher average loan and deposit balances and increases in loan fees, partially offset by the impact of declining rates on the margin benefit from deposits. Total noninterest income increased $43 million (15.6 percent) in the third quarter and $109 million (13.2 percent) in the first nine months of 2011, compared with the same periods of 2010. The increases were primarily due to growth in commercial products revenue, including syndication and other capital markets fees, commercial leasing, foreign exchange and international trade revenue, and commercial loan fees. In addition, other revenue increased due to higher equity investment and customer-related derivative revenue.
Total noninterest expense increased $12 million (3.9 percent) in the third quarter and $66 million (7.5 percent) in the first nine months of 2011, compared with the same periods of 2010. The increases were primarily due to higher total compensation and employee benefits expense, and increased net shared services costs. The provision for credit losses decreased $198 million (75.3 percent) in the third quarter and $672 million (65.4 percent) in the first nine months of 2011, compared with the same periods of 2010. The favorable changes were primarily due to lower net charge-offs in the third quarter and first nine months of 2011, compared with the same periods of 2010. Nonperforming assets were $1.2 billion at September 30, 2011, $1.3 billion at June 30, 2011, and $1.8 billion at September 30, 2010. Nonperforming assets as a percentage of period-end loans were 2.01 percent at September 30, 2011, 2.22 percent at June 30, 2011, and 3.26 percent at September 30, 2010. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.
Consumer and Small Business Banking Consumer and Small Business Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail, ATM processing and over mobile devices. It encompasses community banking, metropolitan banking, in-store banking, small business banking, consumer lending, mortgage banking, consumer finance, workplace banking, student banking and 24-hour banking. Consumer and Small Business Banking contributed $228 million of the Company’s net income in the third quarter and $556 million in the first nine months of 2011, or increases of $1 million (.4 percent), and $16 million (3.0 percent), respectively, compared with the same periods of 2010.
Within Consumer and Small Business Banking, the retail banking division contributed $117 million of the total net income in the third quarter and $196 million in the first nine months of 2011, compared with $41 million and $108 million in the same periods of 2010. Mortgage banking contributed $111 million and $360 million of Consumer and Small Business Banking’s net income in the third quarter and first nine months of 2011, respectively, compared with $186 million and $432 million in the same periods of 2010.
Total net revenue decreased $7 million (.4 percent) in the third quarter and increased $74 million (1.4 percent) in the first nine months of 2011, compared with the same periods of 2010. Net interest income, on a taxable-equivalent basis, increased $18 million (1.6 percent) in the third quarter and $176 million (5.4 percent) in the first nine months of 2011, compared with the same periods of 2010. The year-over-year increases in net interest income were due to higher loan and deposit volumes, partially offset by declines in the margin benefit from deposits. Total noninterest income decreased $25 million (3.4 percent) in the third quarter and $102 million (4.9 percent) in the first nine months of 2011, compared with the same periods of 2010. The decline in third quarter noninterest income, compared to
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Table 10 Line of Business Financial Performance
Wholesale Banking and
Consumer and Small
Commercial Real Estate Business Banking
Three Months Ended September 30
Percent
Percent
(Dollars in Millions) 2011 2010 Change 2011 2010 Change
Condensed Income Statement
Net interest income (taxable-equivalent basis)
$ 544 $ 518 5.0 % $ 1,154 $ 1,136 1.6 %
Noninterest income
318 276 15.2 708 733 (3.4 )
Securities gains (losses), net
(1 ) *
Total net revenue
862 793 8.7 1,862 1,869 (.4 )
Noninterest expense
314 302 4.0 1,154 1,094 5.5
Other intangibles
4 4 18 22 (18.2 )
Total noninterest expense
318 306 3.9 1,172 1,116 5.0
Income before provision and income taxes
544 487 11.7 690 753 (8.4 )
Provision for credit losses
65 263 (75.3 ) 332 394 (15.7 )
Income before income taxes
479 224 * 358 359 (.3 )
Income taxes and taxable-equivalent adjustment
174 82 * 130 131 (.8 )
Net income
305 142 * 228 228
Net (income) loss attributable to noncontrolling interests
(1 ) 2 * (1 ) *
Net income attributable to U.S. Bancorp
$ 304 $ 144 * $ 228 $ 227 .4
Average Balance Sheet
Commercial
$ 38,069 $ 32,952 15.5 % $ 7,322 $ 7,368 (.6 )%
Commercial real estate
19,119 19,540 (2.2 ) 15,647 13,940 12.2
Residential mortgages
53 74 (28.4 ) 33,569 27,438 22.3
Credit card
Other retail
4 33 (87.9 ) 45,968 45,208 1.7
Total loans, excluding covered loans
57,245 52,599 8.8 102,506 93,954 9.1
Covered loans
1,352 1,866 (27.5 ) 8,247 9,361 (11.9 )
Total loans
58,597 54,465 7.6 110,753 103,315 7.2
Goodwill
1,604 1,608 (.2 ) 3,515 3,546 (.9 )
Other intangible assets
50 67 (25.4 ) 1,945 1,734 12.2
Assets
64,556 59,501 8.5 123,932 118,574 4.5
Noninterest-bearing deposits
27,840 17,104 62.8 17,806 16,902 5.3
Interest checking
10,978 12,822 (14.4 ) 26,995 23,779 13.5
Savings products
9,273 10,668 (13.1 ) 40,789 36,717 11.1
Time deposits
14,733 11,629 26.7 24,492 25,036 (2.2 )
Total deposits
62,824 52,223 20.3 110,082 102,434 7.5
Total U.S. Bancorp shareholders’ equity
5,606 5,291 6.0 9,326 8,525 9.4
Wholesale Banking and
Consumer and Small
Commercial Real Estate Business Banking
Nine Months Ended September 30
Percent
Percent
(Dollars in Millions) 2011 2010 Change 2011 2010 Change
Condensed Income Statement
Net interest income (taxable-equivalent basis)
$ 1,588 $ 1,477 7.5 % $ 3,417 $ 3,241 5.4 %
Noninterest income
937 829 13.0 2,001 2,103 (4.9 )
Securities gains (losses), net
(1 ) *
Total net revenue
2,525 2,305 9.5 5,418 5,344 1.4
Noninterest expense
936 869 7.7 3,387 3,178 6.6
Other intangibles
12 13 (7.7 ) 54 74 (27.0 )
Total noninterest expense
948 882 7.5 3,441 3,252 5.8
Income before provision and income taxes
1,577 1,423 10.8 1,977 2,092 (5.5 )
Provision for credit losses
356 1,028 (65.4 ) 1,102 1,236 (10.8 )
Income before income taxes
1,221 395 * 875 856 2.2
Income taxes and taxable-equivalent adjustment
444 143 * 318 314 1.3
Net income
777 252 * 557 542 2.8
Net (income) loss attributable to noncontrolling interests
4 3 33.3 (1 ) (2 ) 50.0
Net income attributable to U.S. Bancorp
$ 781 $ 255 * $ 556 $ 540 3.0
Average Balance Sheet
Commercial
$ 36,478 $ 33,196 9.9 % $ 7,213 $ 7,244 (.4 )%
Commercial real estate
19,184 19,628 (2.3 ) 15,454 13,660 13.1
Residential mortgages
56 71 (21.1 ) 32,399 26,593 21.8
Credit card
Other retail
6 43 (86.0 ) 45,661 44,737 2.1
Total loans, excluding covered loans
55,724 52,938 5.3 100,727 92,234 9.2
Covered loans
1,603 2,015 (20.4 ) 8,496 9,693 (12.3 )
Total loans
57,327 54,953 4.3 109,223 101,927 7.2
Goodwill
1,604 1,608 (.2 ) 3,520 3,532 (.3 )
Other intangible assets
55 71 (22.5 ) 2,137 1,936 10.4
Assets
63,204 60,140 5.1 122,892 115,545 6.4
Noninterest-bearing deposits
23,746 16,866 40.8 17,603 16,175 8.8
Interest checking
13,028 13,192 (1.2 ) 26,172 23,647 10.7
Savings products
9,482 11,930 (20.5 ) 40,313 35,518 13.5
Time deposits
14,870 11,196 32.8 24,469 26,612 (8.1 )
Total deposits
61,126 53,184 14.9 108,557 101,952 6.5
Total U.S. Bancorp shareholders’ equity
5,538 5,357 3.4 9,275 8,451 9.8
*  Not meaningful
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Wealth Management and
Payment
Treasury and
Consolidated
Securities Services Services Corporate Support Company
Percent
Percent
Percent
Percent
2011 2010 Change 2011 2010 Change 2011 2010 Change 2011 2010 Change
$ 90 $ 79 13.9 % $ 334 $ 335 (.3 )% $ 502 $ 409 22.7 % $ 2,624 $ 2,477 5.9 %
254 277 (8.3 ) 856 805 6.3 44 28 57.1 2,180 2,119 2.9
(9 ) (8 ) (12.5 ) (9 ) (9 )
344 356 (3.4 ) 1,190 1,140 4.4 537 429 25.2 4,795 4,587 4.5
268 245 9.4 446 430 3.7 219 224 (2.2 ) 2,401 2,295 4.6
10 13 (23.1 ) 43 51 (15.7 ) 75 90 (16.7 )
278 258 7.8 489 481 1.7 219 224 (2.2 ) 2,476 2,385 3.8
66 98 (32.7 ) 701 659 6.4 318 205 55.1 2,319 2,202 5.3
13 * 124 305 (59.3 ) (2 ) 20 * 519 995 (47.8 )
66 85 (22.4 ) 577 354 63.0 320 185 73.0 1,800 1,207 49.1
24 31 (22.6 ) 210 129 62.8 10 (60 ) * 548 313 75.1
42 54 (22.2 ) 367 225 63.1 310 245 26.5 1,252 894 40.0
(10 ) (8 ) (25.0 ) 32 21 52.4 21 14 50.0
$ 42 $ 54 (22.2 ) $ 357 $ 217 64.5 $ 342 $ 266 28.6 $ 1,273 $ 908 40.2
$ 1,048 $ 986 6.3 % $ 5,828 $ 5,328 9.4 % $ 77 $ 150 (48.7 )% $ 52,344 $ 46,784 11.9 %
573 574 (.2 ) 230 136 69.1 35,569 34,190 4.0
396 361 9.7 8 17 (52.9 ) 34,026 27,890 22.0
16,057 16,510 (2.7 ) 16,057 16,510 (2.7 )
1,521 1,625 (6.4 ) 885 992 (10.8 ) 2 1 * 48,380 47,859 1.1
3,538 3,546 (.2 ) 22,770 22,830 (.3 ) 317 304 4.3 186,376 173,233 7.6
12 14 (14.3 ) 5 5 6,177 8,062 (23.4 ) 15,793 19,308 (18.2 )
3,550 3,560 (.3 ) 22,775 22,835 (.3 ) 6,494 8,366 (22.4 ) 202,169 192,541 5.0
1,463 1,515 (3.4 ) 2,367 2,340 1.2 8,949 9,009 (.7 )
179 194 (7.7 ) 775 928 (16.5 ) 6 6 2,955 2,929 .9
5,965 5,656 5.5 28,235 27,536 2.5 98,893 74,793 32.2 321,581 286,060 12.4
11,856 4,916 * 653 619 5.5 451 191 * 58,606 39,732 47.5
2,884 2,582 11.7 184 124 48.4 1 1 41,042 39,308 4.4
21,365 12,433 71.8 31 24 29.2 207 171 21.1 71,665 60,013 19.4
4,794 6,527 (26.6 ) 1 * 37 414 (91.1 ) 44,056 43,607 1.0
40,899 26,458 54.6 868 768 13.0 696 777 (10.4 ) 215,369 182,660 17.9
2,073 2,090 (.8 ) 5,276 5,289 (.2 ) 10,806 7,692 40.5 33,087 28,887 14.5
Wealth Management and
Payment
Treasury and
Consolidated
Securities Services Services Corporate Support Company
Percent
Percent
Percent
Percent
2011 2010 Change 2011 2010 Change 2011 2010 Change 2011 2010 Change
$ 259 $ 215 20.5 % $ 991 $ 1,013 (2.2 )% $ 1,420 $ 1,343 5.7 % $ 7,675 $ 7,289 5.3 %
793 829 (4.3 ) 2,450 2,339 4.7 170 102 66.7 6,351 6,202 2.4
(22 ) (63 ) 65.1 (22 ) (64 ) 65.6
1,052 1,044 .8 3,441 3,352 2.7 1,568 1,382 13.5 14,004 13,427 4.3
802 723 10.9 1,300 1,227 5.9 565 623 (9.3 ) 6,990 6,620 5.6
30 40 (25.0 ) 129 151 (14.6 ) 225 278 (19.1 )
832 763 9.0 1,429 1,378 3.7 565 623 (9.3 ) 7,215 6,898 4.6
220 281 (21.7 ) 2,012 1,974 1.9 1,003 759 32.1 6,789 6,529 4.0
(1 ) 17 * 376 1,128 (66.7 ) 13 35 (62.9 ) 1,846 3,444 (46.4 )
221 264 (16.3 ) 1,636 846 93.4 990 724 36.7 4,943 3,085 60.2
80 94 (14.9 ) 595 306 94.4 46 (81 ) * 1,483 776 91.1
141 170 (17.1 ) 1,041 540 92.8 944 805 17.3 3,460 2,309 49.8
(29 ) (23 ) (26.1 ) 88 56 57.1 62 34 82.4
$ 141 $ 170 (17.1 ) $ 1,012 $ 517 95.7 $ 1,032 $ 861 19.9 $ 3,522 $ 2,343 50.3
$ 1,047 $ 1,033 1.4 % $ 5,561 $ 5,126 8.5 % $ 84 $ 199 (57.8 )% $ 50,383 $ 46,798 7.7 %
581 569 2.1 198 308 (35.7 ) 35,417 34,165 3.7
389 369 5.4 10 12 (16.7 ) 32,854 27,045 21.5
16,022 16,399 (2.3 ) 4 * 16,022 16,403 (2.3 )
1,577 1,580 (.2 ) 909 1,015 (10.4 ) 1 16 (93.8 ) 48,154 47,391 1.6
3,594 3,551 1.2 22,492 22,540 (.2 ) 293 539 (45.6 ) 182,830 171,802 6.4
12 14 (14.3 ) 5 5 6,587 8,663 (24.0 ) 16,703 20,390 (18.1 )
3,606 3,565 1.2 22,497 22,545 (.2 ) 6,880 9,202 (25.2 ) 199,533 192,192 3.8
1,463 1,517 (3.6 ) 2,366 2,346 .9 3 * 8,953 9,006 (.6 )
188 208 (9.6 ) 807 967 (16.5 ) 5 * 3,192 3,182 .3
6,002 5,726 4.8 27,680 27,243 1.6 94,301 74,402 26.7 314,079 283,056 11.0
8,227 5,338 54.1 684 613 11.6 298 231 29.0 50,558 39,223 28.9
2,958 2,626 12.6 174 115 51.3 2 19 (89.5 ) 42,334 39,599 6.9
21,379 12,040 77.6 29 23 26.1 193 238 (18.9 ) 71,396 59,749 19.5
5,926 5,940 (.2 ) 1 * 182 517 (64.8 ) 45,447 44,266 2.7
38,490 25,944 48.4 887 752 18.0 675 1,005 (32.8 ) 209,735 182,837 14.7
2,076 2,109 (1.6 ) 5,272 5,308 (.7 ) 9,538 6,357 50.0 31,699 27,582 14.9
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the same period of 2010, was driven by a reduction in mortgage origination and sales revenue. Partially offsetting this decline was higher deposit service charges due to new account growth, higher transaction volumes and recent product redesign initiatives, partially offset by the impact of 2010 legislative and pricing changes. In addition, other income increased year-over-year due to higher retail lease residual revenue and ATM processing services income. The decline in noninterest income for the first nine months of 2011 compared to the same period of 2010 was primarily due to reductions in mortgage origination and sales revenue, and lower deposit service charges due to the impact of 2010 legislative and pricing changes, partially offset by new account growth, higher transaction volumes and recent product redesign initiatives.
Total noninterest expense increased $56 million (5.0 percent) in the third quarter and $189 million (5.8 percent) in the first nine months of 2011, compared with the same periods of 2010. The increases reflected higher compensation and employee benefits expense, mortgage servicing-related professional service projects, net shared services costs and net occupancy and equipment expenses related to business initiatives, partially offset by lower other intangibles expense.
The provision for credit losses decreased $62 million (15.7 percent) in the third quarter and $134 million (10.8 percent) in the first nine months of 2011, compared with the same periods of 2010, principally due to lower net charge-offs. As a percentage of average loans outstanding on an annualized basis, net charge-offs decreased to 1.16 percent in the third quarter of 2011, compared with 1.43 percent in the third quarter of 2010. Nonperforming assets were $1.6 billion at September 30, 2011, $1.7 billion at June 30, 2011, and $1.6 billion at September 30, 2010. Nonperforming assets as a percentage of period-end loans were 1.41 percent at September 30, 2011, 1.58 percent at June 30, 2011, and 1.55 percent at September 30, 2010. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.
During the second quarter of 2011, the Company’s two primary banking subsidiaries, U.S. Bank National Association and U.S. Bank National Association ND, entered into a Consent Order with the Office of the Comptroller of the Currency regarding residential mortgage servicing and foreclosure processes. The Company also entered into a related Consent Order with the Board of Governors of the Federal Reserve System. The Consent Orders were the result of an interagency horizontal review of the foreclosure practices of the 14 largest mortgage servicers in the United States.
The Consent Orders mandate certain changes to the Company’s mortgage servicing and foreclosure processes. Specifically, the Consent Orders require the Company, U.S. Bank National Association and U.S. Bank National Association ND to, among other things, submit a comprehensive action plan setting forth the steps necessary to ensure residential mortgage servicing and foreclosure processes are conducted in accordance with the Consent Orders; develop and implement other plans and programs to enhance residential mortgage servicing and foreclosure processes; retain an independent consultant to conduct a review of certain residential mortgage foreclosure actions and to remediate errors or deficiencies identified by the consultant; and oversee compliance with the Consent Orders and the new plans and programs. The Company has made significant progress in complying with these requirements during the last several months.
