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 June 30, 2010
 
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 July 31, 2010
Common Stock, $.01 Par Value
  1,917,160,774 shares
 


 

 
Table of Contents and Form 10-Q Cross Reference Index
 
     
Part I — Financial Information
   
   
  3
  4
  6
  26
  27
  27
2) Quantitative and Qualitative Disclosures About Market Risk/Corporate Risk Profile (Item 3)
   
  9
  9
  19
  19
  19
  20
  21
  21
  22
  28
   
  58
  58
  58
  59
  60
 EX-3.1
 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. 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 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, 2009, 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
      Six Months Ended
 
    June 30,       June 30,  
                  Percent
                      Percent
 
(Dollars and Shares in Millions, Except Per Share Data)   2010     2009       Change       2010       2009       Change  
Condensed Income Statement
                                                       
Net interest income (taxable-equivalent basis) (a)
    $2,409       $2,104         14.5 %     $ 4,812       $ 4,199         14.6 %
Noninterest income
    2,131       2,074         2.7         4,083         4,060         .6  
Securities gains (losses), net
    (21 )     (19 )       (10.5 )       (55 )       (217 )       74.7  
                                                         
Total net revenue
    4,519       4,159         8.7         8,840         8,042         9.9  
Noninterest expense
    2,377       2,129         11.6         4,513         4,000         12.8  
Provision for credit losses
    1,139       1,395         (18.4 )       2,449         2,713         (9.7 )
                                                         
Income before taxes
    1,003       635         58.0         1,878         1,329         41.3  
Taxable-equivalent adjustment
    52       50         4.0         103         98         5.1  
Applicable income taxes
    199       100         99.0         360         201         79.1  
                                                         
Net income
    752       485         55.1         1,415         1,030         37.4  
Net (income) loss attributable to noncontrolling interests
    14       (14 )       *         20         (30 )       *  
                                                         
Net income attributable to U.S. Bancorp
    $766       $471         62.6       $ 1,435       $ 1,000         43.5  
                               
Net income applicable to U.S. Bancorp common shareholders
    $862       $221         *       $ 1,510       $ 640         *  
                               
Per Common Share
                                                       
Earnings per share
    $.45       $.12         * %     $ .79       $ .36         * %
Diluted earnings per share
    .45       .12         *         .79         .36         *  
Dividends declared per share
    .05       .05                 .10         .10          
Book value per share
    13.69       11.86         15.4                                
Market value per share
    22.35       17.92         24.7                                
Average common shares outstanding
    1,912       1,833         4.3         1,911         1,794         6.5  
Average diluted common shares outstanding
    1,921       1,840         4.4         1,920         1,801         6.6  
Financial Ratios
                                                       
Return on average assets
    1.09 %     .71 %                 1.03 %       .76 %          
Return on average common equity
    13.4       4.2                   12.0         6.4            
Net interest margin (taxable-equivalent basis) (a)
    3.90       3.60                   3.90         3.59            
Efficiency ratio (b)
    52.4       51.0                   50.7         48.4            
Average Balances
                                                       
Loans
    $191,161       $183,878         4.0 %     $ 192,015       $ 184,786         3.9 %
Loans held for sale
    4,048       6,092         (33.6 )       3,990         5,644         (29.3 )
Investment securities
    47,140       42,189         11.7         46,678         42,255         10.5  
Earning assets
    247,446       234,265         5.6         248,133         234,786         5.7  
Assets
    281,340       266,107         5.7         281,530         266,171         5.8  
Noninterest-bearing deposits
    39,917       37,388         6.8         38,964         36,707         6.1  
Deposits
    183,318       163,220         12.3         182,927         161,880         13.0  
Short-term borrowings
    32,286       27,638         16.8         32,418         29,915         8.4  
Long-term debt
    30,242       38,768         (22.0 )       31,343         38,279         (18.1 )
Total U.S. Bancorp shareholders’ equity
    27,419       28,202         (2.8 )       26,919         27,514         (2.2 )
                               
                                                         
      June 30,
2010
      December 31,
2009
                                         
                                                         
Period End Balances
                                                       
Loans
    $191,584       $194,755         (1.6 )%                              
Allowance for credit losses
    5,536       5,264         5.2                                
Investment securities
    48,367       44,768         8.0                                
Assets
    283,243       281,176         .7                                
Deposits
    183,123       183,242         (.1 )                              
Long-term debt
    29,137       32,580         (10.6 )                              
Total U.S. Bancorp shareholders’ equity
    28,169       25,963         8.5                                
Capital ratios
                                                       
Tier 1 capital
    10.1 %     9.6 %                                        
Total risk-based capital
    13.4       12.9                                          
Leverage
    8.8       8.5                                          
Tier 1 common equity to risk-weighted assets (c)
    7.4       6.8                                          
Tangible common equity to tangible assets (c)
    6.0       5.3                                          
Tangible common equity to risk-weighted assets (c)
    6.9       6.1                                          
 
  * 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 beginning on page 26.
 
 
 
