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
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Table of Contents

Management’s Discussion and Analysis
 
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
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Table of Contents

STATEMENT OF INCOME ANALYSIS
 
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.
 
 
 
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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.
 
 
 
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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
 
 
 
26
U.S. Bancorp


Table of Contents

 
                                                                                                 
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.
 
NON-REGULATORY CAPITAL RATIOS
 
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
 
 
 
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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
 
 
 
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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.
 
 
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    U.S. Bancorp
    Member FDIC
 
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