The Company has long been committed to sound modification and foreclosure practices and is committed to revising its practices where necessary to satisfy the requirements of the Consent Orders. The Company does not believe that the resolution of any outstanding issues will materially affect its financial position, results of operations, or ability to conduct normal business activities.
Wealth Management and Securities Services Wealth Management and Securities Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through five businesses: Wealth Management, Corporate Trust Services, U.S. Bancorp Asset Management, Institutional Trust & Custody and Fund Services. Wealth Management and Securities Services contributed $42 million of the Company’s net income in the third quarter and $141 million in the first nine months of 2011, or decreases of $12 million (22.2 percent) and $29 million (17.1 percent), respectively, compared with the same periods of 2010. The decreases were due to lower net revenue and higher total noninterest expense, partially offset by lower provision for credit losses.
Total net revenue decreased $12 million (3.4 percent) in the third quarter and increased $8 million (.8 percent) in the first nine months of 2011, compared with the same periods of 2010. Net interest income, on a taxable-equivalent basis, increased $11 million (13.9 percent) in the third quarter and $44 million (20.5 percent) in the first nine months of 2011, compared with the same periods of 2010. The year-over-year increases in net interest income were primarily due to higher average deposit balances, including the impact of the securitization trust
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administration acquisition. Total noninterest income declined $23 million (8.3 percent) in the third quarter and $36 million (4.3 percent) in the first nine months of 2011, compared with the same periods of 2010. Trust and investment management fees declined, primarily due to the sale of the long-term asset management business in the fourth quarter of 2010 and money market investment fee waivers, partially offset by the impact of the fourth quarter 2010 securitization trust administration acquisition and improved market conditions during the third quarter and first nine months of 2011. Additionally, investment product fees were higher due to increased sales volumes.
Total noninterest expense increased $20 million (7.8 percent) in the third quarter and $69 million (9.0 percent) in the first nine months of 2011, compared with the same periods of 2010. The increases in noninterest expense were primarily due to higher compensation and employee benefits expense, higher net shared services expense and the impact of the securitization trust administration acquisition, partially offset by reductions in other intangibles expense and expenses related to the sale of the long-term asset management business.
Payment Services Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate and purchasing card services, consumer lines of credit and merchant processing. Payment Services contributed $357 million of the Company’s net income in the third quarter and $1.0 billion in the first nine months of 2011, or increases of $140 million (64.5 percent) and $495 million (95.7 percent), respectively, compared with the same periods of 2010. The increases were primarily due to a lower provision for credit losses and higher total net revenue, partially offset by an increase in total noninterest expense.
Total net revenue increased $50 million (4.4 percent) in the third quarter and $89 million (2.7 percent) in the first nine months of 2011, compared with the same periods of 2010. Net interest income, on a taxable-equivalent basis, decreased $1 million (.3 percent) in the third quarter and $22 million (2.2 percent) in the first nine months of 2011, compared with the same periods of 2010, primarily due to lower retail credit card average loan balances. Noninterest income increased $51 million (6.3 percent) in the third quarter and $111 million (4.7 percent) in the first nine months of 2011, compared with the same periods of 2010, primarily due to increased transaction volumes.
Total noninterest expense increased $8 million (1.7 percent) in the third quarter and $51 million (3.7 percent) in the first nine months of 2011, compared with the same periods of 2010. The increases were driven by higher compensation and employee benefits expense and processing costs, partially offset by lower other intangibles expense. The provision for credit losses decreased $181 million (59.3 percent) in the third quarter and $752 million (66.7 percent) in the first nine months of 2011, compared with the same periods of 2010. The decreases were due to lower net charge-offs and favorable changes in the reserve allocation due to improved loss rates. As a percentage of average loans outstanding, net charge-offs were 3.78 percent in the third quarter of 2011, compared with 6.08 percent in the third quarter of 2010.
Treasury and Corporate Support Treasury and Corporate Support includes the Company’s investment portfolios, most covered commercial and commercial real estate loans and related other real estate owned, funding, capital management, asset securitization, interest rate risk management, the net effect of transfer pricing related to average balances and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $342 million in the third quarter and $1.0 billion in the first nine months of 2011, compared with $266 million in the third quarter and $861 million in the first nine months of 2010.
Total net revenue increased $108 million (25.2 percent) in the third quarter and $186 million (13.5 percent) in the first nine months of 2011, compared with the same periods of 2010. Net interest income, on a taxable-equivalent basis, increased $93 million (22.7 percent) in the third quarter and $77 million (5.7 percent) in the first nine months of 2011, compared with the same periods of 2010, reflecting the impact of growth in the investment portfolio, wholesale funding decisions and the Company’s asset/liability position. Total noninterest income increased $15 million (75.0 percent) in the third quarter of 2011, compared with the third quarter of 2010, due to income from sales of tax-advantaged projects and higher commercial products revenue. Total noninterest income increased $109 million in the first nine months of 2011, compared with the same period of 2010, principally due to the FCB gain recorded in the first quarter of 2011 and lower net securities losses.
Total noninterest expense decreased $5 million (2.2 percent) in the third quarter and $58 million (9.3 percent) in the first nine months of 2011, compared with the same periods of 2010, as favorable variances in net shared services expense and lower litigation and insurance costs, were partially offset by increased compensation and employee benefits expense.
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Income taxes are assessed to each line of business at a managerial tax rate of 36.4 percent with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.
In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:
Tangible common equity to tangible assets,
Tier 1 common equity to risk-weighted assets using Basel I definition,
Tier 1 common equity to risk-weighted assets using anticipated Basel III definition, and
Tangible common equity to risk-weighted assets using Basel I definition.
These non-regulatory capital ratios are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected market conditions. Additionally, presentation of these ratios allows readers to compare the Company’s capitalization to other financial services companies. These ratios differ from capital ratios defined by banking regulators principally in that the numerator excludes preferred securities, the nature and extent of which varies among different financial services companies. These ratios are not defined in Generally Accepted Accounting Principles (“GAAP”) or federal banking regulations. As a result, these non-regulatory capital ratios disclosed by the Company may be considered non-GAAP financial measures.
Because there are no standardized definitions for these non-regulatory capital ratios, the Company’s calculation methods may differ from those used by other financial services companies. Also, there may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this report in their entirety, and not to rely on any single financial measure.
The following table shows the Company’s calculation of these measures:
September 30,
December 31,
(Dollars in Millions) 2011 2010
Total equity
$ 34,210 $ 30,322
Preferred stock
(2,606) (1,930)
Noncontrolling interests
(980) (803)
Goodwill (net of deferred tax liability)
(8,265) (8,337)
Intangible assets, other than mortgage servicing rights
(1,209) (1,376)
Tangible common equity (a)
21,150 17,876
Tier 1 capital, determined in accordance with prescribed regulatory requirements using Basel I definition
28,081 25,947
Trust preferred securities
(2,675) (3,949)
Preferred stock
(2,606) (1,930)
Noncontrolling interests, less preferred stock not eligible for Tier 1 capital
(695) (692)
Tier 1 common equity using Basel I definition (b)
22,105 19,376
Tier 1 capital, determined in accordance with prescribed regulatory requirements using anticipated Basel III definition
24,902 20,854
Preferred stock
(2,606) (1,930)
Noncontrolling interests of real estate investment trusts
(667) (667)
Tier 1 common equity using anticipated Basel III definition (c)
21,629 18,257
Total assets
330,141 307,786
Goodwill (net of deferred tax liability)
(8,265) (8,337)
Intangible assets, other than mortgage servicing rights
(1,209) (1,376)
Tangible assets (d)
320,667 298,073
Risk-weighted assets, determined in accordance with prescribed regulatory requirements using Basel I definition (e)
261,115 247,619
Risk-weighted assets using anticipated Basel III definition (f)
264,103 251,704
Ratios
Tangible common equity to tangible assets (a)/(d)
6.6 % 6.0 %
Tier 1 common equity to risk-weighted assets using Basel I definition (b)/(e)
8.5 7.8
Tier 1 common equity to risk-weighted assets using anticipated Basel III definition (c)/(f)
8.2 7.3
Tangible common equity to risk-weighted assets (a)/(e)
8.1 7.2
Note: Anticipated Basel III definitions reflect adjustments for changes to the related elements as proposed in December 2010 by regulatory authorities.
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CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company’s financial statements. Critical accounting policies are those policies management believes are the most important to the portrayal of the Company’s financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Those policies considered to be critical accounting policies relate to the allowance for credit losses, fair value estimates, purchased loans and related indemnification assets, MSRs, goodwill and other intangibles and income taxes. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee. These accounting policies are discussed in detail in “Management’s Discussion and Analysis — Critical Accounting Policies” and the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
During the most recently completed fiscal quarter, there was no change made in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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U.S. Bancorp
Consolidated Balance Sheet
September 30,
December 31,
(Dollars in Millions) 2011 2010
(Unaudited)
Assets
Cash and due from banks
$ 13,708 $ 14,487
Investment securities
Held-to-maturity (fair value $16,613 and $1,419, respectively)
16,269 1,469
Available-for-sale
52,109 51,509
Loans held for sale (included $5,152 and $8,100 of mortgage loans carried at fair value, respectively)
5,375 8,371
Loans
Commercial
53,832 48,398
Commercial real estate
35,603 34,695
Residential mortgages
35,124 30,732
Credit card
16,332 16,803
Other retail
48,479 48,391
Total loans, excluding covered loans
189,370 179,019
Covered loans
15,398 18,042
Total loans
204,768 197,061
Less allowance for loan losses
(4,950 ) (5,310 )
Net loans
199,818 191,751
Premises and equipment
2,581 2,487
Goodwill
8,933 8,954
Other intangible assets
2,675 3,213
Other assets
28,673 25,545
Total assets
$ 330,141 $ 307,786
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing
$ 64,228 $ 45,314
Interest-bearing
130,332 129,381
Time deposits greater than $100,000
28,072 29,557
Total deposits
222,632 204,252
Short-term borrowings
32,029 32,557
Long-term debt
30,624 31,537
Other liabilities
10,646 9,118
Total liabilities
295,931 277,464
Shareholders’ equity
Preferred stock
2,606 1,930
Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares;
issued: 9/30/11 and 12/31/10 — 2,125,725,742 shares
21 21
Capital surplus
8,248 8,294
Retained earnings
29,704 27,005
Less cost of common stock in treasury: 9/30/11 — 213,050,586 shares; 12/31/10 — 204,822,330 shares
(6,419 ) (6,262 )
Accumulated other comprehensive income (loss)
(930 ) (1,469 )
Total U.S. Bancorp shareholders’ equity
33,230 29,519
Noncontrolling interests
980 803
Total equity
34,210 30,322
Total liabilities and equity
$ 330,141 $ 307,786
See Notes to Consolidated Financial Statements.
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U.S. Bancorp
Consolidated Statement of Income
Three Months Ended
Nine Months Ended
(Dollars and Shares in Millions, Except Per Share Data) September 30, September 30,
(Unaudited) 2011 2010 2011 2010
Interest Income
Loans
$ 2,621 $ 2,560 $ 7,736 $ 7,580
Loans held for sale
42 71 139 162
Investment securities
470 400 1,357 1,204
Other interest income
67 46 187 119
Total interest income
3,200 3,077 9,419 9,065
Interest Expense
Deposits
202 231 646 696
Short-term borrowings
143 149 407 414
Long-term debt
289 273 860 822
Total interest expense
634 653 1,913 1,932
Net interest income
2,566 2,424 7,506 7,133
Provision for credit losses
519 995 1,846 3,444
Net interest income after provision for credit losses
2,047 1,429 5,660 3,689
Noninterest Income
Credit and debit card revenue
289 274 842 798
Corporate payment products revenue
203 191 563 537
Merchant processing services
338 318 977 930
ATM processing services
115 105 341 318
Trust and investment management fees
241 267 755 798
Deposit service charges
183 160 488 566
Treasury management fees
137 139 418 421
Commercial products revenue
212 197 621 563
Mortgage banking revenue
245 310 683 753
Investment products fees and commissions
31 27 98 82
Securities gains (losses), net
Realized gains (losses), net
9 2 21
Total other-than-temporary impairment
(11 ) (28 ) (41 ) (145 )
Portion of other-than-temporary impairment recognized in other comprehensive income
2 10 17 60
Total securities gains (losses), net
(9 ) (9 ) (22 ) (64 )
Other
186 131 565 436
Total noninterest income
2,171 2,110 6,329 6,138
Noninterest Expense
Compensation
1,021 973 2,984 2,780
Employee benefits
203 171 643 523
Net occupancy and equipment
252 229 750 682
Professional services
100 78 252 209
Marketing and business development
102 108 257 254
Technology and communications
189 186 563 557
Postage, printing and supplies
76 74 226 223
Other intangibles
75 90 225 278
Other
458 476 1,315 1,392
Total noninterest expense
2,476 2,385 7,215 6,898
Income before income taxes
1,742 1,154 4,774 2,929
Applicable income taxes
490 260 1,314 620
Net income
1,252 894 3,460 2,309
Net (income) loss attributable to noncontrolling interests
21 14 62 34
Net income attributable to U.S. Bancorp
$ 1,273 $ 908 $ 3,522 $ 2,343
Net income applicable to U.S. Bancorp common shareholders
$ 1,237 $ 871 $ 3,407 $ 2,381
Earnings per common share
$ .65 $ .46 $ 1.78 $ 1.25
Diluted earnings per common share
$ .64 $ .45 $ 1.77 $ 1.24
Dividends declared per common share
$ .125 $ .050 $ .375 $ .150
Average common shares outstanding
1,915 1,913 1,918 1,911
Average diluted common shares outstanding
1,922 1,920 1,926 1,920
See Notes to Consolidated Financial Statements.
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U.S. Bancorp
Consolidated Statement of Shareholders’ Equity
U.S. Bancorp Shareholders
Total
Other
U.S. Bancorp
(Dollars and Shares in Millions)
Common Shares
Preferred
Common
Capital
Retained
Treasury
Comprehensive
Shareholders’
Noncontrolling
Total
(Unaudited) Outstanding Stock Stock Surplus Earnings Stock Income (Loss) Equity Interests Equity
Balance December 31, 2009
1,913 $ 1,500 $ 21 $ 8,319 $ 24,116 $ (6,509 ) $ (1,484 ) $ 25,963 $ 698 $ 26,661
Change in accounting principle
(72 ) (1 ) (73 ) (16 ) (89 )
Net income (loss)
2,343 2,343 (34 ) 2,309
Changes in unrealized gains and losses on securities available-for-sale
1,265 1,265 1,265
Other-than-temporary impairment not recognized in earnings on securities available-for-sale
(60 ) (60 ) (60 )
Unrealized gain (loss) on derivative hedges
(331 ) (331 ) (331 )
Foreign currency translation
16 16 16
Reclassification for realized (gains) losses
65 65 65
Income taxes
(364 ) (364 ) (364 )
Total comprehensive income (loss)
2,934 (34 ) 2,900
Preferred stock dividends
(70 ) (70 ) (70 )
Common stock dividends
(288 ) (288 ) (288 )
Issuance of preferred stock
430 10 118 558 558
Issuance of common and treasury stock
6 (103 ) 162 59 59
Purchase of treasury stock
(1 ) (16 ) (16 ) (16 )
Distributions to noncontrolling interests
(57 ) (57 )
Net other changes in noncontrolling interests
201 201
Stock option and restricted stock grants
84 84 84
Balance September 30, 2010
1,918 $ 1,930 $ 21 $ 8,310 $ 26,147 $ (6,363 ) $ (894 ) $ 29,151 $ 792 $ 29,943
Balance December 31, 2010
1,921 $ 1,930 $ 21 $ 8,294 $ 27,005 $ (6,262 ) $ (1,469 ) $ 29,519 $ 803 $ 30,322
Change in accounting principle
(2 ) (2 ) (2 )
Net income (loss)
3,522 3,522 (62 ) 3,460
Changes in unrealized gains and losses on securities available-for-sale
1,000 1,000 1,000
Other-than-temporary impairment not recognized in earnings on securities available-for-sale
(17 ) (17 ) (17 )
Unrealized gain (loss) on derivative hedges
(323 ) (323 ) (323 )
Foreign currency translation
(16 ) (16 ) (16 )
Reclassification for realized (gains) losses
228 228 228
Income taxes
(333 ) (333 ) (333 )
Total comprehensive income (loss)
4,061 (62 ) 3,999
Preferred stock dividends
(99 ) (99 ) (99 )
Common stock dividends
(722 ) (722 ) (722 )
Issuance of preferred stock
676 676 676
Issuance of common and treasury stock
8 (121 ) 252 131 131
Purchase of treasury stock
(16 ) (409 ) (409 ) (409 )
Distributions to noncontrolling interests
(57 ) (57 )
Net other changes in noncontrolling interests
296 296
Stock option and restricted stock grants
75 75 75
Balance September 30, 2011
1,913 $ 2,606 $ 21 $ 8,248 $ 29,704 $ (6,419 ) $ (930 ) $ 33,230 $ 980 $ 34,210
See Notes to Consolidated Financial Statements.
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U.S. Bancorp
Consolidated Statement of Cash Flows
Nine Months Ended
(Dollars in Millions)
September 30,
(Unaudited) 2011 2010
Operating Activities
Net income attributable to U.S. Bancorp
$3,522 $2,343
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses
1,846 3,444
Depreciation and amortization of premises and equipment
196 169
Amortization of intangibles
225 278
Provision for deferred income taxes
250 (291 )
Gain on sales of securities and other assets, net
(982 ) (1,271 )
Loans originated for sale in the secondary market, net of repayments
(29,486 ) (34,328 )
Proceeds from sales of loans held for sale
33,237 31,839
Other, net
(53 ) 623
Net cash provided by operating activities
8,755 2,806
Investing Activities
Proceeds from sales of available-for-sale investment securities
926 1,113
Proceeds from maturities of held-to-maturity investment securities
714 133
Proceeds from maturities of available-for-sale investment securities
7,872 10,811
Purchases of held-to-maturity investment securities
(15,192 ) (64 )
Purchases of available-for-sale investment securities
(8,399 ) (14,365 )
Net increase in loans outstanding
(8,458 ) (2,720 )
Proceeds from sales of loans
454 1,365
Purchases of loans
(1,750 ) (3,669 )
Acquisitions, net of cash acquired
650 832
Other, net
(1,006 ) (1,151 )
Net cash used in investing activities
(24,189 ) (7,715 )
Financing Activities
Net increase in deposits
16,593 3,681
Net increase (decrease) in short-term borrowings
(644 ) 2,376
Proceeds from issuance of long-term debt
2,002 5,349
Principal payments or redemption of long-term debt
(3,048 ) (7,942 )
Fees paid on exchange of income trust securities for perpetual preferred stock
(4 )
Proceeds from issuance of preferred stock
676
Proceeds from issuance of common stock
125 56
Repurchase of common stock
(383 )
Cash dividends paid on preferred stock
(88 ) (56 )
Cash dividends paid on common stock
(578 ) (287 )
Net cash provided by financing activities
14,655 3,173
Change in cash and due from banks
(779 ) (1,736 )
Cash and due from banks at beginning of period
14,487 6,206
Cash and due from banks at end of period
$13,708 $4,470
See Notes to Consolidated Financial Statements.