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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 $766 million for the second quarter of 2010 or $.45 per diluted common share, compared with $471 million, or $.12 per diluted common share for the second quarter of 2009. Return on average assets and return on average common equity were 1.09 percent and 13.4 percent, respectively, for the second quarter of 2010, compared with .71 percent and 4.2 percent, respectively, for the second quarter of 2009. Diluted earnings per common share for the second quarter of 2010 included a non-recurring $.05 benefit related to an exchange of newly issued perpetual preferred stock for outstanding income trust securities (“ITS exchange”), net of related debt extinguishment costs. Also impacting the second quarter of 2010 were $25 million of provision for credit losses in excess of net charge-offs, net securities losses of $21 million and a $28 million gain related to the Company’s investment in Visa Inc. The second quarter of 2009 included $466 million of provision for credit losses in excess of net charge-offs, net securities losses of $19 million, a $123 million accrual for a Federal Deposit Insurance Corporation (“FDIC”) special assessment and a reduction to earnings per share from recognition of $154 million of unaccreted preferred stock discount as a result of the redemption of preferred stock previously issued to the U.S. Department of the Treasury.
Total net revenue, on a taxable-equivalent basis, for the second quarter of 2010 was $360 million (8.7 percent) higher than the second quarter of 2009, reflecting a 14.5 percent increase in net interest income and a 2.7 percent increase in total noninterest income. The increase in net interest income over a year ago was largely the result of continued growth in lower cost core deposit funding and an increase in average earning assets, primarily related to acquisitions. Noninterest income increased over a year ago as a result of higher payments-related and commercial products revenue and other income.
Total noninterest expense in the second quarter of 2010 was $248 million (11.6 percent) higher than the second quarter of 2009, primarily due to the impact of acquisitions, higher compensation and employee benefits expense and costs related to investments in affordable housing and other tax-advantaged projects, partially offset by lower FDIC deposit insurance expense due to the FDIC special assessment in the second quarter of the prior year.
The provision for credit losses for the second quarter of 2010 was $1.1 billion, or $256 million (18.4 percent) lower than the second quarter of 2009. The provision for credit losses exceeded net charge-offs by $25 million in the second quarter of 2010, compared with $466 million in the second quarter of 2009. Net charge-offs in the second quarter of 2010 were $1.1 billion, compared with net charge-offs of $929 million in the second quarter of 2009. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and 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 $1.4 billion for the first six months of 2010 or $.79 per diluted common share, compared with $1.0 billion, or $.36 per diluted common share for the first six months of 2009. Return on average assets and return on average common equity were 1.03 percent and 12.0 percent, respectively, for the first six months of 2010, compared with .76 percent and 6.4 percent, respectively, for the first six months of 2009. The Company’s results for the first six months of 2010 reflected $200 million of provision for credit losses in excess of net charge-offs, $55 million of net securities losses and a $28 million gain related to the Company’s investment in Visa Inc. The first six months of 2009 included $996 million of provision for credit losses in excess of net charge-offs, $217 million of net securities losses, the $123 million FDIC special assessment, the $154 million preferred stock discount recognition and a $92 million gain from a corporate real estate transaction.
Total net revenue, on a taxable-equivalent basis, for the first six months of 2010 was $798 million (9.9 percent) higher than the first six months of 2009, reflecting a 14.6 percent increase in net interest income and a 4.8 percent increase in total noninterest income. The increase in net interest income over a year ago was largely the result of continued growth in lower cost core deposit funding and an increase in average earning assets. Noninterest income increased over a year ago, principally due to higher payments-related and commercial products revenue and a decrease in net securities losses, partially offset by lower mortgage banking revenue and other service charges.
 
 
 
U.S. Bancorp
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Table of Contents

Total noninterest expense in the first six months of 2010 was $513 million (12.8 percent) higher than the first six months of 2009, primarily due to the impact of acquisitions, higher compensation and employee benefits expense and costs related to investments in affordable housing and other tax-advantaged projects, partially offset by lower FDIC deposit insurance expense due to the special assessment in the second quarter of 2009.
The provision for credit losses for the first six months of 2010 was $2.4 billion, or $264 million (9.7 percent) lower than the first six months of 2009. The provision for credit losses exceeded net charge-offs by $200 million in the first six months of 2010, compared with $996 million in the first six months of 2009. Net charge-offs in the first six months of 2010 were $2.2 billion, compared with net charge-offs of $1.7 billion in the first six months of 2009. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
 
STATEMENT OF INCOME ANALYSIS
 
Net Interest Income Net interest income, on a taxable-equivalent basis, was $2.4 billion in the second quarter of 2010, compared with $2.1 billion in the second quarter of 2009. Net interest income, on a taxable-equivalent basis, was $4.8 billion in the first six months of 2010, compared with $4.2 billion in the first six months of 2009. The increases were primarily the result of continued growth in lower cost core deposit funding, increases in average earning assets and a higher net interest margin. Average deposits increased $20.1 billion (12.3 percent) in the second quarter and $21.0 billion (13.0 percent) in the first six months of 2010, compared with the same periods of 2009. Average earning assets were $13.2 billion (5.6 percent) higher in the second quarter and $13.3 billion (5.7 percent) higher in the first six months of 2010, compared with the same periods of 2009, driven by increases in average loans and investment securities. The net interest margin in the second quarter and first six months of 2010 was 3.90 percent, compared with 3.60 percent in the second quarter of 2009 and 3.59 percent in the first six months of 2009. The increases in net interest margin were principally due to the impact of favorable funding rates as a result of the increase in deposits and improved credit spreads. 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 second quarter and first six months of 2010 were $7.3 billion (4.0 percent) and $7.2 billion (3.9 percent) higher, respectively, than the same periods of 2009, driven by growth in residential mortgages, retail loans, commercial real estate loans and acquired loans covered by loss sharing agreements with the FDIC, partially offset by a decline in commercial loans which was principally the result of lower utilization by customers of available commitments. Residential mortgage growth reflected an increase in activity throughout most of 2009 as a result of market interest rate declines, including an increase in government agency-guaranteed mortgages. Average retail loans increased year-over-year, driven by increases in credit card, home equity and other retail (primarily auto) loans. Average credit card balances for the second quarter and first six months of 2010 were $2.0 billion (14.0 percent) and $2.4 billion (17.1 percent) higher, respectively, than the same periods of 2009, reflecting growth in existing portfolios and portfolio purchases of $1.6 billion during 2009 and $.5 billion in the second quarter of 2010. Growth in average commercial real estate balances reflected the impact of new business activity, partially offset by customer debt deleveraging. Assets acquired in FDIC-assisted transactions that are covered by loss sharing agreements with the FDIC (“covered assets” or “covered loans”) relate to the fourth quarter 2008 acquisitions of the banking operations of Downey Savings and Loan Association, F.A. and PFF Bank and Trust (“Downey” and “PFF”, respectively) and the fourth quarter 2009 acquisition of the banking operations of First Bank of Oak Park Corporation (“FBOP”). Average covered loans were $20.5 billion and $20.9 billion in the second quarter and first six months of 2010, respectively, compared with $10.7 billion and $11.0 billion in the same periods of 2009, respectively.
Average investment securities in the second quarter and first six months of 2010 were $5.0 billion (11.7 percent) and $4.4 billion (10.5 percent) higher, respectively, than the same periods of 2009, primarily due to purchases of U.S. government agency-related securities and the consolidation of $.6 billion of held-to-maturity securities held in a variable interest entity (“VIE”) due to the adoption of new authoritative accounting guidance effective January 1, 2010. As a result, the composition of the Company’s investment portfolio shifted to a larger concentration in agency mortgage-backed securities, compared with a year ago.
Average total deposits for the second quarter and first six months of 2010 were $20.1 billion (12.3 percent) and $21.0 billion (13.0 percent) higher, respectively, than the same periods of 2009. Excluding deposits from acquisitions, second quarter 2010 average total deposits increased $6.7 billion (4.1 percent) over the second quarter of 2009. Average noninterest-bearing
 
 
 
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Table 2    Noninterest Income
 
                                                         
    Three Months Ended
      Six Months Ended
 
    June 30,       June 30,  
                  Percent
                      Percent
 
(Dollars in Millions)   2010     2009       Change       2010       2009       Change  
Credit and debit card revenue
  $ 266     $ 259         2.7 %     $ 524       $ 515         1.7 %
Corporate payment products revenue
    178       168         6.0         346         322         7.5  
Merchant processing services
    320       278         15.1         612         536         14.2  
ATM processing services
    108       104         3.8         213         206         3.4  
Trust and investment management fees
    267       304         (12.2 )       531         598         (11.2 )
Deposit service charges
    199       250         (20.4 )       406         476         (14.7 )
Treasury management fees
    145       142         2.1         282         279         1.1  
Commercial products revenue
    205       144         42.4         366         273         34.1  
Mortgage banking revenue
    243       308         (21.1 )       443         541         (18.1 )
Investment products fees and commissions
    30       27         11.1         55         55          
Securities gains (losses), net
    (21 )     (19 )       (10.5 )       (55 )       (217 )       74.7  
Other
    170       90         88.9         305         259         17.8  
                                                         
Total noninterest income
  $ 2,110     $ 2,055         2.7 %     $ 4,028       $ 3,843         4.8 %
                                                         

deposits for the second quarter and first six months of 2010 were $2.5 billion (6.8 percent) and $2.3 billion (6.1 percent) higher, respectively, than the same periods of 2009, primarily due to growth in corporate and institutional trust balances, higher Consumer and Wholesale Banking business line balances and the impact of acquisitions. Average total savings deposits were $22.9 billion (29.7 percent) higher in the second quarter and $25.7 billion (34.9 percent) higher in the first six months of 2010, compared with the same periods of 2009, the result of growth in Consumer Banking, broker-dealer, institutional and corporate trust balances, and the impact of acquisitions. Average time certificates of deposit less than $100,000 were lower in the second quarter and first six months of 2010 by $988 million (5.5 percent) and $396 million (2.2 percent), respectively, compared with the same periods in 2009, as decreases in Consumer Banking balances, reflecting the Company’s funding and pricing decisions, were partially offset by acquisition-related growth. Average time deposits greater than $100,000 were $4.3 billion (13.9 percent) and $6.5 billion (19.5 percent) lower in the second quarter and first six months of 2010, respectively, compared with the same periods of 2009, reflecting a decrease in overall wholesale funding requirements, partially offset by the impact of acquisitions.
 
Provision for Credit Losses The provision for credit losses for the second quarter and first six months of 2010 decreased $256 million (18.4 percent) and $264 million (9.7 percent), respectively, from the same periods of 2009. Net charge-offs increased $185 million (19.9 percent) and $532 million (31.0 percent) in the second quarter and first six months of 2010, respectively, compared with the same periods of 2009, as borrowers impacted by weak economic conditions and real estate markets defaulted on loans. Overall, however, the loan portfolio experienced decreases in delinquencies in all major loan categories in the second quarter of 2010, compared to the first quarter of 2010. The Company recorded provision for credit losses in excess of net charge-offs of $25 million in the second quarter and $200 million in the first six months of 2010, compared with $466 million in the second quarter and $996 million in the first six months of 2009. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
 
Noninterest Income Noninterest income in the second quarter and first six months of 2010 was $2.1 billion and $4.0 billion, respectively, compared with $2.1 billion and $3.8 billion in the same periods of 2009. The $55 million (2.7 percent) increase during the second quarter and $185 million (4.8 percent) increase during the first six months of 2010, compared with the same periods of 2009, were due to higher payments-related income, due to increased volumes, and increases in commercial products revenue attributable to higher standby letters of credit fees, commercial loan fees and syndication revenue. In addition, noninterest income for the first six months of 2010 also increased over the same period of the prior year due to a favorable variance in net securities losses of $162 million. Trust and investment management fees declined as low interest rates negatively impacted money market investment fees and lower money market fund balances led to a decline in account-level fees. Deposit service charges decreased as a result of Company-initiated revisions to overdraft fee policies and lower overdraft incidences. Mortgage banking revenue declined principally due to lower loan
 
 
 
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Table 3    Noninterest Expense
 
                                                         
    Three Months Ended
      Six Months Ended
 
    June 30,       June 30,  
                  Percent
                      Percent
 
(Dollars in Millions)   2010     2009       Change       2010       2009       Change  
Compensation
  $ 946     $ 764         23.8 %     $ 1,807       $ 1,550         16.6 %
Employee benefits
    172       140         22.9         352         295         19.3  
Net occupancy and equipment
    226       208         8.7         453         419         8.1  
Professional services
    73       59         23.7         131         111         18.0  
Marketing and business development
    86       80         7.5         146         136         7.4  
Technology and communications
    186       157         18.5         371         312         18.9  
Postage, printing and supplies
    75       72         4.2         149         146         2.1  
Other intangibles
    91       95         (4.2 )       188         186         1.1  
Other
    522       554         (5.8 )       916         845         8.4  
                                                         
Total noninterest expense
  $ 2,377     $ 2,129         11.6 %     $ 4,513       $ 4,000         12.8 %
                                                         
Efficiency ratio (a)
    52.4 %     51.0 %                 50.7 %       48.4 %          
                                                         
(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.

production, partially offset by higher servicing income and favorable net changes in the valuation of mortgage servicing rights (“MSRs”) and related economic hedging activities. Other income increased in the second quarter and first six months of 2010, compared with the same periods of 2009, primarily due to the $28 million gain related to the Company’s investment in Visa Inc., lower retail lease residual valuation losses and improved equity investment income over the prior year. The increases in other income for the first six months of 2010, compared with the first six months of 2009, were partially offset by the $92 million gain on a corporate real estate transaction that occurred in the first quarter of 2009.
 