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Notes to Consolidated Financial Statements
(Unaudited)

Note 1 Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States. In the opinion of management of U.S. Bancorp (the “Company”), all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Certain amounts in prior periods have been reclassified to conform to the current presentation.
Accounting policies for the lines of business are generally the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs, expenses and other financial elements to each line of business. Table 10 “Line of Business Financial Performance” included in Management’s Discussion and Analysis provides details of segment results. This information is incorporated by reference into these Notes to Consolidated Financial Statements.

Note 2 Accounting Changes
Troubled Debt Restructurings On July 1, 2011, the Company adopted accounting guidance issued by the Financial Accounting Standards Board related to identifying and disclosing troubled debt restructurings (“TDRs”), applicable to modifications occurring on or after January 1, 2011. This guidance provides clarification in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for the purpose of determining whether a restructuring constitutes a TDR. The adoption of this guidance resulted in $1.4 billion of additional loan modifications considered to be TDRs which the Company had not previously considered to be impaired. The allowance for credit losses had previously been measured under a collective allowance for credit losses methodology. Under the new accounting guidance, the allowance for credit losses associated with these loans as of September 30, 2011, was $94 million. The adoption of this guidance did not have a material impact on the Company’s total allowance for credit losses.

Note 3 Business Combinations
In January 2011, the Company acquired the banking operations of First Community Bank of New Mexico (“FCB”) from the Federal Deposit Insurance Corporation (“FDIC”). The FCB transaction did not include a loss sharing agreement. The Company acquired 38 branch locations and approximately $2.1 billion in assets, assumed approximately $2.1 billion in liabilities, and received approximately $412 million in cash from the FDIC. In addition, the Company recognized a $46 million gain on this transaction during the first quarter of 2011.
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Note 4 Investment Securities
The amortized cost, other-than-temporary impairment recorded in other comprehensive income (loss), gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale securities were as follows:
September 30, 2011 December 31, 2010
Unrealized Losses Unrealized Losses
Amortized
Unrealized
Other-than-
Fair
Amortized
Unrealized
Other-than-
Fair
(Dollars in Millions) Cost Gains Temporary (d) Other (e) Value Cost Gains Temporary (d) Other (e) Value
Held-to-maturity (a)
U.S. Treasury and agencies
$ 2,623 $ 36 $ $ $ 2,659 $ 165 $ $ $ (1 ) $ 164
Mortgage-backed securities
Residential
Agency
13,400 339 (4 ) 13,735 847 (4 ) 843
Non-agency non-prime
2 (1 ) 1 3 3
Commercial non-agency
5 (2 ) 3 10 (5 ) 5
Asset-backed securities
Collateralized debt obligations/Collaterized loan obligations
60 13 (3 ) 70 157 13 (18 ) 152
Other
24 1 (7 ) 18 127 (1) (7 ) 119
Obligations of state and political subdivisions
24 1 (1 ) 24 27 1 (1 ) 27
Obligations of foreign governments
7 7 7 7
Other debt securities
124 (28 ) 96 126 (27 ) 99
Total held-to-maturity
$ 16,269 $ 390 $ $ (46 ) $ 16,613 $ 1,469 $ 14 $ (1) $ (63 ) $ 1,419
Available-for-sale (b)
U.S. Treasury and agencies
$ 1,477 $ 12 $ $ $ 1,489 $ 2,559 $ 6 $ $ (28 ) $ 2,537
Mortgage-backed securities
Residential
Agency
38,767 992 (21 ) 39,738 37,144 718 (159 ) 37,703
Non-agency
Prime (c)
950 6 (48) (49 ) 859 1,216 12 (86) (39 ) 1,103
Non-prime
1,076 17 (224) (12 ) 857 1,193 15 (243) (18 ) 947
Commercial
Agency
140 7 147 194 5 (2 ) 197
Non-agency
43 2 45 47 3 50
Asset-backed securities
Collateralized debt obligations/Collaterized loan obligations
189 34 (2) (3 ) 218 204 23 (2) (1 ) 224
Other
693 19 (3) (23 ) 686 709 23 (3) (9 ) 720
Obligations of state and political subdivisions
6,409 130 (40 ) 6,499 6,835 3 (421 ) 6,417
Obligations of foreign governments
6 6 6 6
Corporate debt securities
1,109 (140 ) 969 1,109 (151 ) 958
Perpetual preferred securities
455 31 (80 ) 406 456 41 (49 ) 448
Other investments
178 13 (1 ) 190 183 17 (1 ) 199
Total available-for-sale
$ 51,492 $ 1,263 $ (277) $ (369 ) $ 52,109 $ 51,855 $ 866 $ (334) $ (878 ) $ 51,509
(a) Held-to-maturity securities are carried at historical cost adjusted for amortization of premiums and accretion of discounts and credit-related other-than-temporary impairment.
(b) Available-for-sale securities are carried at fair value with unrealized net gains or losses reported within accumulated other comprehensive income (loss) in shareholders’ equity.
(c) Prime securities are those designated as such by the issuer or those with underlying asset characteristics and/or credit enhancements consistent with securities designated as prime.
(d) Represents impairment not related to credit for those securities that have been determined to be other-than-temporarily impaired.
(e) Represents unrealized losses on securities that have not been determined to be other-than-temporarily impaired.
The weighted-average maturity of the available-for-sale investment securities was 5.3 years at September 30, 2011, compared with 7.4 years at December 31, 2010. The corresponding weighted-average yields were 3.25 percent and 3.41 percent, respectively. The weighted-average maturity of the held-to-maturity investment securities was 4.0 years at September 30, 2011, and 6.3 years at December 31, 2010. The corresponding weighted-average yields were 2.20 percent and 2.07 percent, respectively.
For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale securities outstanding at September 30, 2011, refer to Table 4 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.
Securities carried at $21.3 billion at September 30, 2011, and $28.0 billion at December 31, 2010, were pledged to secure public, private and trust deposits, repurchase agreements and for other purposes required by law. Included in these amounts were securities sold under agreements to repurchase where the buyer/lender has the right to sell or pledge the securities and which were collateralized by securities with a carrying amount of $7.0 billion at September 30, 2011, and $9.3 billion at December 31, 2010.
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The following table provides information about the amount of interest income from taxable and non-taxable investment securities:
Three Months Ended
Nine Months Ended
September 30, September 30,
(Dollars in Millions) 2011 2010 2011 2010
Taxable
$ 394 $ 323 $ 1,127 $ 973
Non-taxable
76 77 230 231
Total interest income from investment securities
$ 470 $ 400 $ 1,357 $ 1,204
The following table provides information about the amount of gross gains and losses realized through the sales of available-for-sale investment securities:
Three Months Ended
Nine Months Ended
September 30, September 30,
(Dollars in Millions) 2011 2010 2011 2010
Realized gains
$ 4 $ 9 $ 6 $ 21
Realized losses
(4 ) (4 )
Net realized gains (losses)
$ $ 9 $ 2 $ 21
Income tax (benefit) on realized gains (losses)
$ $ 4 $ 1 $ 8
In 2007, the Company purchased certain structured investment securities (“SIVs”) from certain money market funds managed by an affiliate of the Company. Subsequent to the initial purchase, the Company exchanged its interest in the SIVs for a pro-rata portion of the underlying investment securities according to the applicable restructuring agreements. The SIVs and the investment securities received are collectively referred to as “SIV-related securities.”
Some of the SIV-related securities evidenced credit deterioration at the time of acquisition by the Company. Investment securities with evidence of credit deterioration at acquisition had an unpaid principal balance and fair value of $429 million and $157 million, respectively, at September 30, 2011, and $485 million and $173 million, respectively, at December 31, 2010. Changes in the accretable balance for these securities were as follows:
Three Months Ended
Nine Months Ended
September 30, September 30,
(Dollars in Millions) 2011 2010 2011 2010
Balance at beginning of period
$ 117 $ 302 $ 139 $ 292
Additions (a)
66 66
Disposals (a)
(50 ) (50 )
Accretion
(4 ) (8 ) (13 ) (23 )
Other (b)
(6 ) (1 ) (19 ) 24
Balance at end of period
$ 107 $ 309 $ 107 $ 309
(a) Additions and disposals resulted from the exchange of certain SIV’s for the underlying investment securities.
(b) Primarily represents changes in projected future cash flows related to variable rates on certain investment securities.
The Company conducts a regular assessment of its investment securities with unrealized losses to determine whether securities are other-than-temporarily impaired considering, among other factors, the nature of the securities, credit ratings or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows of underlying collateral, market conditions and whether the Company intends to sell or it is more likely than not the Company will be required to sell the securities.
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The following tables summarize other-than-temporary impairment by investment category:
2011 2010
Losses
Losses
Three Months Ended September 30
Recorded in
Other Gains
Recorded in
Other Gains
(Dollars in Millions) Earnings (Losses) (b) Total Earnings (Losses) (b) Total
Held-to-maturity
Asset-backed securities
Other
$ $ $ $ $ $
Total held-to-maturity
$ $ $ $ $ $
Available-for-sale
Mortgage-backed securities
Non-agency residential
Prime (a)
$ $ $ $ (1 ) $ (1 ) $ (2 )
Non-prime
(6 ) (4 ) (10 ) (13 ) (11 ) (24 )
Asset-backed securities
Collateralized debt obligations/Collaterized loan obligations
(1 ) (1 )
Other
(3 ) 2 (1 ) (2 ) 2
Perpetual preferred securities
(1 ) (1 )
Total available-for-sale
$ (9 ) $ (2 ) $ (11 ) $ (18 ) $ (10 ) $ (28 )
(a) Prime securities are those designated as such by the issuer or those with underlying asset characteristics and/or credit enhancements consistent with securities designated as prime.
(b) Represents the non-credit portion of other-than-temporary impairment recorded in other comprehensive income for securities determined to be other-than-temporarily impaired during the period.
2011 2010
Losses
Losses
Nine Months Ended September 30
Recorded in
Other Gains
Recorded in
Other Gains
(Dollars in Millions) Earnings (Losses) (b) Total Earnings (Losses) (b) Total
Held-to-maturity
Asset-backed securities
Other
$ $ $ $ (2 ) $ $ (2 )
Total held-to-maturity
$ $ $ $ (2 ) $ $ (2 )
Available-for-sale
Mortgage-backed securities
Non-agency residential
Prime (a)
$ (2 ) $ (3 ) $ (5 ) $ (4 ) $ (11 ) $ (15 )
Non-prime
(18 ) (16 ) (34 ) (59 ) (54 ) (113 )
Asset-backed securities
Collateralized debt obligations/Collaterized loan obligations
(6 ) (6 )
Other
(4 ) 2 (2 ) (12 ) 4 (8 )
Perpetual preferred securities
(1 ) (1 )
Other debt securities
(1 ) 1
Total available-for-sale
$ (24 ) $ (17 ) $ (41 ) $ (83 ) $ (60 ) $ (143 )
(a) Prime securities are those designated as such by the issuer or those with underlying asset characteristics and/or credit enhancements consistent with securities designated as prime.
(b) Represents the non-credit portion of other-than-temporary impairment recorded in other comprehensive income for securities determined to be other-than-temporarily impaired during the period.
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The Company determined the other-than-temporary impairment recorded in earnings for securities by estimating the future cash flows of each individual security, using market information where available, and discounting the cash flows at the original effective rate of the security. Other-than-temporary impairment recorded in other comprehensive income (loss) was measured as the difference between that discounted amount and the fair value of each security. The following table includes the ranges for principal assumptions used for those available-for-sale non-agency mortgage-backed securities determined to be other-than-temporarily impaired:
Prime Non-Prime
Minimum Maximum Average Minimum Maximum Average
September 30, 2011
Estimated lifetime prepayment rates
7 % 15 % 13 % 1 % 11 % 6 %
Lifetime probability of default rates
2 7 3 1 19 6
Lifetime loss severity rates
40 55 46 8 70 53
December 31, 2010
Estimated lifetime prepayment rates
4 % 14 % 13 % 1 % 12 % 6 %
Lifetime probability of default rates
3 9 3 1 20 8
Lifetime loss severity rates
40 55 41 37 71 55
Changes in the credit losses on debt securities (excludes perpetual preferred securities) are summarized as follows:
Three Months Ended
Nine Months Ended
September 30, September 30,
(Dollars in Millions) 2011 2010 2011 2010
Balance at beginning of period
$ 319 $ 382 $ 358 $ 335
Additions to credit losses due to other-than-temporary impairments
Credit losses on securities not previously considered other-than-temporarily impaired
1 3 3 18
Decreases in expected cash flows on securities for which other-than-temporary impairment was previously recognized
8 15 21 67
Total other-than-temporary impairment on debt securities
9 18 24 85
Other changes in credit losses
Increases in expected cash flows
(3 ) (4 ) (20 ) (17 )
Realized losses (a)
(19 ) (19 ) (55 ) (44 )
Credit losses on security sales and securities expected to be sold
(1 )
Other
18
Balance at end of period
$ 306 $ 377 $ 306 $ 377
(a) Primarily represents principal losses allocated to mortgage and asset-backed securities in the Company’s portfolio under the terms of the securitization transaction documents.
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At September 30, 2011, certain investment securities had a fair value below amortized cost. The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, aggregated by investment category and length of time the individual securities have been in continuous unrealized loss positions, at September 30, 2011:
Less Than 12 Months 12 Months or Greater Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in Millions) Value Losses Value Losses Value Losses
Held-to-maturity
Mortgage-backed securities
Residential
Agency
$ 1,769 $ (4 ) $ $ $ 1,769 $ (4 )
Non-agency non-prime (a)
1 (1 ) 1 (1 )
Commercial non-agency
3 (2 ) 3 (2 )
Asset-backed securities
Collateralized debt obligations/Collaterized loan obligations
31 (3 ) 31 (3 )
Other
15 (7 ) 15 (7 )
Obligations of state and political subdivisions
9 (1 ) 9 (1 )
Other debt securities
96 (28 ) 96 (28 )
Total held-to-maturity
$ 1,769 $ (4 ) $ 155 $ (42 ) $ 1,924 $ (46 )
Available-for-sale
U.S. Treasury and agencies
$ 208 $ $ $ $ 208 $
Mortgage-backed securities
Residential
Agency
10,936 (21 ) 141 11,077 (21 )
Non-agency (a)
Prime (b)
103 (4 ) 689 (93 ) 792 (97 )
Non-prime
59 (6 ) 699 (230 ) 758 (236 )
Commercial non-agency
22 22
Asset-backed securities
Collateralized debt obligations/Collaterized loan obligations
16 (3 ) 7 (2 ) 23 (5 )
Other
460 (12 ) 117 (14 ) 577 (26 )
Obligations of state and political subdivisions
457 (3 ) 1,087 (37 ) 1,544 (40 )
Corporate debt securities
186 (4 ) 641 (136 ) 827 (140 )
Perpetual preferred securities
61 (14 ) 231 (66 ) 292 (80 )
Other investments
1 3 (1 ) 4 (1 )
Total available-for-sale
$ 12,509 $ (67 ) $ 3,615 $ (579 ) $ 16,124 $ (646 )
(a) The Company has $334 million of unrealized losses on residential non-agency mortgage-backed securities. Credit-related other-than-temporary impairment on these securities may occur if there is further deterioration in underlying collateral pool performance. Borrower defaults may increase if current economic conditions persist or worsen. Additionally, further deterioration in home prices may increase the severity of projected losses.
(b) Prime securities are those designated as such by the issuer or those with underlying asset characteristics and/or credit enhanacements consistent with securities designated as prime.
The Company does not consider these unrealized losses to be credit-related. These unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase. A substantial portion of securities that have unrealized losses are either corporate debt, obligations of state and political subdivisions or mortgage-backed securities issued with high investment grade credit ratings. In general, the issuers of the investment securities are contractually prohibited from prepayment at less than par, and the Company did not pay significant purchase premiums for these securities. At September 30, 2011, the Company had no plans to sell securities with unrealized losses, and believes it is more likely than not it would not be required to sell such securities before recovery of their amortized cost.
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Note 5 Loans and Allowance for Credit Losses
The composition of the loan portfolio, disaggregated by class and underlying specific portfolio type, was as follows:
September 30, 2011 December 31, 2010
Percent
Percent
(Dollars in Millions) Amount of Total Amount of Total
Commercial
Commercial
$ 47,947 23.4 % $ 42,272 21.5 %
Lease financing
5,885 2.9 6,126 3.1
Total commercial
53,832 26.3 48,398 24.6
Commercial real estate
Commercial mortgages
29,241 14.3 27,254 13.8
Construction and development
6,362 3.1 7,441 3.8
Total commercial real estate
35,603 17.4 34,695 17.6
Residential mortgages
Residential mortgages
27,495 13.4 24,315 12.3
Home equity loans, first liens
7,629 3.7 6,417 3.3
Total residential mortgages
35,124 17.1 30,732 15.6
Credit card
16,332 8.0 16,803 8.5
Other retail
Retail leasing
5,173 2.5 4,569 2.3
Home equity and second mortgages
18,410 9.0 18,940 9.6
Revolving credit
3,315 1.6 3,472 1.8
Installment
5,376 2.6 5,459 2.8
Automobile
11,453 5.6 10,897 5.5
Student
4,752 2.4 5,054 2.5
Total other retail
48,479 23.7 48,391 24.5
Total loans, excluding covered loans
189,370 92.5 179,019 90.8
Covered loans
15,398 7.5 18,042 9.2
Total loans
$ 204,768 100.0 % $ 197,061 100.0 %
The Company had loans of $62.8 billion at September 30, 2011, and December 31, 2010, pledged at the Federal Home Loan Bank (“FHLB”), and loans of $46.1 billion at September 30, 2011, and $44.6 billion at December 31, 2010, pledged at the Federal Reserve Bank.