Noninterest Expense Noninterest expense was $2.4 billion in the second quarter and $4.5 billion in the first six months of 2010, compared with $2.1 billion in the second quarter and $4.0 billion in the first six months of 2009, or increases of $248 million (11.6 percent) and $513 million (12.8 percent), respectively. The increases in noninterest expense from a year ago were principally due to acquisitions, increased compensation and employee benefits expense, and higher costs related to investments in affordable housing and other tax-advantaged projects. Compensation and employee benefits expense increased reflecting acquisitions, ending a five percent cost reduction program that was in effect during the second quarter of 2009, higher incentives costs related to improved financial results, merit increases, and increased pension costs associated with previous declines in the value of pension assets. Net occupancy and equipment expense and professional services expense increased principally due to acquisitions and other business initiatives. Technology and communications expense increased as a result of payments-related initiatives and acquisitions. Other expense decreased in the second quarter and increased in the first six months of 2010, compared with the same periods of 2009, reflecting the net effect of the $123 million FDIC special assessment recorded in the second quarter of 2009, offset by higher costs related to investments in affordable housing and other tax-advantaged projects which benefit the Company’s income tax expense, higher merchant processing expense, increased other real estate owned (“OREO”) costs and debt extinguishment expense associated with the ITS exchange.
 
Income Tax Expense The provision for income taxes was $199 million (an effective rate of 20.9 percent) for the second quarter and $360 million (an effective rate of 20.3 percent) for the first six months of 2010, compared with $100 million (an effective rate of 17.1 percent) and $201 million (an effective rate of 16.3 percent) for the same periods of 2009. The increases in the effective tax rate for the second quarter and first six months of 2010, compared with the same periods of the prior year, primarily reflected the marginal impact of higher pre-tax earnings year-over-year. For further information on income taxes, refer to Note 10 of the Notes to Consolidated Financial Statements.
 
BALANCE SHEET ANALYSIS
 
Loans The Company’s total loan portfolio was $191.6 billion at June 30, 2010, compared with $194.8 billion at December 31, 2009, a decrease of $3.2 billion (1.6 percent). The decrease was driven primarily by lower commercial and covered loans, partially offset by higher residential mortgages. The $2.0 billion (4.2 percent) decrease in commercial loans was primarily driven by lower capital spending and uncertain economic conditions decreasing utilization of existing commitments by business customers. The decrease was also due to the consolidation of a VIE and
 
 
 
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the elimination of a related loan balance, the result of the adoption of new authoritative accounting guidance effective January 1, 2010.
Commercial real estate loans decreased $149 million (.4 percent) at June 30, 2010, compared with December 31, 2009, reflecting customer debt deleveraging, partially offset by the impact of new business activity.
Residential mortgages held in the loan portfolio increased $1.2 billion (4.6 percent) at June 30, 2010, compared with December 31, 2009. Most loans retained in the portfolio are to customers with prime or near-prime credit characteristics at the date of origination.
Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, decreased $316 million (.5 percent) at June 30, 2010, compared with December 31, 2009. The decrease was primarily driven by lower student loans and retail leasing balances, partially offset by higher installment loans.
 
Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages, were $4.9 billion at June 30, 2010, compared with $4.8 billion at December 31, 2009, as residential mortgage production volume was similar in the second quarter of 2010 to the fourth quarter of 2009.
 
Investment Securities Investment securities totaled $48.4 billion at June 30, 2010, compared with $44.8 billion at December 31, 2009. The $3.6 billion (8.0 percent) increase reflected $2.1 billion of net investment purchases, the consolidation of $.6 billion of held-to-maturity securities held in a VIE due to the adoption of new authoritative accounting guidance effective January 1, 2010, and a $.9 billion favorable change in net unrealized gains (losses) on available-for-sale securities.
The Company conducts a regular assessment of its investment portfolio to determine whether any securities are other-than-temporarily impaired. At June 30, 2010, the Company’s net unrealized gain on available-for-sale securities was $226 million, compared with a net unrealized loss of $635 million at December 31, 2009. The favorable change in net unrealized gains (losses) was primarily due to increases in the fair value of agency mortgage-backed securities. Unrealized losses on securities in an unrealized loss position totaled $948 million at June 30, 2010, compared with $1.3 billion at December 31, 2009. 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 collateral or assets and market conditions. At June 30, 2010, 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.
There is limited market activity for structured investment related and 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 $21 million and $67 million of impairment charges in earnings during the second quarter and first six months of 2010, respectively, predominately on non-agency mortgage-backed and structured investment related securities. These impairment charges were due to changes in expected cash flows resulting from increases in defaults in the underlying mortgage pools and regulatory actions in the first quarter of 2010 related to an insurer of some of the securities. Further adverse changes in market conditions may result in additional impairment charges in future periods. Refer to Notes 3 and 12 in the Notes to Consolidated Financial Statements for further information on investment securities.
 
Deposits Total deposits were $183.1 billion at June 30, 2010, compared with $183.2 billion at December 31, 2009, the result of increases in savings accounts and noninterest-bearing deposit balances, offset by decreases in time certificates of deposit, money market savings and interest checking balances. Savings account balances increased $4.1 billion (24.2 percent) primarily due to continued strong participation in a savings product offered by Consumer Banking beginning in 2008. Noninterest-bearing deposits increased $3.5 billion (9.1 percent) primarily due to increases in corporate and commercial banking, and corporate trust balances. Money market savings balances decreased $2.8 billion (7.0 percent), reflecting the Company’s deposit pricing decisions in relation to other funding sources. Interest checking balances decreased $861 million (2.2 percent) due to lower Consumer Banking balances. Time certificates of deposit less than $100,000 decreased $2.5 billion (13.2 percent), and time deposits greater than $100,000 decreased $1.5 billion (5.0 percent), reflecting the Company’s funding and pricing decisions. Time deposits greater than $100,000 are managed as an alternative to other funding sources, such as wholesale borrowing, based largely on relative pricing.
 