Net gains on the sale of loans of $74 million and $105 million for the three months ended September 30, 2011 and 2010, respectively, and $340 million and $308 million for the nine months ended September 30, 2011 and 2010, respectively, were included in noninterest income, primarily in mortgage banking revenue.
Originated loans are presented net of unearned interest and deferred fees and costs, which amounted to $1.1 billion at September 30, 2011, and $1.3 billion at December 31, 2010. In accordance with applicable authoritative accounting guidance, all purchased loans and related indemnification assets are recorded at fair value at the date of purchase. The Company evaluates purchased loans for impairment at the date of purchase in accordance with applicable authoritative accounting guidance. Purchased loans with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are considered “purchased impaired loans”. All other purchased loans are considered “purchased nonimpaired loans”.
Covered assets represent loans and other assets acquired from the FDIC subject to loss sharing agreements in the Downey Savings and Loan Association, F.A.; PFF Bank and Trust; and First Bank of Oak Park Corporation transactions and included expected reimbursements from the FDIC of approximately $2.4 billion at September 30, 2011 and $3.1 billion at December 31, 2010.
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The carrying amount of the covered assets consisted of purchased impaired loans, purchased nonimpaired loans, and other assets as shown in the following table:
September 30, 2011 December 31, 2010
Purchased
Purchased
Purchased
Purchased
impaired
nonimpaired
Other
impaired
nonimpaired
Other
(Dollars in Millions) loans loans assets Total loans loans assets Total
Commercial loans
$ 68 $ 160 $ $ 228 $ 70 $ 260 $ $ 330
Commercial real estate loans
2,092 4,385 6,477 2,254 5,952 8,206
Residential mortgage loans
3,953 1,417 5,370 3,819 1,620 5,439
Credit card loans
5 5 5 5
Other retail loans
878 878 925 925
Losses reimbursable by the FDIC
2,440 2,440 3,137 3,137
Covered loans
6,113 6,845 2,440 15,398 6,143 8,762 3,137 18,042
Foreclosed real estate
293 293 453 453
Total covered assets
$ 6,113 $ 6,845 $ 2,733 $ 15,691 $ 6,143 $ 8,762 $ 3,590 $ 18,495
At September 30, 2011, $.3 billion of the purchased impaired loans included in covered loans were classified as nonperforming assets, compared with $.5 billion at December 31, 2010, because the expected cash flows are primarily based on the liquidation of underlying collateral and the timing and amount of the cash flows could not be reasonably estimated. Interest income is recognized on other purchased impaired loans through accretion of the difference between the carrying amount of those loans and their expected cash flows. The initial determination of the fair value of the purchased loans includes the impact of expected credit losses and, therefore, no allowance for credit losses is recorded at the purchase date. To the extent credit deterioration occurs after the date of acquisition, the Company records an allowance for credit losses.
On the acquisition date, the estimate of the contractually required payments receivable for all purchased impaired loans acquired in the FCB transaction were $502 million, the cash flows expected to be collected were $338 million including interest, and the estimated fair values of the loans were $238 million. These amounts were determined based upon the estimated remaining life of the underlying loans, which includes the effects of estimated prepayments. For the purchased nonimpaired loans acquired in the FCB transaction, the estimate as of the acquisition date of the contractually required payments receivable were $1.2 billion, the contractual cash flows not expected to be collected were $184 million, and the estimated fair value of the loans was $828 million.
Changes in the accretable balance for all purchased impaired loans, including those acquired in the FCB transaction, were as follows:
Three Months Ended
Nine Months Ended
September 30, September 30,
(Dollars in Millions) 2011 2010 2011 2010
Balance at beginning of period
$ 3,015 $ 2,749 $ 2,890 $ 2,845
Purchases
100
Accretion
(110 ) (103 ) (337 ) (308 )
Disposals
(43 ) (2 ) (47 ) (20 )
Reclassifications (to)/from nonaccretable difference (a)
(170 ) 156 117 316
Other
(7 ) (4 ) (38 ) (37 )
Balance at end of period
$ 2,685 $ 2,796 $ 2,685 $ 2,796
(a) Primarily relates to changes in expected credit performance and changes in variable rates.
The allowance for credit losses reserves for probable and estimable losses incurred in the Company’s loan and lease portfolio and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the FDIC. The allowance for credit losses is increased through provisions charged to operating earnings and reduced by net charge-offs. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses.
The allowance recorded for loans in the commercial lending segment is generally based on quarterly reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. The Company currently uses an 11 year period of historical losses in considering actual loss experience. This timeframe and the results of the analysis are evaluated quarterly to determine the appropriateness. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan analysis utilizing expected cash flows discounted using the original effective interest rate, the
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observable market price, or the fair value of the collateral for collateral-dependent loans. The allowance recorded for all other commercial lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, and historical losses, adjusted for current trends. The Company also considers the impacts of any loan modifications made to commercial lending segment loans and any subsequent payment defaults to its expectations of cash flows, principal balance, and current expectations about the borrower’s ability to pay in determining the allowance for credit losses.
The allowance recorded for purchased impaired and TDR loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool. The allowance recorded for all other consumer lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, and historical losses, adjusted for current trends. The Company also considers any modifications made to consumer lending segment loans including the impacts of any subsequent payment defaults since modification in determining the allowance for credit losses, such as borrower’s ability to pay under the restructured terms, and the timing and amount of payments.
The allowance for covered segment loans is evaluated each quarter in a manner similar to that described for non-covered loans and represents any decreases in expected cash flows of those loans after the acquisition date. The provision for credit losses for covered segment loans considers the indemnification provided by the FDIC.
The Company’s methodology for determining the appropriate allowance for credit losses for all the loan segments also considers the imprecision inherent in the methodologies used. As a result, in addition to the amounts determined under the methodologies described above, management also considers the potential impact of other qualitative factors which include, but are not limited to, economic factors; geographic and other concentration risks; delinquency and nonaccrual trends; current business conditions; changes in lending policy, underwriting standards, internal review and other relevant business practices; and the regulatory environment. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each of the above loan segments.
The Company also assesses the credit risk associated with off-balance sheet loan commitments, letters of credit, and derivatives. Credit risk associated with derivatives is reflected in the fair values recorded for those positions. The liability for off-balance sheet credit exposure related to loan commitments and other credit guarantees is included in other liabilities. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments.
Activity in the allowance for credit losses by portfolio class was as follows:
Total Loans,
Commercial
Residential
Credit
Other
Excluding
Covered
Total
(Dollars in Millions) Commercial Real Estate Mortgages Card Retail Covered Loans Loans Loans
Three months ended September 30, 2011:
Balance at beginning of period
$ 1,109 $ 1,258 $ 841 $ 1,140 $ 843 $ 5,191 $ 117 $ 5,308
Add
Provision for credit losses
15 88 168 106 131 508 11 519
Deduct
Loans charged off
126 131 124 203 175 759 3 762
Less recoveries of loans charged off
(27 ) (6 ) (2 ) (25 ) (33 ) (93 ) (93 )
Net loans charged off
99 125 122 178 142 666 3 669
Net change for credit losses to be reimbursed by the FDIC
32 32
Balance at end of period
$ 1,025 $ 1,221 $ 887 $ 1,068 $ 832 $ 5,033 $ 157 $ 5,190
Nine months ended September 30, 2011:
Balance at beginning of period
$ 1,104 $ 1,291 $ 820 $ 1,395 $ 807 $ 5,417 $ 114 $ 5,531
Add
Provision for credit losses
255 344 437 314 477 1,827 19 1,846
Deduct
Loans charged off
412 446 380 712 551 2,501 10 2,511
Less recoveries of loans charged off
(78 ) (32 ) (10 ) (71 ) (99 ) (290 ) (290 )
Net loans charged off
334 414 370 641 452 2,211 10 2,221
Net change for credit losses to be reimbursed by the FDIC
34 34
Balance at end of period
$ 1,025 $ 1,221 $ 887 $ 1,068 $ 832 $ 5,033 $ 157 $ 5,190
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Additional detail of the allowance for credit losses by portfolio class was as follows:
Total Loans,
Commercial
Residential
Credit
Other
Excluding
Covered
Total
(Dollars in Millions) Commercial Real Estate Mortgages Card Retail Covered Loans Loans Loans
Allowance balance at September 30, 2011 related to:
Loans individually evaluated for impairment (a)
$ 16 $ 70 $ 1 $ $ $ 87 $ $ 87
TDRs collectively evaluated for impairment
37 17 459 226 55 794 794
Other loans collectively evaluated for impairment
972 1,132 427 842 777 4,150 26 4,176
Loans acquired with deteriorated credit quality
2 2 131 133
Total allowance for credit losses
$ 1,025 $ 1,221 $ 887 $ 1,068 $ 832 $ 5,033 $ 157 $ 5,190
Allowance balance at December 31, 2010 related to:
Loans individually evaluated for impairment (a)
$ 38 $ 55 $ $ $ $ 93 $ $ 93
TDRs collectively evaluated for impairment
320 223 30 573 573
Other loans collectively evaluated for impairment
1,066 1,235 500 1,172 777 4,750 28 4,778
Loans acquired with deteriorated credit quality
1 1 86 87
Total allowance for credit losses
$ 1,104 $ 1,291 $ 820 $ 1,395 $ 807 $ 5,417 $ 114 $ 5,531
(a) Represents the allowance for credit losses related to loans greater than $5 million classified as nonperforming or TDRs.
Additional detail of loan balances by portfolio class was as follows:
Total Loans,
Commercial
Residential
Credit
Other
Excluding
Covered
Total
(Dollars in Millions) Commercial Real Estate Mortgages Card Retail Covered Loans Loans Loans
September 30, 2011:
Loans individually evaluated for impairment (a)
$ 177 $ 903 $ 6 $ $ $ 1,086 $ 182 $ 1,268
TDRs collectively evaluated for impairment
241 287 2,949 580 143 4,200 89 4,289
Other loans collectively evaluated for impairment
53,402 34,237 32,160 15,752 48,336 183,887 9,014 192,901
Loans acquired with deteriorated credit quality
12 176 9 197 6,113 6,310
Total loans
$ 53,832 $ 35,603 $ 35,124 $ 16,332 $ 48,479 $ 189,370 $ 15,398 (b) $ 204,768
December 31, 2010:
Loans individually evaluated for impairment (a)
$ 295 $ 801 $ $ $ $ 1,096 $ $ 1,096
TDRs collectively evaluated for impairment
1,957 452 114 2,523 2,523
Other loans collectively evaluated for impairment
48,103 33,834 28,775 16,351 48,277 175,340 11,899 187,239
Loans acquired with deteriorated credit quality
60 60 6,143 6,203
Total loans
$ 48,398 $ 34,695 $ 30,732 $ 16,803 $ 48,391 $ 179,019 $ 18,042 (b) $ 197,061
(a) Represents loans greater than $5 million classified as nonperforming or TDRs.
(b) Includes expected reimbursements from the FDIC under loss sharing agreements.
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Credit Quality The quality of the Company’s loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Company. These credit quality ratings are an important part of the Company’s overall credit risk management process and evaluation of its allowance for credit losses.
For all loan classes, loans are considered past due based on the number of days delinquent except for monthly amortizing loans which are classified delinquent based upon the number of contractually required payments not made (for example, two missed payments is considered 30 days delinquent).
Commercial lending segment loans are placed on nonaccrual status when the collection of principal and interest has become 90 days past due or is otherwise considered doubtful. When a loan is placed on nonaccrual status, unpaid accrued interest is reversed. Commercial lending segment loans are generally fully or partially charged down to the fair value of the collateral securing the loan, less costs to sell, when the loan is considered uncollectible.
Consumer lending segment loans are generally charged-off at a specific number of days or payments past due. Residential mortgages and other retail loans secured by 1-4 family properties are generally charged down to fair market value, less costs to sell, at 180 days past due, and placed on nonaccrual status in instances where a partial charge-off occurs unless the loan is well secured and in the process of collection. Credit card loans continue to accrue interest until the account is charged off. Credit cards are charged off at 180 days past due. Other retail loans not secured by 1-4 family properties are charged-off at 120 days past due; and revolving consumer lines are charged off at 180 days past due. Similar to credit cards, other retail loans are generally not placed on nonaccrual status because of the relative short period of time to charge-off. Certain retail customers having financial difficulties may have the terms of their credit card and other loan agreements modified to require only principal payments and, as such, are reported as nonaccrual.
For all loan classes, interest payments received on nonaccrual loans are generally recorded as a reduction to the loan carrying amount. Interest payments recorded as reductions to a loan’s carrying amount while a loan is on nonaccrual are recognized as interest income only upon payoff of the loan. In certain circumstances, loans in any class may be restored to accrual status, such as when none of the principal and interest is past due and prospects for future payment are no longer in doubt; or the loan becomes well secured and is in the process of collection. Loans where there has been a partial charge-off may be returned to accrual status if all principal and interest (including amounts previously charged-off) is expected to be collected and the loan is current.
Covered loans not considered to be purchased impaired are evaluated for delinquency, nonaccrual status and charge-off consistent with the class of loan they would be included in had the loss share coverage not been in place. Generally, purchased impaired loans are considered accruing loans. However, the timing and amount of future cash flows for some loans is not reasonably estimable. Those loans are classified as nonaccrual loans and interest income is not recognized until the timing and amount of the future cash flows can be reasonably estimated.
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The following table provides a summary of loans by portfolio class, including the delinquency status of those that continue to accrue interest, and those that are nonperforming:
Accruing
30-89 Days
90 Days or
(Dollars in Millions) Current Past Due More Past Due Nonperforming Total
September 30, 2011:
Commercial
$ 53,189 $ 219 $ 42 $ 382 $ 53,832
Commercial real estate
34,197 158 28 1,220 35,603
Residential mortgages (a)
33,728 385 361 650 35,124
Credit card
15,648 225 209 250 16,332
Other retail
47,910 329 174 66 48,479
Total loans, excluding covered loans
184,672 1,316 814 2,568 189,370
Covered loans
13,015 581 792 1,010 15,398
Total loans
$ 197,687 $ 1,897 $ 1,606 $ 3,578 $ 204,768
December 31, 2010:
Commercial
$ 47,412 $ 325 $ 64 $ 597 $ 48,398
Commercial real estate
32,986 415 1 1,293 34,695
Residential mortgages (a)
29,140 456 500 636 30,732
Credit card
15,993 269 313 228 16,803
Other retail
47,706 404 216 65 48,391
Total loans, excluding covered loans
173,237 1,869 1,094 2,819 179,019
Covered loans
14,951 757 1,090 1,244 18,042
Total loans
$ 188,188 $ 2,626 $ 2,184 $ 4,063 $ 197,061
(a) At September 30, 2011, $507 million of loans 30 – 89 days past due and $2.5 billion of loans 90 days or more past due purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, were classified as current, compared with $439 million and $2.6 billion at December 31, 2010, respectively.
The Company classifies its loan portfolios using internal credit quality ratings on a quarterly basis. These ratings include: pass, special mention and classified, and are an important part of the Company’s overall credit risk management process and evaluation of the allowance for credit losses. Loans with a pass rating represent those not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Special mention loans are those that have a potential weakness deserving management’s close attention. Classified loans are those where a well-defined weakness has been identified that may put full collection of contractual cash flows at risk. It is possible that others, given the same information, may reach different reasonable conclusions regarding the credit quality rating classification of specific loans.
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The following table provides a summary of loans by portfolio class and the Company’s internal credit quality rating:
Criticized
Special
Total
(Dollars in Millions) Pass Mention Classified (a) Criticized Total
September 30, 2011:
Commercial
$ 50,792 $ 1,174 $ 1,866 $ 3,040 $ 53,832
Commercial real estate
30,165 1,010 4,428 5,438 35,603
Residential mortgages (b)
33,879 19 1,226 1,245 35,124
Credit card
15,873 459 459 16,332
Other retail
48,066 21 392 413 48,479
Total loans, excluding covered loans
178,775 2,224 8,371 10,595 189,370
Covered loans
14,472 208 718 926 15,398
Total loans
$ 193,247 $ 2,432 $ 9,089 $ 11,521 $ 204,768
Total outstanding commitments
$ 393,645 $ 3,862 $ 10,087 $ 13,949 $ 407,594
December 31, 2010:
Commercial
$ 44,595 $ 1,545 $ 2,258 $ 3,803 $ 48,398
Commercial real estate
28,155 1,540 5,000 6,540 34,695
Residential mortgages (b)
29,355 29 1,348 1,377 30,732
Credit card
16,262 541 541 16,803
Other retail
47,906 70 415 485 48,391
Total loans, excluding covered loans
166,273 3,184 9,562 12,746 179,019
Covered loans
17,073 283 686 969 18,042
Total loans
$ 183,346 $ 3,467 $ 10,248 $ 13,715 $ 197,061
Total outstanding commitments
$ 370,031 $ 4,923 $ 11,576 $ 16,499 $ 386,530
(a) Classified rating on consumer loans primarily based on delinquency status.
(b) At September 30, 2011, $2.5 billion of GNMA loans 90 days or more past due and $1.8 billion of restructured GNMA loans whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs were classified with a pass rating, compared with $2.6 billion and $1.1 billion at December 31, 2010, respectively.
For all loan classes, a loan is considered to be impaired when, based on current events or information, it is probable the Company will be unable to collect all amounts due per the contractual terms of the loan agreement. Impaired loans include all nonaccrual and TDR loans. For all loan classes, interest income on TDR loans is recognized under the modified terms and conditions if the borrower has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. Interest income is not recognized on other impaired loans until the loan is paid off.