 
 
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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
 
June 30, 2010 (Dollars in Millions)   Cost     Value     Years     Yield (d)       Cost     Value     Years     Yield (d)  
U.S. Treasury and Agencies
                                                                 
Maturing in one year or less
  $ 1,420     $ 1,428       .1       2.29 %     $     $             %
Maturing after one year through five years
    427       431       1.2       2.44                            
Maturing after five years through ten years
    35       37       7.3       4.78                            
Maturing after ten years
    651       651       13.7       2.16         63       63       11.5       1.78  
                                                                   
Total
  $ 2,533     $ 2,547       3.9       2.31 %     $ 63     $ 63       11.5       1.78 %
                                                                   
Mortgage-Backed Securities (a)
                                                                 
Maturing in one year or less
  $ 2,465     $ 2,461       .7       1.86 %     $     $             %
Maturing after one year through five years
    26,879       27,700       3.3       3.47         14       9       2.6       2.02  
Maturing after five years through ten years
    4,855       4,687       6.1       2.94         4       3       6.1       .84  
Maturing after ten years
    848       706       11.7       2.05                            
                                                                   
Total
  $ 35,047     $ 35,554       3.7       3.25 %     $ 18     $ 12       3.3       1.78 %
                                                                   
Asset-Backed Securities (a)
                                                                 
Maturing in one year or less
  $     $ 3       .5       11.64 %     $ 147     $ 136       .6       .77 %
Maturing after one year through five years
    367       366       2.8       8.76         97       95       2.9       .95  
Maturing after five years through ten years
    300       312       7.3       4.06         78       69       7.4       .99  
Maturing after ten years
    398       400       10.3       2.22         18       11       19.9       .95  
                                                                   
Total
  $ 1,065     $ 1,081       6.9       5.00 %     $ 340     $ 311       3.8       .88 %
                                                                   
Obligations of State and Political Subdivisions (b)
                                                                 
Maturing in one year or less
  $ 128     $ 129       .3       1.27 %     $ 2     $ 1       .4       7.88 %
Maturing after one year through five years
    779       784       4.4       6.75         5       6       3.7       7.97  
Maturing after five years through ten years
    4,412       4,409       6.4       6.77         8       9       6.5       6.85  
Maturing after ten years
    1,542       1,462       21.5       6.91         15       14       16.6       5.54  
                                                                   
Total
  $ 6,861     $ 6,784       9.4       6.70 %     $ 30     $ 30       10.9       6.43 %
                                                                   
Other Debt Securities
                                                                 
Maturing in one year or less
  $ 6     $ 6       .4       .89 %     $ 2     $ 2       .3       .84 %
Maturing after one year through five years
    67       54       1.9       6.36         16       12       3.0       1.17  
Maturing after five years through ten years
    31       28       7.3       6.33         88       71       7.6       1.41  
Maturing after ten years
    1,402       1,129       32.1       4.36         33       18       10.3       1.11  
                                                                   
Total
  $ 1,506     $ 1,217       30.1       4.48 %     $ 139     $ 103       7.6       1.31 %
                                                                   
Other Investments
  $ 539     $ 594       13.3       3.50 %     $     $             %
                                                                   
Total investment securities (c)
  $ 47,551     $ 47,777       5.5       3.78 %     $ 590     $ 519       5.9       1.38 %
                                                                   
(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) The weighted-average maturity of the available-for-sale investment securities was 7.1 years at December 31, 2009, with a corresponding weighted-average yield of 4.00 percent. The weighted-average maturity of the held-to-maturity investment securities was 8.4 years at December 31, 2009, with a corresponding weighted-average yield of 5.10 percent.
(d) 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.
 
                                   
    June 30, 2010       December 31, 2009  
    Amortized
    Percent
      Amortized
    Percent
 
(Dollars in Millions)   Cost     of Total       Cost     of Total  
U.S. Treasury and agencies
  $ 2,596       5.4 %     $ 3,415       7.5 %
Mortgage-backed securities
    35,065       72.9         32,289       71.1  
Asset-backed securities
    1,405       2.9         559       1.2  
Obligations of state and political subdivisions
    6,891       14.3         6,854       15.1  
Other debt securities and investments
    2,184       4.5         2,286       5.1  
                                   
Total investment securities
  $ 48,141       100.0 %     $ 45,403       100.0 %
                                   

 
 
 
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Borrowings The Company utilizes both short-term and long-term borrowings to fund growth of assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $33.8 billion at June 30, 2010, compared with $31.3 billion at December 31, 2009. The $2.5 billion (7.9 percent) increase in short-term borrowings reflected wholesale funding associated with the Company’s asset growth and asset/liability management activities.
Long-term debt was $29.1 billion at June 30, 2010, compared with $32.6 billion at December 31, 2009, reflecting a $2.6 billion net decrease in Federal Home Loan Bank advances, $4.0 billion of medium-term note maturities and repayments and the extinguishment of $.6 billion of junior subordinated debentures in connection with the ITS exchange, partially offset by $2.3 billion of medium-term note and subordinated debt issuances and the consolidation of $1.7 billion of long-term debt related to certain VIEs at June 30, 2010. 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 risk, processing errors, technology, breaches of internal controls and business continuation and disaster recovery risk. 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 and derivatives that are accounted for on a mark-to-market 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 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. 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, 2009, 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 commercial and retail lending products. The Company’s retail lending business utilizes several distinct business processes and channels to originate retail 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.
 
 
 
 
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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 June 30, 2010 (excluding covered loans):
 
                                   
Residential mortgages
    Interest
                Percent
 
(Dollars in Millions)     Only     Amortizing     Total     of Total  
Consumer Finance
                                 
Less than or equal to 80%
    $ 1,304     $ 3,967     $ 5,271       49.9 %
Over 80% through 90%
      556       1,911       2,467       23.4  
Over 90% through 100%
      519       2,154       2,673       25.3  
Over 100%
            149       149       1.4  
                                   
Total
    $ 2,379     $ 8,181     $ 10,560       100.0 %
Other Retail
                                 
Less than or equal to 80%
    $ 1,986     $ 13,335     $ 15,321       91.8 %
Over 80% through 90%
      65       590       655       3.9  
Over 90% through 100%
      85       631       716       4.3  
Over 100%
                         
                                   
Total
    $ 2,136     $ 14,556     $ 16,692       100.0 %
Total Company
                                 
Less than or equal to 80%
    $ 3,290     $ 17,302     $ 20,592       75.6 %
Over 80% through 90%
      621       2,501       3,122       11.5  
Over 90% through 100%
      604       2,785       3,389       12.4  
Over 100%
            149       149       .5  
                                   