Factors used by the Company in determining whether all principal and interest payments due on commercial and commercial real estate loans will be collected and therefore whether those loans are impaired, include but are not limited to, the financial condition of the borrower, collateral and/or guarantees on the loan, and the borrower’s estimated future ability to pay based on industry, geographic location and certain financial ratios. The evaluation of impairment on residential mortgages, credit card and other retail loans is primarily driven by delinquency status of individual loans or whether a loan has been modified. Individual covered loans, whose future losses are covered by loss sharing agreements with the FDIC that substantially reduce the risk of credit losses to the Company, are evaluated for impairment and accounted for in a manner consistent with the class of loan they would have been included in had the loss sharing coverage not been in place.
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A summary of impaired loans by portfolio class was as follows:
Commitments
Period-end
Unpaid
to Lend
Recorded
Principal
Valuation
Additional
(Dollars in Millions) Investment (a) Balance Allowance Funds
September 30, 2011:
Commercial
$ 637 $ 1,596 $ 65 $ 27
Commercial real estate
1,679 2,986 148 33
Residential mortgages
2,588 3,018 460
Credit card
580 580 226
Other retail
179 180 56
Total impaired loans, excluding GNMA and covered loans
5,663 8,360 955 60
Loans purchased from GNMA mortgage pools
866 866 10
Covered loans
1,169 1,704 50 108
Total
$ 7,698 $ 10,930 $ 1,015 $ 168
December 31, 2010:
Commercial
$ 596 $ 1,631 $ 59 $ 80
Commercial real estate
1,308 2,659 118 17
Residential mortgages
2,440 2,877 334
Credit card
452 452 218
Other retail
152 189 32
Total
$ 4,948 $ 7,808 $ 761 $ 97
(a) Substantially all loans classified as impaired at September 30, 2011 and December 31, 2010, had an associated allowance for credit losses.
Additional information on impaired loans follows:
Three Months Ended
Nine Months Ended
September 30, 2011 September 30, 2011
Average
Interest
Average
Interest
Recorded
Income
Recorded
Income
(Dollars in Millions) Investment Recognized Investment Recognized
Commercial
$ 536 $ 4 $ 529 $ 7
Commercial real estate
1,558 6 1,519 10
Residential mortgages
2,573 24 2,540 74
Credit card
492 4 471 10
Other retail
165 1 160 3
Total impaired loans, excluding GNMA and covered loans
5,324 39 5,219 104
Loans purchased from GNMA mortgage pools
710 10 433 10
Covered loans
1,145 7 584 7
Total
$ 7,179 $ 56 $ 6,236 $ 121
Troubled Debt Restructurings In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in payments to be received. The Company accrues interest on TDRs if the borrower complies with the revised terms and conditions as agreed upon with the Company and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. To the extent a previous restructuring was insignificant, the Company considers the cumulative effect of past restructurings related to the receivable when determining whether a current restructuring is a TDR. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.
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The following table provides a summary of loans modified as TDRs during the periods presented, by portfolio class:
Three Months Ended September 30, 2011 Nine Months Ended September 30, 2011
Pre-Modification
Post-Modification
Pre-Modification
Post-Modification
Outstanding
Outstanding
Outstanding
Outstanding
Number
Loan
Loan
Number
Loan
Loan
(Dollars in Millions) of Loans Balance Balance of Loans Balance Balance
Commercial
1,137 $ 89 $ 74 3,984 $ 337 $ 310
Commercial real estate
115 124 115 380 906 896
Residential mortgages
2,857 440 462 (a) 8,613 1,328 1,383 (a)
Credit card
14,942 78 78 41,610 239 238
Other retail
956 16 16 3,020 55 55
Total loans, excluding covered loans
20,007 747 745 57,607 2,865 2,882
Covered loans
67 148 133 233 456 430
Total loans
20,074 $ 895 $ 878 57,840 $ 3,321 $ 3,312
(a) Includes accrued interest and/or outstanding advances capitalized into the outstanding loan balance upon modification under the HAMP program of $32 million and $85 million for the three and nine months ended September 30, 2011, respectively.
Many of the Company’s TDRs are determined on a case-by-case basis in connection with ongoing loan collection processes. However, the Company has also implemented certain restructuring programs that may result in TDRs. The modifications made to each of the loans presented in the table above varies within each of the portfolio classes, however, generally result in revisions to interest rates, changes to payment frequency, extensions of maturity dates, forgiveness of accrued interest and/or fees, and in limited circumstances, reductions of principal.
For the commercial lending segment, modifications generally result in the Company working with borrowers on a case-by-case basis. Commercial and commercial real estate modifications generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate, which may not be deemed a market rate of interest. In addition, the Company may work with the borrower in identifying other changes that mitigate loss to the Company, which may include additional collateral or guarantees to support the loan. To a lesser extent, the Company may waive contractual principal. The Company classifies these concessions as TDRs to the extent the Company determines that the borrower is experiencing financial difficulty.
Modifications for the consumer lending segment are generally part of programs the Company has initiated. The Company participates in the U.S. Department of Treasury Home Affordable Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to permanently modify their loan and achieve more affordable monthly payments, with the U.S. Department of Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. The Company also modifies residential mortgage loans under Federal Housing Administration, Department of Veterans Affairs, or other internal programs. Under these programs, the Company provides concessions to qualifying borrowers experiencing financial difficulties. The concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extension of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement and the loan documents are not modified until that time. Loans in trial period arrangements are not reported as TDRs. Loans permanently modified are reported as TDRs. Loans in trial period arrangements were $96 million at September 30, 2011.
Credit card and other retail loan modifications are generally part of two distinct restructuring programs. The Company offers workout programs providing customers experiencing financial difficulty with modifications whereby balances may be amortized up to 60 months, and generally include waiver of fees and reduced interest rates. The Company also provides modification programs to qualifying customers experiencing a temporary financial hardship in which reductions are made to monthly required minimum payments for up to 12 months. Balances related to these programs are generally frozen, however, may be reopened upon successful exit of the program, in which account privileges may be restored.
Modifications to loans in the covered segment are similar in nature to that described above for non-covered loans, and the evaluation and determination of TDR status is similar, except that acquired loans restructured after acquisition are not considered TDRs for purposes of the Company’s accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. Losses associated with the modification
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on covered loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss sharing agreements.
The following table provides a summary of loans modified as TDRs within the previous 12 months for which there was a default (fully or partially charged-off or became 90 days or more past due) during the period:
Three Months Ended
Nine Months Ended
September 30, 2011 September 30, 2011
Number
Amount
Number
Amount
(Dollars in Millions) of Loans Defaulted of Loans Defaulted
Commercial
245 $ 13 513 $ 23
Commercial real estate
29 32 37 37
Residential mortgages
318 51 1,011 178
Credit card
2,183 12 6,304 34
Other retail
169 3 391 6
Total
2,944 $ 111 8,256 $ 278

Note 6 Accounting For Transfers and Servicing of Financial Assets and Variable Interest Entities
The Company sells financial assets in the normal course of business. The majority of the Company’s financial asset sales are residential mortgage loan sales primarily to government-sponsored enterprises through established programs, the sale or syndication of tax-advantaged investments, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. For loans sold under participation agreements, the Company also considers the terms of the loan participation agreement and whether they meet the definition of a participating interest and thus qualify for derecognition. With the exception of servicing and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses. The guarantees provided to certain third-parties in connection with the sale or syndication of certain assets, primarily loan portfolios and tax-advantaged investments, are further discussed in Note 14. When the Company sells financial assets, it may retain servicing rights and/or other interests in the transferred financial assets. The gain or loss on sale depends on the previous carrying amount of the transferred financial assets and the consideration received and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests that continue to be held by the Company are initially recognized at fair value. For further information on mortgage servicing rights (“MSRs”), refer to Note 7. The Company has no asset securitizations or similar asset-backed financing arrangements that are off-balance sheet.
The Company is involved in various entities that are considered to be variable interest entities (“VIEs”). The Company’s investments in VIEs primarily represent private investment funds or partnerships that make equity investments, provide debt financing or support community-based investments in affordable housing development entities that provide capital for communities located in low-income districts and for historic rehabilitation projects that may enable the Company to ensure regulatory compliance with the Community Reinvestment Act. In addition, the Company sponsors entities to which it transfers tax-advantaged investments. The Company’s investments in these entities are designed to generate a return primarily through the realization of federal and state income tax credits over specified time periods. The Company realized federal and state income tax credits related to these investments of $191 million and $189 million for the three months ended September 30, 2011 and 2010, respectively, and $510 million and $500 million for the nine months ended September 30, 2011 and 2010, respectively. The Company amortizes its investments in these entities as the tax credits are realized. Tax credit amortization expense is recorded in tax expense for investments meeting certain characteristics, and in other noninterest expense for other investments. Amortization expense recorded in tax expense was $60 million and $72 million, and in other noninterest expense was $144 million and $136 million for the three months ended September 30, 2011 and 2010, respectively. Amortization expense recorded in tax expense was $175 million and $159 million, and in other noninterest expense was $386 million and $391 million for the nine months ended September 30, 2011 and 2010, respectively.
At September 30, 2011, approximately $5.1 billion of the Company’s assets and $3.7 billion of its liabilities included on the consolidated balance sheet were related to community development and tax-advantaged investment
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VIEs, compared with $3.8 billion and $2.6 billion, respectively, at December 31, 2010. The majority of the assets of these consolidated VIEs are reported in other assets, and the liabilities are reported in long-term debt. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs do not have recourse to the general credit of the Company. The Company’s exposure to the consolidated VIEs is generally limited to the carrying value of its variable interests plus any related tax credits previously recognized or sold to others.
In addition, the Company sponsors a conduit to which it previously transferred high-grade investment securities. The Company consolidates the conduit because of its ability to manage the activities of the conduit. At September 30, 2011, $214 million of the held-to-maturity investment securities on the Company’s consolidated balance sheet related to the conduit, compared with $400 million at December 31, 2010.
The Company also sponsors a municipal bond securities tender option bond program. The Company controls the activities of the program’s entities, is entitled to the residual returns and provides credit, liquidity and remarketing arrangements to the program. As a result, the Company has consolidated the program’s entities. At September 30, 2011, $5.3 billion of available-for-sale securities and $5.3 billion of short-term borrowings on the consolidated balance sheet were related to the tender option bond program, compared with $5.3 billion of available-for-sale securities and $5.7 billion of short-term borrowings at December 31, 2010.
The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities’ most significant activities and the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIEs. The Company’s investments in unconsolidated VIEs ranged from less than $1 million to $70 million, with an aggregate amount of approximately $1.9 billion at September 30, 2011, and from less than $1 million to $41 million, with an aggregate amount of approximately $2.0 billion at December 31, 2010. The Company’s investments in these unconsolidated VIEs generally are carried in other assets on the balance sheet. While the Company believes potential losses from these investments are remote, the Company’s maximum exposure to loss from these unconsolidated VIEs was approximately $4.7 billion at September 30, 2011, compared with $5.0 billion at December 31, 2010. The maximum exposure to loss was primarily related to community development tax-advantaged investments and included $1.8 billion at September 30, 2011 and $1.9 billion at December 31, 2010 recorded on the Company’s balance sheet and $2.9 billion at September 30, 2011 and $3.0 billion at December 31, 2010 of previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. The remaining amounts related to investments in private investment funds and partnerships for which the maximum exposure to loss included amounts recorded on the balance sheet and any unfunded commitments. The maximum exposure was determined by assuming a scenario where the separate investments within the individual private funds were to become worthless, and the community-based business and housing projects and related tax credits completely failed and did not meet certain government compliance requirements.

Note 7 Mortgage Servicing Rights
The Company serviced $185.6 billion of residential mortgage loans for others at September 30, 2011, and $173.9 billion at December 31, 2010. The net impact included in mortgage banking revenue of fair value changes of MSRs and derivatives used to economically hedge MSRs was a net gain of $7 million and $1 million for the three months ended September 30, 2011, and 2010, respectively, and a net gain of $151 million and $98 million for the nine months ended September 30, 2011 and 2010, respectively. Loan servicing fees, not including valuation changes, included in mortgage banking revenue, were $166 million and $154 million for the three months ended September 30, 2011, and 2010, respectively, and $483 million and $439 million for the nine months ended September 30, 2011 and 2010, respectively.
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Changes in fair value of capitalized MSRs are summarized as follows:
Three Months Ended
Nine Months Ended
September 30, September 30,
(Dollars in Millions) 2011 2010 2011 2010
Balance at beginning of period
$ 1,989 $ 1,543 $ 1,837 $ 1,749
Rights purchased
5 10 16 48
Rights capitalized
101 149 416 398
Changes in fair value of MSRs
Due to change in valuation assumptions (a)
(532 ) (186 ) (542 ) (536 )
Other changes in fair value (b)
(97 ) (94 ) (261 ) (237 )
Balance at end of period
$ 1,466 $ 1,422 $ 1,466 $ 1,422
(a) Principally reflects changes in prepayment speeds, discount rates and escrow earnings assumptions, primarily arising from interest rate changes.
(b) Primarily represents changes due to collection/realization of expected cash flows over time (decay).
The estimated sensitivity to changes in interest rates of the fair value of the MSRs portfolio and the related derivative instruments at September 30, 2011 and December 31, 2010 follows:
September 30, 2011 December 31, 2010
Down
Down
Up
Up
Down
Down
Up
Up
(Dollars in Millions) 50 bps 25 bps 25 bps 50 bps 50 bps 25 bps 25 bps 50 bps
Net fair value
$ 24 $ 8 $ 2 $ 14 $ 6 $ (5 ) $ 5 $ 1
The fair value of MSRs and their sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. The Company’s servicing portfolio consists of the distinct portfolios of government-insured mortgages, conventional mortgages, and Mortgage Revenue Bond Programs (“MRBP”). The servicing portfolios are predominantly comprised of fixed-rate agency loans with limited adjustable-rate or jumbo mortgage loans. The MRBP division specializes in servicing loans made under state and local housing authority programs. These programs provide mortgages to low-income and moderate-income borrowers and are generally government-insured programs with a favorable rate subsidy, down payment and/or closing cost assistance.
A summary of the Company’s MSRs and related characteristics by portfolio at September 30, 2011 and December 31, 2010 follows:
September 30, 2011 December 31, 2010
(Dollars in Millions) MRBP Government Conventional Total MRBP Government Conventional Total
Servicing portfolio
$ 13,247 $ 32,055 $ 140,253 $ 185,555 $ 12,646 $ 28,880 $ 132,393 $ 173,919
Fair market value
$ 163 $ 274 $ 1,029 $ 1,466 $ 166 $ 342 $ 1,329 $ 1,837
Value (bps) (a)
123 85 73 79 131 118 100 106
Weighted-average servicing fees (bps)
40 36 29 31 40 38 30 32
Multiple (value/servicing fees)
3.08 2.36 2.52 2.55 3.28 3.11 3.33 3.31
Weighted-average note rate
5.56 % 5.16 % 5.05 % 5.11 % 5.75 % 5.35 % 5.27 % 5.32 %
Age (in years)
4.2 2.4 2.7 2.8 4.1 2.2 2.7 2.7
Expected prepayment (constant prepayment rate)
12.5 % 22.7 % 22.1 % 21.5 % 12.3 % 17.2 % 16.2 % 16.1 %
Expected life (in years)
6.6 3.7 3.8 4.0 6.7 5.1 5.3 5.4
Discount rate
11.9 % 11.2 % 10.2 % 10.5 % 11.9 % 11.4 % 10.3 % 10.6 %
(a) Value is calculated as fair market value divided by the servicing portfolio.
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Note 8 Preferred Stock
At September 30, 2011 and December 31, 2010, the Company had authority to issue 50 million shares of preferred stock. The number of shares issued and outstanding and the carrying amount of each outstanding series of the Company’s preferred stock was as follows:
September 30, 2011 December 31, 2010
Shares
Shares
Issued and
Liquidation
Carrying
Issued and
Liquidation
Carrying
(Dollars in Millions) Outstanding Preference Discount Amount Outstanding Preference Discount Amount
Series A
12,510 $ 1,251 $ 145 $ 1,106 5,746 $ 575 $ 145 $ 430
Series B
40,000 1,000 1,000 40,000 1,000 1,000
Series D
20,000 500 500 20,000 500 500
Total preferred stock (a)
72,510 $ 2,751 $ 145 $ 2,606 65,746 $ 2,075 $ 145 $ 1,930
(a) The par value of all shares issued and outstanding at September 30, 2011 and December 31, 2010, was $1.00 a share.
On April 15, 2011, the Company issued depositary shares representing an ownership interest in 6,764 shares of Series A Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $100,000 per share (the “Series A Preferred Stock”). The Series A Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable quarterly, in arrears, at a rate per annum equal to the greater of three-month LIBOR plus 1.02 percent or 3.50 percent. The Series A Preferred Stock is redeemable at the Company’s option, subject to prior approval by the Federal Reserve Board.
For further information on preferred stock, refer to Note 15 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Note 9 Earnings Per Share
The components of earnings per share were:
Three Months Ended
Nine Months Ended
September 30, September 30,
(Dollars and Shares in Millions, Except Per Share Data) 2011 2010 2011 2010
Net income attributable to U.S. Bancorp
$ 1,273 $ 908 $ 3,522 $ 2,343
Preferred dividends
(30 ) (33 ) (99 ) (70 )
Equity portion of gain on ITS exchange transaction, net of tax (a)
118
Earnings allocated to participating stock awards
(6 ) (4 ) (16 ) (10 )
Net income applicable to U.S. Bancorp common shareholders
$ 1,237 $ 871 $ 3,407 $ 2,381
Average common shares outstanding
1,915 1,913 1,918 1,911
Net effect of the exercise and assumed purchase of stock awards and conversion of outstanding convertible notes
7 7 8 9
Average diluted common shares outstanding
1,922 1,920 1,926 1,920
Earnings per common share
$ .65 $ .46 $ 1.78 $ 1.25
Diluted earnings per common share
$ .64 $ .45 $ 1.77 $ 1.24
(a) On June 10, 2010, the Company exchanged depositary shares representing an ownership interest in 5,746 shares of Series A Preferred Stock for approximately 46 percent of the outstanding Income Trust Securities (“ITS”) issued by USB Capital IX to third-party investors, retired a pro-rata portion of the related junior subordinated debentures and cancelled a pro-rata portion of the related stock purchase contracts.
Options and warrants to purchase 60 million and 65 million common shares for the three months ended September 30, 2011 and 2010, respectively, and 54 million and 56 million common shares for the nine months ended September 30, 2011 and 2010, respectively, were outstanding but not included in the computation of diluted earnings per share because they were antidilutive. Convertible senior debentures that could potentially be converted into shares of the Company’s common stock pursuant to specified formulas, were not included in the computation of dilutive earnings per share because they were antidilutive.
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Note 10 Employee Benefits
The components of net periodic benefit cost for the Company’s retirement plans were:
Three Months Ended September 30, Nine Months Ended September 30,
Postretirement
Postretirement
Pension Plans Welfare Plan Pension Plans Welfare Plan
(Dollars in Millions) 2011 2010 2011 2010 2011 2010 2011 2010
Service cost
$ 30 $ 24 $ 1 $ 2 $ 89 $ 70 $ 3 $ 6
Interest cost
42 38 3 3 126 116 7 8
Expected return on plan assets
(52 ) (54 ) (1 ) (2 ) (155 ) (161 ) (3 ) (4 )
Prior service (credit) cost and transition (asset) obligation amortization
(2 ) (3 ) (7 ) (9 )
Actuarial (gain) loss amortization
31 16 (2 ) (1 ) 94 48 (5 ) (4 )
Net periodic benefit cost
$ 49 $ 21 $ 1 $ 2 $ 147 $ 64 $ 2 $ 6

Note 11 Income Taxes
The components of income tax expense were:
Three Months Ended
Nine Months Ended
September 30, September 30,
(Dollars in Millions) 2011 2010 2011 2010
Federal
Current
$ 450 $ 313 $ 907 $ 768
Deferred
(41 ) (123 ) 232 (266 )
Federal income tax
409 190 1,139 502
State
Current
85 82 157 143
Deferred
(4 ) (12 ) 18 (25 )
State income tax
81 70 175 118
Total income tax provision
$ 490 $ 260 $ 1,314 $ 620
A reconciliation of expected income tax expense at the federal statutory rate of 35 percent to the Company’s applicable income tax expense follows:
Three Months Ended
Nine Months Ended
September 30, September 30,
(Dollars in Millions) 2011 2010 2011 2010
Tax at statutory rate
$ 610 $ 403 $ 1,671 $ 1,025
State income tax, at statutory rates, net of federal tax benefit
53 46 114 77
Tax effect of
Tax credits, net of related expenses
(124 ) (114 ) (319 ) (324 )
Tax-exempt income
(57 ) (56 ) (170 ) (161 )
Noncontrolling interests
8 5 22 12
Other items
(24 ) (4 ) (9 )
Applicable income taxes
$ 490 $ 260 $ 1,314 $ 620
The Company’s income tax returns are subject to review and examination by federal, state, local and foreign government authorities. On an ongoing basis, numerous federal, state, local and foreign examinations are in progress and cover multiple tax years. As of September 30, 2011, the federal taxing authority has completed its examination of the Company through the fiscal year ended December 31, 2006. The years open to examination by foreign, state and local government authorities vary by jurisdication.
The Company’s net deferred tax position was a $750 million liability at September 30, 2011, and a $424 million asset at December 31, 2010.
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Note 12 Derivative Instruments
The Company recognizes all derivatives in the consolidated balance sheet at fair value as other assets or liabilities. On the date the Company enters into a derivative contract, the derivative is designated as either a hedge of the fair value of a recognized asset or liability (“fair value hedge”); a hedge of a forecasted transaction or the variability of cash flows to be paid related to a recognized asset or liability (“cash flow hedge”); a hedge of the volatility of an investment in foreign operations driven by changes in foreign currency exchange rates (“net investment hedge”); or a designation is not made as it is a customer-related transaction, an economic hedge for asset/liability risk management purposes or another stand-alone derivative created through the Company’s operations (“free-standing derivative”).
Of the Company’s $53.1 billion of total notional amount of asset and liability management positions at September 30, 2011, $14.9 billion was designated as a fair value, cash flow or net investment hedge. When a derivative is designated as a fair value, cash flow or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).
Fair Value Hedges These derivatives are primarily interest rate swaps that hedge the change in fair value related to interest rate changes of underlying fixed-rate debt and junior subordinated debentures. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings. All fair value hedges were highly effective for the nine months ended September 30, 2011, and the change in fair value attributed to hedge ineffectiveness was not material.
Cash Flow Hedges These derivatives are interest rate swaps that are hedges of the forecasted cash flows from the underlying variable-rate loans and debt. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until expense from the cash flows of the hedged items is realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts within other comprehensive income (loss) remain. At September 30, 2011, the Company had $510 million (net-of-tax) of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $414 million (net-of-tax) at December 31, 2010. The estimated amounts to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2011 and the next 12 months are losses of $34 million (net-of-tax) and $129 million (net-of-tax), respectively. This includes gains and losses related to hedges that were terminated early for which the forecasted transactions are still probable. All cash flow hedges were highly effective for the nine months ended September 30, 2011, and the change in fair value attributed to hedge ineffectiveness was not material.
Net Investment Hedges The Company uses forward commitments to sell specified amounts of certain foreign currencies to hedge the volatility of its investment in foreign operations driven by fluctuations in foreign currency exchange rates. The ineffectiveness on all net investment hedges was not material for the nine months ended September 30, 2011.
Other Derivative Positions The Company enters into free-standing derivatives to mitigate interest rate risk and for other risk management purposes. These derivatives include forward commitments to sell residential mortgage loans, which are used to economically hedge the interest rate risk related to residential mortgage loans held for sale. The Company also enters into U.S. Treasury futures, options on U.S. Treasury futures contracts, interest rate swaps and forward commitments to buy residential mortgage loans to economically hedge the change in the fair value of the Company’s residential MSRs. In addition, the Company acts as a seller and buyer of interest rate derivatives and foreign exchange contracts for its customers. To mitigate the market and liquidity risk associated with these customer derivatives, the Company enters into similar offsetting positions with broker-dealers. The Company also has derivative contracts that are created through its operations, including commitments to originate mortgage loans held for sale and certain derivative financial guarantee contracts.
For additional information on the Company’s purpose for entering into derivative transactions and its overall risk management strategies, refer to “Management Discussion and Analysis — Use of Derivatives to Manage Interest Rate and Other Risks” which is incorporated by reference into these Notes to Consolidated Financial Statements.
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The following table provides information on the fair value of the Company’s derivative positions:
September 30, 2011 December 31, 2010
Asset
Liability
Asset
Liability
(Dollars in Millions) Derivatives Derivatives Derivatives Derivatives
Total fair value of derivative positions
$ 2,139 $ 2,728 $ 1,799 $ 2,174
Netting (a)
(361 ) (1,680 ) (280 ) (1,163 )
Total
$ 1,778 $ 1,048 $ 1,519 $ 1,011
Note: The fair value of asset and liability derivatives are included in Other assets and Other liabilities on the Consolidated Balance Sheet, respectively.
(a) Represents netting of derivative asset and liability balances, and related collateral, with the same counterparty subject to master netting agreements. Authoritative accounting guidance permits the netting of derivative receivables and payables when a legally enforceable master netting agreement exists between the Company and a derivative counterparty. A master netting agreement is an agreement between two counterparties who have multiple derivative contracts with each other that provide for the net settlement of contracts through a single payment, in a single currency, in the event of default on or termination of any one contract. At September 30, 2011, the amount of cash and money market investments collateral posted by counterparties that was netted against derivative assets was $111 million and the amount of cash collateral posted by the Company that was netted against derivative liabilities was $1.4 billion. At December 31, 2010, the amount of cash and money market investments collateral posted by counterparties that was netted against derivative assets was $55 million and the amount of cash collateral posted by the Company that was netted against derivative liabilities was $936 million.
The following table summarizes the asset and liability management derivative positions of the Company:
Asset Derivatives Liability Derivatives
Weighted-Average
Weighted-Average
Remaining
Remaining
Notional
Fair
Maturity
Notional
Fair
Maturity
(Dollars in Millions) Value Value In Years Value Value In Years
September 30, 2011
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps
$ 1,035 $ 42 31.17 $ $
Foreign exchange cross-currency swaps
895 52 5.49 447 8 5.49
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps
750 1 3.05 11,039 845 3.67
Net investment hedges
Foreign exchange forward contracts
738 15 .08
Other economic hedges
Interest rate contracts
Futures and forwards
Buy
12,832 132 .08 691 4 .05
Sell
2,893 9 .14 9,732 126 .12
Options
Purchased
1,000 .06
Written
4,664 79 .14 13 .16
Receive fixed/pay floating swaps
2,875 12 10.21
Pay fixed/receive floating swaps
250 4 10.21
Foreign exchange forward contracts
690 23 .09 144 1 .10
Equity contracts
30 2 1.53 31 5 .88
Credit contracts
710 6 2.85 1,611 8 3.05
December 31, 2010
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps
1,800 72 55.75
Foreign exchange cross-currency swaps
891 70 6.17 445 6.17
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps
4,788 688 5.03
Net investment hedges
Foreign exchange forward contracts
512 3 .08
Other economic hedges
Interest rate contracts
Futures and forwards
Buy
2,879 20 .10 6,312 79 .05
Sell
9,082 207 .07 6,002 51 .09
Options
Purchased
1,600 .06
Written
6,321 23 .07 1,348 9 .07
Receive fixed/pay floating swaps
2,250 3 10.22
Foreign exchange forward contracts
158 1 .09 694 6 .09
Equity contracts
61 3 1.60
Credit contracts
650 2 3.22 1,183 7 2.71
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The following table summarizes the customer-related derivative positions of the company:
Asset Derivatives Liability Derivatives
Weighted-Average
Weighted-Average
Remaining
Remaining
Notional
Fair
Maturity
Notional
Fair
Maturity
(Dollars in Millions) Value Value In Years Value Value In Years
September 30, 2011
Interest rate contracts
Receive fixed/pay floating swaps
$ 16,482 $ 1,270 5.05 $ 239 $ 2.80
Pay fixed/receive floating swaps
217 1 3.94 16,572 1,241 5.07
Options
Purchased
2,191 5 1.85 100 23 .08
Written
369 23 .20 1,962 5 2.04
Foreign exchange rate contracts
Forwards, spots and swaps (a)
13,166 457 .41 12,357 456 .39
Options
Purchased
144 6 .46
Written
144 6 .46
December 31, 2010
Interest rate contracts
Receive fixed/pay floating swaps
15,730 956 4.64 1,294 21 6.01
Pay fixed/receive floating swaps
1,315 24 6.12 15,769 922 4.68
Options
Purchased
2,024 13 1.98 115 12 .36
Written
472 12 .26 1,667 13 2.35
Foreign exchange rate contracts
Forwards, spots and swaps (a)
7,772 384 .74 7,694 360 .75
Options
Purchased
224 6 .40
Written
224 6 .40
(a) Reflects the net of long and short positions.
The table below shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses) reclassified from other comprehensive income (loss) into earnings (net-of-tax):
Three Months Ended September 30, Nine Months Ended September 30,
Gains (Losses)
Reclassified
Gains (Losses)
Gains (Losses)
from Other
Reclassified
Recognized in Other
Comprehensive
Gains (Losses) Recognized in
from Other
Comprehensive
Income (Loss)
Other Comprehensive
Comprehensive Income (Loss)
Income (Loss)
into Earnings
Income (Loss)
into Earnings
Dollars in Millions) 2011 2010 2011 2010 2011 2010 2011 2010
Asset and Liability Management Positions
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps (a)
$ (120 ) $ (111 ) $ (34 ) $ (34 ) $ (199 ) $ (317 ) $ (103 ) $ (113 )
Net investment hedges
Foreign exchange forward contracts
(57 ) (53 ) (104 ) (36 )
Note: Ineffectiveness on cash flow and net investment hedges was not material for the three months and nine months ended September 30, 2011 and 2010.
(a) Gains (Losses) reclassified from other comprehensive income (loss) into interest income on loans and interest expense on long-term debt.
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The table below shows the gains (losses) recognized in earnings for fair value hedges, other economic hedges and the customer-related positions:
Gains (Losses) Recognized in Earnings
Location of
Three Months Ended September 30, Nine Months Ended September 30,
Gains (Losses)
(Dollars in Millions) Recognized in Earnings 2011 2010 2011 2010
Asset and Liability Management Positions
Fair value hedges (a)
Interest rate contracts
Other noninterest income $ 1 $ 20 $ 25 $ (64 )
Foreign exchange cross-currency swaps
Other noninterest income (111 ) 80 (13 ) (151 )
Other economic hedges
Interest rate contracts
Futures and forwards
Mortgage banking revenue 17 286 (7 ) 555
Purchased and written options
Mortgage banking revenue 181 183 323 374
Receive fixed/pay floating swaps
Mortgage banking revenue 377 479
Pay fixed/receive floating swaps
Mortgage banking revenue 4 4
Foreign exchange forward contracts
Commercial products revenue (48 ) (14 ) (66 ) (5 )
Equity contracts
Compensation expense 1 1 2 3
Credit contracts
Other noninterest income/expense 4 2
Customer-Related Positions
Interest rate contracts
Receive fixed/pay floating swaps
Other noninterest income 366 213 352 567
Pay fixed/receive floating swaps
Other noninterest income (376 ) (216 ) (365 ) (565 )
Purchased and written options
Other noninterest income 1 1
Foreign exchange rate contracts
Forwards, spots and swaps
Commercial products revenue 14 13 41 34
Purchased and written options
Commercial products revenue 1 1
(a) Gains (Losses) on items hedged by interest rate contracts and foreign exchange forward contracts, included in noninterest income (expense), were $(3) million and $117 million for the three months ended September 30, 2011, respectively, and $(18) million and $(80) million for the three months ended September 30, 2010, respectively. Gains (Losses) on items hedged by interest rate contracts and foreign exchange forward contracts, included in noninterest income (expense), were $(27) million and $20 million for the nine months ended September 30, 2011, respectively, and $65 million and $150 million for the nine months ended September 30, 2010, respectively. The ineffective portion was immaterial for the three months and nine months ended September 30, 2011 and 2010.
Derivatives are subject to credit risk associated with counterparties to the derivative contracts. The Company measures that credit risk based on its assessment of the probability of counterparty default and includes that within the fair value of the derivative. The Company manages counterparty credit risk through diversification of its derivative positions among various counterparties, by entering into master netting agreements where possible and by requiring collateral agreements which allow the Company to call for immediate, full collateral coverage when credit-rating thresholds are triggered by counterparties.
The Company’s collateral agreements are bilateral and, therefore, contain provisions that require collateralization of the Company’s net liability derivative positions. Required collateral coverage is based on certain net liability thresholds and contingent upon the Company’s credit rating from two of the nationally recognized statistical rating organizations. If the Company’s credit rating were to fall below credit ratings thresholds established in the collateral agreements, the counterparties to the derivatives could request immediate full collateral coverage for derivatives in net liability positions. The aggregate fair value of all derivatives under collateral agreements that were in a net liability position at September 30, 2011, was $2.0 billion. At September 30, 2011, the Company had $1.4 billion of cash posted as collateral against this net liability position.
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Note 13 Fair Values of Assets and Liabilities
The Company uses fair value measurements for the initial recording of certain assets and liabilities, periodic remeasurement of certain assets and liabilities, and disclosures. Derivatives, trading and available-for-sale investment securities, certain mortgage loans held for sale (“MLHFS”) and MSRs are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance.
The Company groups its assets and liabilities measured at fair value into a three-level hierarchy for valuation techniques used to measure financial assets and financial liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. These levels are:
Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 1 includes U.S. Treasury and exchange-traded instruments.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 includes debt securities that are traded less frequently than exchange-traded instruments and which are valued using third-party pricing services; derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data; and MLHFS whose values are determined using quoted prices for similar assets or pricing models with inputs that are observable in the market or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes residential MSRs, certain debt securities, including the Company’s SIV-related securities and non-agency mortgage-backed securities, and certain derivative contracts.
When the Company changes its valuation inputs for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the nine months ended September 30, 2011 and 2010, there were no significant transfers of financial assets or financial liabilities between the hierarchy levels.
The following section describes the valuation methodologies used by the Company to measure financial assets and liabilities at fair value and for estimating fair value for financial instruments not recorded at fair value as required under disclosure guidance related to the fair value of financial instruments. In addition, for financial assets and liabilities measured at fair value, the following section includes an indication of the level of the fair value hierarchy in which the assets or liabilities are classified. Where appropriate, the description includes information about the valuation models and key inputs to those models.
Cash and Cash Equivalents The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements was assumed to approximate fair value.
Investment Securities When available, quoted market prices are used to determine the fair value of investment securities and such items are classified within Level 1 of the fair value hierarchy.
For other securities, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar securities where a price for the identical security is not observable. Prices are verified, where possible, to prices of observable market trades as obtained from independent sources. Securities measured at fair value by such methods are classified within Level 2.
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The fair value of securities for which there are no market trades, or where trading is inactive as compared to normal market activity, are classified within Level 3. Securities classified within Level 3 include non-agency mortgage-backed securities, certain asset-backed securities, certain collateralized debt obligations and collateralized loan obligations, certain corporate debt securities and SIV-related securities. Due to the limited number of trades of non-agency mortgage-backed securities and lack of reliable evidence about transaction prices, the Company determines the fair value of these securities using a cash flow methodology and incorporating observable market information, where available.
Cash flow methodologies and other market valuation techniques involving management judgment use assumptions regarding housing prices, interest rates and borrower performance. Inputs are refined and updated to reflect market developments. The primary valuation drivers of these securities are the prepayment rates, default rates and default severities associated with the underlying collateral, as well as the discount rate used to calculate the present value of the projected cash flows.
The following table shows the valuation assumption ranges for Level 3 available-for-sale non-agency mortgage-backed securities:
Prime (a) Non-prime
Minimum Maximum Average Minimum Maximum Average
September 30, 2011
Estimated lifetime prepayment rates
4 % 23 % 13 % 1 % 13 % 6 %
Lifetime probability of default rates
14 2 20 7
Lifetime loss severity rates
9 80 39 8 88 54
Discount margin
3 38 6 4 40 11
December 31, 2010
Estimated lifetime prepayment rates
4 % 28 % 13 % 1 % 13 % 6 %
Lifetime probability of default rates
14 1 20 8
Lifetime loss severity rates
16 100 41 10 88 56
Discount margin
3 30 6 3 40 11
(a) Prime securities are those designated as such by the issuer or those with underlying asset characteristics and/or credit enhancements consistent with securities designated as prime.