Total
    $ 4,515     $ 22,737     $ 27,252       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%
    $ 911     $ 206     $ 1,117       45.5 %
Over 80% through 90%
      415       163       578       23.6  
Over 90% through 100%
      348       274       622       25.4  
Over 100%
      56       80       136       5.5  
                                   
Total
    $ 1,730     $ 723     $ 2,453       100.0 %
Other Retail
                                 
Less than or equal to 80%
    $ 11,769     $ 1,428     $ 13,197       78.2 %
Over 80% through 90%
      1,985       499       2,484       14.7  
Over 90% through 100%
      709       408       1,117       6.6  
Over 100%
      51       24       75       .5  
                                   
Total
    $ 14,514     $ 2,359     $ 16,873       100.0 %
Total Company
                                 
Less than or equal to 80%
    $ 12,680     $ 1,634     $ 14,314       74.1 %
Over 80% through 90%
      2,400       662       3,062       15.8  
Over 90% through 100%
      1,057       682       1,739       9.0  
Over 100%
      107       104       211       1.1  
                                   
Total
    $ 16,244     $ 3,082     $ 19,326       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 June 30, 2010, approximately $2.3 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 $2.5 billion at December 31, 2009.
 
The following table provides further information on the loan-to-values of residential mortgages specifically for the consumer finance division at June 30, 2010:
 
                                   
      Interest
                Percent of
 
(Dollars in Millions)     Only     Amortizing     Total     Division  
Sub-Prime Borrowers
                                 
Less than or equal to 80%
    $ 6     $ 1,012     $ 1,018       9.7 %
Over 80% through 90%
      3       529       532       5.0  
Over 90% through 100%
      14       697       711       6.7  
Over 100%
            60       60       .6  
                                   
Total
    $ 23     $ 2,298     $ 2,321       22.0 %
Other Borrowers
                                 
Less than or equal to 80%
    $ 1,298     $ 2,955     $ 4,253       40.3 %
Over 80% through 90%
      553       1,382       1,935       18.3  
Over 90% through 100%
      505       1,457       1,962       18.6  
Over 100%
            89       89       .8  
                                   
Total
    $ 2,356     $ 5,883     $ 8,239       78.0 %
                                   
Total Consumer Finance
    $ 2,379     $ 8,181     $ 10,560       100.0 %
                                   
In addition to residential mortgages, at June 30, 2010, the consumer finance division had $.6 billion of home equity and second mortgage loans to customers that may be defined as sub-prime borrowers, unchanged from December 31, 2009.
 
The following table provides further information on the loan-to-values of home equity and second mortgages specifically for the consumer finance division at June 30, 2010:
 
                                   
                        Percent
 
(Dollars in Millions)     Lines     Loans     Total     of Total  
Sub-Prime Borrowers
                                 
Less than or equal to 80%
    $ 38     $ 121     $ 159       6.5 %
Over 80% through 90%
      43       98       141       5.7  
Over 90% through 100%
      6       167       173       7.1  
Over 100%
      36       62       98       4.0  
                                   
Total
    $ 123     $ 448     $ 571       23.3 %
Other Borrowers
                                 
Less than or equal to 80%
    $ 873     $ 85     $ 958       39.1 %
Over 80% through 90%
      372       65       437       17.8  
Over 90% through 100%
      342       107       449       18.3  
Over 100%
      20       18       38       1.5  
                                   
Total
    $ 1,607     $ 275     $ 1,882       76.7 %
                                   
Total Consumer Finance
    $ 1,730     $ 723     $ 2,453       100.0 %
                                   
The total amount of residential mortgage, home equity and second mortgage loans, other than covered loans, to customers that may be defined as sub-prime borrowers represented only 1.0 percent of total assets at June 30, 2010, compared with 1.1 percent at December 31, 2009. Covered loans include $1.8 billion in loans with negative-amortization payment options at June 30, 2010, compared with $2.2 billion at December 31, 2009. Other than covered loans, the Company does not have any residential mortgages with payment schedules that would cause balances to increase over time.
 
 
 
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Table 5    Delinquent Loan Ratios as a Percent of Ending Loan Balances
 
                 
    June 30,
    December 31,
 
90 days or more past due excluding nonperforming loans   2010     2009  
Commercial
               
Commercial
    .24 %     .25 %
Lease financing
    .03        
                 
Total commercial
    .21       .22  
                 
Commercial Real Estate
               
Commercial mortgages
    .11        
Construction and development
    .04       .07  
                 
Total commercial real estate
    .09       .02  
Residential Mortgages
    1.85       2.80  
Retail
               
Credit card
    2.38       2.59  
Retail leasing
    .05       .11  
Other retail
    .48       .57  
                 
Total retail
    .95       1.07  
                 
Total loans, excluding covered loans
    .72       .88  
                 
Covered Loans
    4.91       3.59  
                 
Total loans
    1.16 %     1.19 %
                 
 
                 
    June 30,
    December 31,
 
90 days or more past due including nonperforming loans   2010     2009  
Commercial
    1.89 %     2.25 %
Commercial real estate
    4.84       5.22  
Residential mortgages (a)
    4.08       4.59  
Retail (b)
    1.32       1.39  
                 
Total loans, excluding covered loans
    2.61       2.87  
                 
Covered loans
    11.72       9.76  
                 
Total loans
    3.56 %     3.64 %
                 
(a) Delinquent loan ratios exclude loans 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. Including the guaranteed amounts, the ratio of residential mortgages 90 days or more past due including nonperforming loans was 12.67 percent at June 30, 2010, and 12.86 percent at December 31, 2009.
(b) Delinquent loan ratios exclude student loans that are guaranteed by the federal government. Including the guaranteed amounts, the ratio of retail loans 90 days or more past due including nonperforming loans was 1.53 percent at June 30, 2010, and 1.57 percent at December 31, 2009.
 
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 totaled $2.2 billion ($1.2 billion excluding covered loans) at June 30, 2010, compared with $2.3 billion ($1.5 billion excluding covered loans) at December 31, 2009. The $286 million decrease, excluding covered loans, reflected a moderation in the level of stress in economic conditions in the first six months of 2010. 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 1.16 percent (.72 percent excluding covered loans) at June 30, 2010, compared with 1.19 percent (.88 percent excluding covered loans) at December 31, 2009.
 