Certain mortgage loans held for sale MLHFS measured at fair value, for which an active secondary market and readily available market prices exist, are initially valued at the transaction price and are subsequently valued by comparison to instruments with similar collateral and risk profiles. MLHFS are classified within Level 2. Included in mortgage banking revenue was a $98 million net gain and a $26 million net loss, for the three months ended September 30, 2011 and 2010, respectively, and a $38 million net loss and a $100 million net gain for the nine months ended September 30, 2011 and 2010, respectively, from the changes to fair value of these MLHFS under fair value option accounting guidance. Changes in fair value due to instrument specific credit risk were immaterial. The fair value of MLHFS was $5.2 billion as of September 30, 2011, which exceeded the unpaid principal balance by $242 million as of that date. Interest income for MLHFS is measured based on contractual interest rates and reported as interest income in the Consolidated Statement of Income. Electing to measure MLHFS at fair value reduces certain timing differences and better matches changes in fair value of these assets with changes in the value of the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting.
Loans The loan portfolio includes adjustable and fixed-rate loans, the fair value of which was estimated using discounted cash flow analyses and other valuation techniques. The expected cash flows of loans considered historical prepayment experiences and estimated credit losses for nonperforming loans and were discounted using current rates offered to borrowers of similar credit characteristics. Generally, loan fair values reflect Level 3 information.
Mortgage servicing rights MSRs are valued using a cash flow methodology and third-party prices, if available. Accordingly, MSRs are classified within Level 3. The Company determines fair value by estimating the present value of the asset’s future cash flows using market-based prepayment rates, discount rates, and other assumptions validated through comparison to trade information, industry surveys, and independent third-party valuations. Risks inherent in MSRs valuation include higher than expected prepayment rates and/or delayed receipt of cash flows.
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Derivatives Exchange-traded derivatives are measured at fair value based on quoted market (i.e., exchange) prices. Because prices are available for the identical instrument in an active market, these fair values are classified within Level 1 of the fair value hierarchy.
The majority of derivatives held by the Company are executed over-the-counter and are valued using standard cash flow, Black-Scholes and Monte Carlo valuation techniques. The models incorporate inputs, depending on the type of derivative, including interest rate curves, foreign exchange rates and volatility. In addition, all derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Company’s evaluation of credit risk as well as external assessments of credit risk, where available. In its assessment of nonperformance risk, the Company considers its ability to net derivative positions under master netting agreements, as well as collateral received or provided under collateral support agreements. The majority of these derivatives are classified within Level 2 of the fair value hierarchy as the significant inputs to the models are observable. An exception to the Level 2 classification is certain derivative transactions for which the risk of nonperformance cannot be observed in the market. These derivatives are classified within Level 3 of the fair value hierarchy. In addition, commitments to sell, purchase and originate mortgage loans that meet the requirements of a derivative, are valued by pricing models that include market observable and unobservable inputs. Due to the significant unobservable inputs, these commitments are classified within Level 3 of the fair value hierarchy.
Deposit Liabilities The fair value of demand deposits, savings accounts and certain money market deposits is equal to the amount payable on demand. The fair value of fixed-rate certificates of deposit was estimated by discounting the contractual cash flow using current market rates.
Short-term Borrowings Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term funds borrowed have floating rates or short-term maturities. The fair value of short-term borrowings was determined by discounting contractual cash flows using current market rates.
Long-term Debt The fair value for most long-term debt was determined by discounting contractual cash flows using current market rates. Junior subordinated debt instruments were valued using market quotes.
Loan Commitments, Letters of Credit and Guarantees The fair value of commitments, letters of credit and guarantees represents the estimated costs to terminate or otherwise settle the obligations with a third-party. The fair value of residential mortgage commitments is estimated based on observable and unobservable inputs. Other loan commitments, letters of credit and guarantees are not actively traded, and the Company estimates their fair value based on the related amount of unamortized deferred commitment fees adjusted for the probable losses for these arrangements.
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The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis:
(Dollars in Millions) Level 1 Level 2 Level 3 Netting Total
September 30, 2011
Available-for-sale securities
U.S. Treasury and agencies
$ 583 $ 906 $ $ $ 1,489
Mortgage-backed securities
Residential
Agency
39,738 39,738
Non-agency
Prime
859 859
Non-prime
857 857
Commercial
Agency
147 147
Non-agency
45 45
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations
93 125 218
Other
566 120 686
Obligations of state and political subdivisions
6,499 6,499
Obligations of foreign governments
6 6
Corporate debt securities
960 9 969
Perpetual preferred securities
406 406
Other investments
182 8 190
Total available-for-sale
765 49,329 2,015 52,109
Mortgage loans held for sale
5,152 5,152
Mortgage servicing rights
1,466 1,466
Derivative assets
775 1,364 (361 ) 1,778
Other assets
927 927
Total
$ 765 $ 56,183 $ 4,845 $ (361 ) $ 61,432
Derivative liabilities
$ $ 2,694 $ 34 $ (1,680 ) $ 1,048
Other liabilities
876 876
Total
$ $ 3,570 $ 34 $ (1,680 ) $ 1,924
December 31, 2010
Available-for-sale securities
U.S. Treasury and agencies
$ 873 $ 1,664 $ $ $ 2,537
Mortgage-backed securities
Residential
Agency
37,703 37,703
Non-agency
Prime
1,103 1,103
Non-prime
947 947
Commercial
Agency
197 197
Non-agency
50 50
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations
89 135 224
Other
587 133 720
Obligations of state and political subdivisions
6,417 6,417
Obligations of foreign governments
6 6
Corporate debt securities
949 9 958
Perpetual preferred securities
448 448
Other investments
181 18 199
Total available-for-sale
1,054 48,078 2,377 51,509
Mortgage loans held for sale
8,100 8,100
Mortgage servicing rights
1,837 1,837
Derivative assets
846 953 (280 ) 1,519
Other assets
470 470
Total
$ 1,054 $ 57,494 $ 5,167 $ (280 ) $ 63,435
Derivative liabilities
$ $ 2,072 $ 102 $ (1,163 ) $ 1,011
Other liabilities
470 470
Total
$ $ 2,542 $ 102 $ (1,163 ) $ 1,481
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The following table presents the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30:
Net Gains
Net Total
Net Change in
(Losses)
Purchases,
Unrealized Gains
Net Gains
Included in
Sales, Principal
(Losses) Relating
Beginning
(Losses)
Other
Payments,
End
to Assets
of Period
Included in
Comprehensive
Issuances and
of Period
Still Held at
(Dollars in Millions) Balance Net Income Income (Loss) Settlements Balance End of Period
2011
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime
$ 896 $ 1 $ (2 ) $ (36 ) $ 859 $ (2 )
Non-prime
895 (2 ) (5 ) (31 ) 857 (5 )
Commercial non-agency
50 1 (1 ) (5 ) 45
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations
133 3 (2 ) (9 ) 125 (2 )
Other
129 1 (4 ) (6 ) 120 (4 )
Corporate debt securities
9 9
Total available-for-sale
2,112 4 (a) (14 ) (87 ) 2,015 (13 )
Mortgage servicing rights
1,989 (629 ) (b) 106 1,466 (629 ) (b)
Net derivative assets and liabilities
836 836 (c) (342 ) 1,330 77 (d)
2010
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime
$ 1,197 $ 1 $ 22 $ (51 ) $ 1,169 $ 22
Non-prime
907 (9 ) 36 11 945 36
Commercial non-agency
15 1 1 33 50 1
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations
75 3 2 69 149 2
Other
328 3 8 (209 ) 130 8
Corporate debt securities
10 (1 ) 9
Other investments
266 2 16 (7 ) 277 16
Total available-for-sale
2,798 (e) 85 (154 ) 2,729 85
Mortgage servicing rights
1,543 (280 ) (b) 159 1,422 (280 ) (b)
Net derivative assets and liabilities
1,294 682 (f) (544 ) 1,432 119 (g)
(a) Approximately $(9) million included in securities gains (losses) and $13 million included in interest income.
(b) Included in mortgage banking revenue.
(c) Approximately $445 million included in other noninterest income and $391 million included in mortgage banking revenue.
(d) Approximately $317 million included in other noninterest income and $(240) million included in mortgage banking revenue.
(e) Approximately $(18) million included in securities gains (losses) and $18 million included in interest income.
(f) Approximately $252 million included in other noninterest income and $430 million included in mortgage banking revenue.
(g) Approximately $504 million included in other noninterest income and $(385) million included in mortgage banking revenue.
Additional detail of purchases, sales, principal payments, issuances and settlements for assets and liabilities classified within Level 3 for the three months ended September 30, 2011, was as follows:
Principal
(Dollars in Millions) Purchases Sales Payments Issuances Settlements Net Total
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime
$ $ $ (36 ) $ $ $ (36 )
Non-prime
(31 ) (31 )
Commercial non-agency
(4 ) (1 ) (5 )
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations
(9 ) (9 )
Other
(6 ) (6 )
Total available-for-sale
(4 ) (83 ) (87 )
Mortgage servicing rights
5 101 (a) 106
Net derivative assets and liabilities
(2 ) (340 ) (342 )
(a) Represents MSRs capitalized during the period
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The following table presents the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30:
Net Gains
Net Total
Net Change in
(Losses)
Purchases,
Unrealized Gains
Net Gains
Included in
Sales, Principal
(Losses) Relating
Beginning
(Losses)
Other
Payments,
End
to Assets
of Period
Included in
Comprehensive
Issuances and
of Period
Still Held at
(Dollars in Millions) Balance Net Income Income (Loss) Settlements Balance End of Period
2011
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime
$ 1,103 $ 4 $ 22 $ (270 ) $ 859 $ 14
Non-prime
947 (4 ) 27 (113 ) 857 26
Commercial non-agency
50 2 (1 ) (6 ) 45
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations
135 10 6 (26 ) 125 7
Other
133 8 (2 ) (19 ) 120 (2 )
Corporate debt securities
9 9
Total available-for-sale
2,377 20 (a) 52 (434 ) 2,015 45
Mortgage servicing rights
1,837 (803 ) (b) 432 1,466 (803 ) (b)
Net derivative assets and liabilities
851 1,252 (c) (773 ) 1,330 (92 ) (d)
2010
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime
$ 1,429 $ 1 $ 72 $ (333 ) $ 1,169 $ 66
Non-prime
968 (46 ) 104 (81 ) 945 104
Commercial non-agency
13 1 3 33 50 2
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations
98 3 48 149 3
Other
357 (2 ) 6 (231 ) 130 7
Corporate debt securities
10 (1 ) 9
Other investments
231 4 63 (21 ) 277 63
Total available-for-sale
3,106 (40 ) (e) 248 (585 ) 2,729 245
Mortgage servicing rights
1,749 (773 ) (b) 446 1,422 (773 ) (b)
Net derivative assets and liabilities
815 1,741 (f) 1,124 1,432 160 (g)
(a) Approximately $(24) million included in securities gains (losses) and $44 million included in interest income.
(b) Included in mortgage banking revenue.
(c) Approximately $672 million included in other noninterest income and $580 million included in mortgage banking revenue.
(d) Approximately $303 million included in other noninterest income and $(395) million included in mortgage banking revenue.
(e) Approximately $(85) million included in securities gains (losses) and $45 million included in interest income.
(f) Approximately $865 million included in other noninterest income and $876 million included in mortgage banking revenue.
(g) Approximately $842 million included in other noninterest income and $(682) million included in mortgage banking revenue.
Additional detail of purchases, sales, principal payments, issuances and settlements for assets and liabilities classified within Level 3 for the nine months ended September 30, 2011, was as follows:
Principal
(Dollars in Millions) Purchases Sales Payments Issuances Settlements Net Total
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime
$ $ (115 ) $ (155 ) $ $ $ (270 )
Non-prime
(12 ) (101 ) (113 )
Commercial non-agency
(4 ) (2 ) (6 )
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations
(26 ) (26 )
Other
(19 ) (19 )
Total available-for-sale
(131 ) (303 ) (434 )
Mortgage servicing rights
16 416 (a) 432
Net derivative assets and liabilities
(5 ) (768 ) (773 )
(a) Represents MSRs capitalized during the period
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The Company is also required periodically to measure certain other financial assets at fair value on a nonrecurring basis. These measurements of fair value usually result from the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.
The following table summarizes the adjusted carrying values and the level of valuation assumptions for assets measured at fair value on a nonrecurring basis:
September 30, 2011 December 31, 2010
(Dollars in Millions) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Loans (a)
$ $ $ 170 $ 170 $ $ 404 $ 1 $ 405
Other real estate owned (b)
255 255 812 812
Other intangible assets
1 1
Other assets
3 3 4 9 13
(a) Represents the carrying value of loans for which adjustments were based on the fair value of the collateral, excluding loans fully charged-off.
(b) Represents the fair value of foreclosed properties that were measured at fair value based on an appraisal or broker price opinion of the collateral subsequent to their initial acquisition.
The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios:
Three Months
Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2011 2010 2011 2010
Loans (a)
$ 32 $ 67 $ 153 $ 280
Other real estate owned (b)
81 97 230 212
Other intangible assets
Other assets
(a) Represents write-downs of loans which were based on the fair value of the collateral, excluding loans fully charged-off.
(b) Represents related losses of foreclosed properties that were measured at fair value subsequent to their initial acquisition.
Fair Value Option
The following table summarizes the differences between the aggregate fair value carrying amount of MLHFS for which the fair value option has been elected and the aggregate unpaid principal amount that the Company is contractually obligated to receive at maturity:
September 30, 2011 December 31, 2010
Carrying
Carrying
Fair Value
Aggregate
Amount Over
Fair Value
Aggregate
Amount Over
Carrying
Unpaid
(Under) Unpaid
Carrying
Unpaid
(Under) Unpaid
(Dollars in Millions) Amount Principal Principal Amount Principal Principal
Total loans
$ 5,152 $ 4,910 $ 242 $ 8,100 $ 8,034 $ 66
Nonaccrual loans
7 14 (7 ) 11 18 (7 )
Loans 90 days or more past due
2 4 (2 ) 6 6
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Disclosures about Fair Value of Financial Instruments The following table summarizes the estimated fair value for financial instruments as of September 30, 2011 and December 31, 2010, and includes financial instruments that are not accounted for at fair value. In accordance with disclosure guidance related to fair values of financial instruments, the Company did not include assets and liabilities that are not financial instruments, such as the value of goodwill, long-term relationships with deposit, credit card, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other liabilities.
The estimated fair values of the Company’s financial instruments are shown in the table below:
September 30, 2011 December 31, 2010
Carrying
Fair
Carrying
Fair
(Dollars in Millions) Amount Value Amount Value
Financial Assets
Cash and due from banks
$ 13,708 $ 13,708 $ 14,487 $ 14,487
Investment securities held-to-maturity
16,269 16,613 1,469 1,419
Mortgages held for sale (a)
4 4 4 4
Other loans held for sale
219 220 267 267
Loans
199,818 202,037 191,751 192,058
Financial Liabilities
Deposits
222,632 223,042 204,252 204,799
Short-term borrowings
32,029 32,094 32,557 32,839
Long-term debt
30,624 31,467 31,537 31,981
(a) Balance excludes mortgages held for sale for which the fair value option under applicable accounting guidance was elected.
The fair value of unfunded commitments, standby letters of credit and other guarantees is approximately equal to their carrying value. The carrying value of unfunded commitments and standby letters of credit was $358 million and $353 million at September 30, 2011 and December 31, 2010, respectively. The carrying value of other guarantees was $372 million and $330 million at September 30, 2011 and December 31, 2010, respectively.

Note 14 Guarantees and Contingent Liabilities
Visa Restructuring and Card Association Litigation The Company’s payment services business issues and acquires credit and debit card transactions through the Visa U.S.A. Inc. card association or its affiliates (collectively “Visa”). In 2007, Visa completed a restructuring and issued shares of Visa Inc. common stock to its financial institution members in contemplation of its initial public offering (“IPO”) completed in the first quarter of 2008 (the “Visa Reorganization”). As a part of the Visa Reorganization, the Company received its proportionate number of shares of Visa Inc. common stock, which were subsequently converted to Class B shares of Visa Inc. (“Class B shares”). The Company and certain of its subsidiaries have been named as defendants along with Visa U.S.A. Inc. (“Visa U.S.A.”) and MasterCard International (collectively, the “Card Associations”), as well as several other banks, in antitrust lawsuits challenging the practices of the Card Associations (the “Visa Litigation”). Visa U.S.A. member banks have a contingent obligation to indemnify Visa Inc. under the Visa U.S.A. bylaws (which were modified at the time of the restructuring in October 2007) for potential losses arising from the Visa Litigation. The indemnification by the Visa U.S.A. member banks has no specific maximum amount. The Company has also entered into judgment and loss sharing agreements with Visa U.S.A. and certain other banks in order to apportion financial responsibilities arising from any potential adverse judgment or negotiated settlements related to the Visa Litigation.
In 2007 and 2008, Visa announced settlement agreements relating to certain of the Visa Litigation matters. Visa U.S.A. member banks remain obligated to indemnify Visa Inc. for potential losses arising from the remaining Visa Litigation. Using proceeds from its IPO and through subsequent reductions to the conversion ratio applicable to the Class B shares held by Visa U.S.A. member banks, Visa Inc. has established an escrow account for the benefit of member financial institutions to fund the expenses of the Visa Litigation, as well as the members’ proportionate share of any judgments or settlements that may arise out of the Visa Litigation. The receivable related to the escrow account is classified in other liabilities as a direct offset to the related Visa Litigation contingent liability, and will decline as amounts are paid out of the escrow account. During the first quarter of 2011, Visa deposited additional funds into the escrow account and further reduced the conversion ratio applicable to the Class B shares. As a result, the Company recognized a gain of $22 million during the first quarter of 2011 related to the effective repurchase of a portion of the Class B shares.
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At September 30, 2011, the carrying amount of the Company’s liability related to the remaining Visa Litigation matters, was $29 million. Class B shares are non-transferable, except for transfers to other Visa U.S.A. member banks. The remaining Class B shares held by the Company will be eligible for conversion to Class A shares upon settlement of the Visa Litigation.
The following table is a summary of other guarantees and contingent liabilities of the Company at September 30, 2011:
Maximum
Potential
Collateral
Carrying
Future
(Dollars in Millions) Held Amount Payments
Standby letters of credit
$ $ 94 $ 18,760
Third-party borrowing arrangements
127
Securities lending indemnifications
8,973 8,569
Asset sales
228 2,046 (a)
Merchant processing
680 73 77,914
Contingent consideration arrangements
5 5
Minimum revenue guarantees
22 37
Other
5,336 15 8,552
(a) The maximum potential future payments do not include loan sales where the Company provides standard representation and warranties to the buyer against losses related to loan underwriting documentation defects that existed at the time of sale that generally are identified after the occurrence of a triggering event such as delinquency. For these types of loan sales, the maximum potential future payments is generally the unpaid principal balance of loans sold measured at the end of the current reporting period . Actual losses will be significantly less than the maximum exposure, as only a fraction of loans sold will have a representation and warranty breach, and any losses on repurchase would generally be mitigated as the loans are typically collateralized.
Merchant Processing The Company, through its subsidiaries, provides merchant processing services. Under the rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In this situation, the transaction is “charged-back” to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant, it bears the loss for the amount of the refund paid to the cardholder.
The Company currently processes card transactions in the United States, Canada and Europe for airline companies. In the event of liquidation of these merchants, the Company could become financially liable for refunding tickets purchased through the credit card associations under the charge-back provisions. Charge-back risk related to these merchants is evaluated in a manner similar to credit risk assessments and, as such, merchant processing contracts contain various provisions to protect the Company in the event of default. At September 30, 2011, the value of airline tickets purchased to be delivered at a future date was $5.8 billion. The Company held collateral of $526 million in escrow deposits, letters of credit and indemnities from financial institutions, and liens on various assets.
Asset Sales The Company regularly sells loans to government-sponsored entities (“GSEs”) as part of its mortgage banking activities. The Company provides customary representation and warranties to the GSEs in conjunction with these sales. These representations and warranties generally require the Company to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Company is unable to cure or refute a repurchase request, the Company is generally obligated to repurchase the loan or otherwise reimburse the counterparty for losses. The Company has been receiving repurchase requests from the GSEs. At September 30, 2011, the Company had reserved $162 million for potential losses from representation and warranty obligations. The Company’s reserve reflects Management’s best estimate of losses for representation and warranty obligations. The Company’s reserving methodology uses current information about investor repurchase requests, and various assumptions such as defect rate, concur rate, repurchase mix, and loss severity, based upon the Company’s most recent loss trends. The Company also considers qualitative factors that may result in anticipated losses different from historical loss trends, such as loan vintage, underwriting characteristics and macroeconomic trends.
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The following table is a rollforward of the Company’s representation and warranty reserve:
Three Months Ended
Nine Months Ended
September 30 September 30
(Dollars in Millions) 2011 2010 2011 2010
Balance at beginning of period
$ 173 $ 101 $ 180 $ 72
Net realized losses
(31 ) (24 ) (106 ) (66 )
Additions to reserve
20 70 88 141
Balance at end of period
$ 162 $ 147 $ 162 $ 147
As of September 30, 2011 and December 31, 2010, the Company had $115 million and $165 million, respectively, of unresolved representation and warranty claims with the GSEs. The Company does not have a significant amount of unresolved claims from investors other than the GSEs.
Checking Account Overdraft Fee Litigation The Company is a defendant in three separate cases primarily challenging the Company’s daily ordering of debit transactions posted to customer checking accounts for the period from 2003 to 2010. The plaintiffs have requested class action treatment; however, no class has been certified. The court has denied a motion by the Company to dismiss these cases. The Company believes it has meritorious defenses against these matters, including class certification. As these cases are in the early stages and no damages have been specified, no specific loss range or range of loss can be determined currently.
Other During the second quarter of 2011, the Company and its two primary banking subsidiaries entered into Consent Orders with U.S. federal banking regulators regarding the Company’s residential mortgage servicing and foreclosure processes. The Company has not been notified of any monetary penalty related to the Consent Orders, however, the Consent Orders could result in fines, penalties, restitutions or other alterations to the Company’s business practices. Other governmental authorities are reported to be discussing various actions with certain mortgage servicers, although the Company has not been notified of any pending regulatory actions or penalties beyond the Consent Orders. Such actions could also lead to fines, settlements or alterations in business practices.
The Company is subject to various other litigation, investigations and legal and administrative cases and proceedings that arise in the ordinary course of its businesses. Due to their complex nature, it may be years before some matters are resolved. While it is impossible to ascertain the ultimate resolution or range of financial liability with respect to these contingent matters, the Company believes that the aggregate amount of such liabilities will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
For additional information on the nature of the Company’s guarantees and contingent liabilities, refer to Note 22 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Note 15 Subsequent Events
The Company has evaluated the impact of events that have occurred subsequent to September 30, 2011 through the date the consolidated financial statements were filed with the United States Securities and Exchange Commission. Based on this evaluation, the Company has determined none of these events were required to be recognized or disclosed in the consolidated financial statements and related notes.
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U.S. Bancorp
Consolidated Daily Average Balance Sheet and Related
Yields and Rates (a)
For the Three Months Ended September 30,
2011 2010
Yields
Yields
% Change
(Dollars in Millions)
Average
and
Average
and
Average
(Unaudited) Balances Interest Rates Balances Interest Rates Balances
Assets
Investment securities
$ 66,252 $ 511 3.08 % $ 47,870 $ 441 3.69 % 38.4 %
Loans held for sale
3,946 42 4.17 6,465 71 4.43 (39.0 )
Loans (b)
Commercial
52,344 521 3.96 46,784 501 4.26 11.9
Commercial real estate
35,569 414 4.62 34,190 390 4.52 4.0
Residential mortgages
34,026 408 4.79 27,890 361 5.17 22.0
Credit card
16,057 389 9.60 16,510 386 9.29 (2.7 )
Other retail
48,380 671 5.51 47,859 696 5.77 1.1
Total loans, excluding covered loans
186,376 2,403 5.12 173,233 2,334 5.35 7.6
Covered loans
15,793 235 5.91 19,308 240 4.93 (18.2 )
Total loans
202,169 2,638 5.19 192,541 2,574 5.31 5.0
Other earning assets
13,902 67 1.92 5,040 46 3.61 *
Total earning assets
286,269 3,258 4.53 251,916 3,132 4.95 13.6
Allowance for loan losses
(5,079 ) (5,406 ) 6.0
Unrealized gain (loss) on available-for-sale securities
470 475 (1.1 )
Other assets
39,921 39,075 2.2
Total assets
$ 321,581 $ 286,060 12.4
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits
$ 58,606 $ 39,732 47.5
Interest-bearing deposits
Interest checking
41,042 14 .14 39,308 19 .19 4.4
Money market savings
44,623 16 .14 38,005 31 .33 17.4
Savings accounts
27,042 26 .38 22,008 32 .59 22.9
Time certificates of deposit less than $100,000
15,251 74 1.92 16,024 75 1.86 (4.8 )
Time deposits greater than $100,000
28,805 72 .99 27,583 74 1.06 4.4
Total interest-bearing deposits
156,763 202 .51 142,928 231 .64 9.7
Short-term borrowings
30,597 143 1.86 36,303 151 1.65 (15.7 )
Long-term debt
31,609 289 3.64 29,422 273 3.70 7.4
Total interest-bearing liabilities
218,969 634 1.15 208,653 655 1.25 4.9
Other liabilities
9,961 8,003 24.5
Shareholders’ equity
Preferred equity
2,606 1,930 35.0
Common equity
30,481 26,957 13.1
Total U.S. Bancorp shareholders’ equity
33,087 28,887 14.5
Noncontrolling interests
958 785 22.0
Total equity
34,045 29,672 14.7
Total liabilities and equity
$ 321,581 $ 286,060 12.4 %
Net interest income
$ 2,624 $ 2,477
Gross interest margin
3.38 % 3.70 %
Gross interest margin without taxable-equivalent increments
3.30 3.62
Percent of Earning Assets
Interest income
4.53 % 4.95 %
Interest expense
.88 1.04
Net interest margin
3.65 % 3.91 %
Net interest margin without taxable-equivalent increments
3.57 % 3.83 %
* Not meaningful
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
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U.S. Bancorp
Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)
For the Nine Months Ended September 30,
2011 2010
Yields
Yields
% Change
(Dollars in Millions)
Average
and
Average
and
Average
(Unaudited) Balances Interest Rates Balances Interest Rates Balances
Assets
Investment securities
$ 61,907 $ 1,479 3.19 % $ 47,080 $ 1,326 3.76 % 31.5 %
Loans held for sale
4,382 139 4.22 4,824 162 4.49 (9.2 )
Loans (b)
Commercial
50,383 1,539 4.08 46,798 1,472 4.20 7.7
Commercial real estate
35,417 1,210 4.57 34,165 1,137 4.45 3.7
Residential mortgages
32,854 1,201 4.88 27,045 1,059 5.22 21.5
Credit card
16,022 1,141 9.52 16,403 1,150 9.37 (2.3 )
Other retail
48,154 1,992 5.53 47,391 2,057 5.80 1.6
Total loans, excluding covered loans
182,830 7,083 5.18 171,802 6,875 5.35 6.4
Covered loans
16,703 704 5.63 20,390 745 4.88 (18.1 )
Total loans
199,533 7,787 5.22 192,192 7,620 5.30 3.8
Other earning assets
13,483 187 1.85 5,312 119 2.98 *
Total earning assets
279,305 9,592 4.59 249,408 9,227 4.94 12.0
Allowance for loan losses
(5,275 ) (5,387 ) 2.1
Unrealized gain (loss) on available-for-sale securities
137 19 *
Other assets
39,912 39,016 2.3
Total assets
$ 314,079 $ 283,056 11.0
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits
$ 50,558 $ 39,223 28.9
Interest-bearing deposits
Interest checking
42,335 50 .16 39,599 56 .19 6.9
Money market savings
45,091 62 .18 39,710 101 .34 13.6
Savings accounts
26,304 89 .45 20,038 87 .58 31.3
Time certificates of deposit less than $100,000
15,294 219 1.92 17,105 230 1.80 (10.6 )
Time deposits greater than $100,000
30,153 226 1.00 27,162 222 1.09 11.0
Total interest-bearing deposits
159,177 646 .54 143,614 696 .65 10.8
Short-term borrowings
30,597 411 1.80 33,727 420 1.66 (9.3 )
Long-term debt
31,786 860 3.62 30,696 822 3.58 3.6
Total interest-bearing liabilities
221,560 1,917 1.16 208,037 1,938 1.25 6.5
Other liabilities
9,377 7,477 25.4
Shareholders’ equity
Preferred equity
2,349 1,678 40.0
Common equity
29,350 25,904 13.3
Total U.S. Bancorp shareholders’ equity
31,699 27,582 14.9
Noncontrolling interests
885 737 20.1
Total equity
32,584 28,319 15.1
Total liabilities and equity
$ 314,079 $ 283,056 11.0 %
Net interest income
$ 7,675 $ 7,289
Gross interest margin
3.43 % 3.69 %
Gross interest margin without taxable-equivalent increments
3.35 3.61
Percent of Earning Assets
Interest income
4.59 % 4.94 %
Interest expense
.92 1.04
Net interest margin
3.67 % 3.90 %
Net interest margin without taxable-equivalent increments
3.59 % 3.82 %
* Not meaningful
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
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Part II — Other Information
Item 1A. Risk Factors — There are a number of factors that may adversely affect the Company’s business, financial results or stock price. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for discussion of these risks.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds — Refer to the “Capital Management” section within Management’s Discussion and Analysis in Part I for information regarding shares repurchased by the Company during the third quarter of 2011.
Item 6. Exhibits
12 Computation of Ratio of Earnings to Fixed Charges
31 .1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31 .2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101 Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2011, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Income, (iii) the Consolidated Statement of Shareholders’ Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to Consolidated Financial Statements.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
U.S. BANCORP
By:
/s/ Craig E. Gifford
Craig E. Gifford
Controller
(Principal Accounting Officer and Duly Authorized Officer)
DATE: November 4, 2011
U.S. Bancorp
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EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges
Three Months Ended
Nine Months Ended
(Dollars in Millions) September 30, 2011 September 30, 2011
Earnings
1. Net income attributable to U.S. Bancorp $ 1,273 $ 3,522
2. Applicable income taxes, including expense related to unrecognized tax positions 490 1,314
3. Net income attributable to U.S. Bancorp before income taxes (1 + 2) $ 1,763 $ 4,836
4. Fixed charges:
a. Interest expense excluding interest on deposits* $ 432 $ 1,267
b. Portion of rents representative of interest and amortization of debt expense 26 77
c. Fixed charges excluding interest on deposits (4a + 4b) 458 1,344
d. Interest on deposits 202 646
e. Fixed charges including interest on deposits (4c + 4d) $ 660 $ 1,990
5. Amortization of interest capitalized $ $
6. Earnings excluding interest on deposits (3 + 4c + 5) 2,221 6,180
7. Earnings including interest on deposits (3 + 4e + 5) 2,423 6,826
8. Fixed charges excluding interest on deposits (4c) 458 1,344
9. Fixed charges including interest on deposits (4e) 660 1,990
Ratio of Earnings to Fixed Charges
10. Excluding interest on deposits (line 6/line 8) 4.85 4.60
11. Including interest on deposits (line 7/line 9) 3.67 3.43
* Excludes interest expense related to unrecognized tax positions
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Richard K. Davis, certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Richard K. Davis
Richard K. Davis
Chief Executive Officer
Dated: November 4, 2011
U.S. Bancorp
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EXHIBIT 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Andrew Cecere, certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Andrew Cecere
Andrew Cecere
Chief Financial Officer
Dated: November 4, 2011
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EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Chief Executive Officer and Chief Financial Officer of U.S. Bancorp, a Delaware corporation (the “Company”), do hereby certify that:
(1) The Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Richard K. Davis

/s/ Andrew Cecere

Richard K. Davis Andrew Cecere
Chief Executive Officer Chief Financial Officer
Dated: November 4, 2011
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Corporate Information
Executive Offices
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402
Common Stock Transfer Agent and Registrar
BNY Mellon Shareowner Services acts as our transfer agent and registrar, dividend paying agent and dividend reinvestment plan administrator, and maintains all shareholder records for the corporation. Inquiries related to shareholder records, stock transfers, changes of ownership, lost stock certificates, changes of address and dividend payment should be directed to the transfer agent at:
BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252-8015
Phone: 888-778-1311 or 201-680-6578 (international calls)
Internet: bnymellon.com/shareowner
For Registered or Certified Mail:
BNY Mellon Shareowner Services
500 Ross St., 6th Floor
Pittsburgh, PA 15219
Telephone representatives are available weekdays from 8:00 a.m. to 6:00 p.m. Central Time, and automated support is available 24 hours a day, 7 days a week. Specific information about your account is available on BNY Mellon’s internet site by clicking on the Investor ServiceDirect ® link.
Independent Auditor
Ernst & Young LLP serves as the independent auditor for U.S. Bancorp’s financial statements.
Common Stock Listing and Trading
U.S. Bancorp common stock is listed and traded on the New York Stock Exchange under the ticker symbol USB.
Dividends and Reinvestment Plan
U.S. Bancorp currently pays quarterly dividends on our common stock on or about the 15th day of January, April, July and October, subject to approval by our Board of Directors. U.S. Bancorp shareholders can choose to participate in a plan that provides automatic reinvestment of dividends and/or optional cash purchase of additional shares of U.S. Bancorp common stock. For more information, please contact our transfer agent, BNY Mellon Shareowner Services.
Investor Relations Contacts
Judith T. Murphy
Executive Vice President, Corporate Investor and Public Relations
judith.murphy@usbank.com
Phone: 612-303-0783 or 866-775-9668
Financial Information
U.S. Bancorp news and financial results are available through our website and by mail.
Website For information about U.S. Bancorp, including news, financial results, annual reports and other documents filed with the Securities and Exchange Commission, access our home page on the internet at usbank.com, click on About U.S. Bank .
Mail At your request, we will mail to you our quarterly earnings, news releases, quarterly financial data reported on Form 10-Q and additional copies of our annual reports. Please contact:
U.S. Bancorp Investor Relations
800 Nicollet Mall
Minneapolis, MN 55402
investorrelations@usbank.com
Phone: 866-775-9668
Media Requests
Thomas Joyce
Senior Vice President, Media Relations
thomas.joyce@usbank.com
Phone: 612-303-3167
Privacy
U.S. Bancorp is committed to respecting the privacy of our customers and safeguarding the financial and personal information provided to us. To learn more about the U.S. Bancorp commitment to protecting privacy, visit usbank.com and click on Privacy Pledge.
Code of Ethics
U.S. Bancorp places the highest importance on honesty and integrity. Each year, every U.S. Bancorp employee certifies compliance with the letter and spirit of our Code of Ethics and Business Conduct, the guiding ethical standards of our organization. For details about our Code of Ethics and Business Conduct, visit usbank.com and click on About U.S. Bank .
Diversity
U.S. Bancorp and our subsidiaries are committed to developing and maintaining a workplace that reflects the diversity of the communities we serve. We support a work environment where individual differences are valued and respected and where each individual who shares the fundamental values of the Company has an opportunity to contribute and grow based on individual merit.
Equal Employment Opportunity/Affirmative Action
U.S. Bancorp and our subsidiaries are committed to providing Equal Employment Opportunity to all employees and applicants for employment. In keeping with this commitment, employment decisions are made based upon performance, skill and abilities, not race, color, religion, national origin or ancestry, gender, age, disability, veteran status, sexual orientation or any other factors protected by law. The corporation complies with municipal, state and federal fair employment laws, including regulations applying to federal contractors.
U.S. Bancorp, including each of our subsidiaries, is an Equal Opportunity Employer committed to creating a diverse workforce.
(EQUAL HOUSING LENDER LOGO)
U.S. Bancorp
Member FDIC
(U.S. BANCORP LOGO)
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