 
 
 
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The following table provides summary delinquency information for residential mortgages and retail loans, excluding covered loans:
 
                                   
            As a Percent of Ending
 
    Amount       Loan Balances  
    June 30,
    December 31,
      June 30,
    December 31,
 
(Dollars in Millions)   2010     2009       2010     2009  
Residential mortgages
                                 
30-89 days
  $ 477     $ 615         1.75 %     2.36 %
90 days or more
    504       729         1.85       2.80  
Nonperforming
    607       467         2.23       1.79  
                                   
Total
  $ 1,588     $ 1,811         5.83 %     6.95 %
                                   
Retail
                                 
Credit card
                                 
30-89 days
  $ 311     $ 400         1.86 %     2.38 %
90 days or more
    399       435         2.38       2.59  
Nonperforming
    175       142         1.04       .84  
                                   
Total
  $ 885     $ 977         5.28 %     5.81 %
Retail leasing
                                 
30-89 days
  $ 20     $ 34         .46 %     .74 %
90 days or more
    2       5         .05       .11  
Nonperforming
                         
                                   
Total
  $ 22     $ 39         .51 %     .85 %
Home equity and second mortgages
                                 
30-89 days
  $ 172     $ 181         .89 %     .93 %
90 days or more
    131       152         .68       .78  
Nonperforming
    31       32         .16       .17  
                                   
Total
  $ 334     $ 365         1.73 %     1.88 %
Other retail
                                 
30-89 days
  $ 198     $ 256         .85 %     1.10 %
90 days or more
    73       92         .32       .40  
Nonperforming
    31       30         .13       .13  
                                   
Total
  $ 302     $ 378         1.30 %     1.63 %
                                   
 
The following table provides information on delinquent and nonperforming loans, excluding covered loans, as a percent of ending loan balances, by channel:
 
                                   
    Consumer Finance (a)       Other Retail  
    June 30,
    December 31,
      June 30,
    December 31,
 
    2010     2009       2010     2009  
Residential mortgages
                                 
30-89 days
    2.63 %     3.99 %       1.19 %     1.30 %
90 days or more
    2.48       4.00         1.45       2.02  
Nonperforming
    3.50       3.04         1.42       .98  
                                   
Total
    8.61 %     11.03 %       4.06 %     4.30 %
                                   
Retail
                                 
Credit card
                                 
30-89 days
    %     %       1.86 %     2.38 %
90 days or more
                  2.38       2.59  
Nonperforming
                  1.04       .84  
                                   
Total
    %     %       5.28 %     5.81 %
Retail leasing
                                 
30-89 days
    %     %       .46 %     .74 %
90 days or more
                  .05       .11  
Nonperforming
                         
                                   
Total
    %     %       .51 %     .85 %
Home equity and second mortgages
                                 
30-89 days
    2.12 %     2.54 %       .71 %     .70 %
90 days or more
    1.55       2.02         .55       .60  
Nonperforming
    .16       .20         .16       .16  
                                   
Total
    3.83 %     4.76 %       1.42 %     1.46 %
Other retail
                                 
30-89 days
    3.93 %     5.17 %       .77 %     1.00 %
90 days or more
    .65       1.17         .30       .37  
Nonperforming
          .16         .14       .13  
                                   
Total
    4.58 %     6.50 %       1.21 %     1.50 %
                                   
(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.
 
 
 
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Within the consumer finance division at June 30, 2010, approximately $425 million and $73 million of these delinquent and nonperforming residential mortgages and other retail loans, respectively, were with customers that may be defined as sub-prime borrowers, compared with $557 million and $98 million, respectively, at December 31, 2009.
 
The following table provides summary delinquency information for covered loans:
 
                                   
            As a Percent of Ending
 
    Amount       Loan Balances  
    June 30,
    December 31,
      June 30,
    December 31,
 
(Dollars in Millions)   2010     2009       2010     2009  
30-89 days
  $ 998     $ 1,195         4.99 %     5.46 %
90 days or more
    982       784         4.91       3.59  
Nonperforming
    1,360       1,350         6.81       6.18  
                                   
Total
  $ 3,340     $ 3,329         16.71 %     15.23 %
                                   
 
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 troubled debt restructurings (“TDRs”) unless the modification is short-term, or results in only an insignificant delay or shortfall in the payments to be received. TDRs accrue interest as long as 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.
 
Short-Term Modifications The Company makes short-term modifications to assist borrowers experiencing temporary hardships. Consumer programs include short-term interest rate reductions (three months or less for residential mortgages and twelve months or less for credit cards), deferrals of up to three past due payments, and the ability to return to current status if the borrower makes required payments during the short-term modification period. At June 30, 2010, loans modified under these programs represented less than 1.0 percent of total residential mortgage loan balances and less than 2.5 percent of credit card receivable balances, respectively. Because these changes have an insignificant impact on the economic return on the loan, the Company does not consider loans modified under these hardship programs to be TDRs. The Company determines applicable allowances for loan losses for these loans in a manner consistent with other homogeneous loan portfolios.
The Company may also modify commercial loans on a short-term basis, with the most common modification being an extension of the maturity date of twelve 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 ultimately pay all contractual amounts owed. These extended loans represented approximately 1.1 percent of total commercial and commercial real estate loan balances at June 30, 2010. Because interest is charged during the extension period (at the original contractual rate or, in many cases, a higher rate), the extension has an insignificant impact on the economic return on the loan. Therefore, the Company does not consider such extensions to be TDRs. The Company determines the applicable allowance for loan loss on these loans in a manner consistent with other commercial loans.
 
Troubled Debt Restructurings 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 consumer finance division has a mortgage loan restructuring program where certain qualifying borrowers facing an interest rate reset who are current in their repayment status, are allowed to retain the lower of their existing interest rate or the market interest rate as of their interest reset date. The Company also participates in the U.S. Department of the Treasury Home Affordable Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to refinance into 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. Both the consumer finance division modification program and the HAMP program require the customer to complete a trial period, where the loan modification is contingent on the customer satisfactorily completing the trial period and the loan documents are not modified until that time. The Company reports loans that are modified following the satisfactory completion of the trial period as TDRs. Loans in the pre-modification trial phase represented less than 1.0 percent of residential mortgage loan balances at June 30, 2010.
In addition, the Company has also modified certain mortgage loans according to provisions in FDIC-assisted transaction loss sharing agreements. Losses associated with modifications on these loans, including the
 
 
 
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economic impact of interest rate reductions, are generally eligible for reimbursement under the loss sharing agreements.
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.
 
The following table provides a summary of TDRs by loan type, including the delinquency status for TDRs that continue to accrue interest and TDRs included in nonperforming assets (excluding covered loans):
 
                                         
          As a Percent of Performing TDRs              
                         
June 30, 2010
  Performing
    30-89 Days
    90 Days or more
    Nonperforming
    Total
 
(Dollars in Millions)   TDRs     Past Due     Past Due     TDRs     TDRs  
Commercial
  $ 51       8.9 %     5.4 %   $ 77 (b)   $ 128  
Commercial real estate
    69                   104 (b)     173  
Residential mortgages(a)
    1,672       6.2       6.3       157       1,829  
Credit card
    234       12.5       10.3       175 (c)     409  
Other retail
    86       9.6       7.0       22       108  
                                         
Total
  $ 2,112       6.9 %     6.6 %   $ 535     $ 2,647  
                                         
(a) Excludes loans purchased from GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, and loans in the trial period under HAMP or the Company’s program where a legal modification of the loan is contingent on the customer successfully completing the trial modification period.
(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) and, for commercial, small business credit cards with a modified rate equal to 0%.
(c) Represents consumer credit cards with a modified rate equal to 0%.
 
The following table provides a summary of TDRs, excluding covered loans, that are performing in accordance with the modified terms, and therefore continue to accrue interest:
 
                                   
            As a Percent of Ending
 
    Amount       Loan Balances  
    June 30,
    December 31,
      June 30,
    December 31,
 
(Dollars in Millions)   2010     2009       2010     2009  
Commercial
  $ 51     $ 35         .11 %     .07 %
Commercial real estate
    69       110         .20       .32  
Residential mortgages (a)
    1,672       1,354         6.14       5.20  
Credit card
    234       221         1.40       1.31  
Other retail
    86       74         .18       .16  
                                   
Total
  $ 2,112     $ 1,794         1.10 %     .92 %
                                   
(a) Excludes loans purchased from GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, and loans in the trial period under HAMP or the Company’s program where a legal modification of the loan is contingent on the customer successfully completing the trial modification period.
TDRs, excluding covered loans, that are performing in accordance with modified terms were $318 million higher at June 30, 2010, than at December 31, 2009, primarily reflecting loan modifications for certain residential mortgage and consumer credit card customers in light of current economic conditions. The Company continues to work with customers to modify loans for borrowers who are having financial difficulties, but expects increases in TDRs to moderate.
 
Nonperforming Assets  The level of nonperforming assets represents another indicator of the potential for future credit losses. At June 30, 2010, total nonperforming assets were $5.9 billion, unchanged from December 31, 2009. Excluding covered assets, nonperforming assets were $3.7 billion at June 30, 2010, compared with $3.9 billion at December 31, 2009. The $170 million (4.4 percent) decrease in nonperforming assets, excluding covered assets, was principally in the construction, land development and financial institution portfolios, as the Company continued to reduce the exposure to these assets. Nonperforming covered assets at June 30, 2010 were $2.2 billion, compared with $2.0 billion at December 31, 2009. These assets are covered by loss sharing agreements with the FDIC that substantially reduce the risk of credit losses to the Company. In addition, the majority of the nonperforming covered assets were considered credit-impaired at acquisition and recorded at their estimated fair value at acquisition. The ratio of total nonperforming assets to total loans and other real estate was 3.05 percent (2.17 percent excluding covered assets) at June 30, 2010, compared with 3.02 percent (2.25 percent excluding covered assets) at December 31, 2009.
The Company expects nonperforming assets, excluding covered assets, to trend lower in the third quarter of 2010.
 
 
 
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Table 6    Nonperforming Assets (a)
 
                 
    June 30,
    December 31,
 
(Dollars in Millions)   2010     2009  
Commercial
               
Commercial
  $ 669     $ 866  
Lease financing
    115       125  
                 
Total commercial
    784       991  
Commercial Real Estate
               
Commercial mortgages
    601       581  
Construction and development
    1,013       1,192  
                 
Total commercial real estate
    1,614       1,773  
Residential Mortgages
    607       467  
Retail
               
Credit card
    175       142  
Retail leasing
           
Other retail
    62       62  
                 
Total retail
    237       204  
                 
Total nonperforming loans, excluding covered loans
    3,242       3,435  
Covered Loans
    1,360       1,350  
                 
Total nonperforming loans
    4,602       4,785  
Other Real Estate (b)(c)
    469       437  
Covered Other Real Estate (c)
    791       653  
Other Assets
    23       32  
                 
Total nonperforming assets
  $ 5,885     $ 5,907  
                 
Total nonperforming assets, excluding covered assets
  $ 3,734     $ 3,904  
                 
Excluding covered assets:
               
Accruing loans 90 days or more past due
  $ 1,239     $ 1,525  
Nonperforming loans to total loans
    1.89 %     1.99 %
Nonperforming assets to total loans plus other real estate (b)
    2.17 %     2.25 %
Including covered assets:
               
Accruing loans 90 days or more past due
  $ 2,221     $ 2,309  
Nonperforming loans to total loans
    2.40 %     2.46 %
Nonperforming assets to total loans plus other real estate (b)
    3.05 %     3.02 %
                 
Changes in Nonperforming Assets
                         
    Commercial and
    Retail and
       
    Commercial
    Residential
       
(Dollars in Millions)   Real Estate     Mortgages (e)     Total  
Balance December 31, 2009
  $ 4,727     $ 1,180     $ 5,907  
Additions to nonperforming assets
                       
New nonaccrual loans and foreclosed properties
    2,201       679       2,880  
Advances on loans
    118             118  
                         
Total additions
    2,319       679       2,998  
Reductions in nonperforming assets
                       
Paydowns, payoffs
    (1,043 )     (108 )     (1,151 )
Net sales
    (259 )     (232 )     (491 )
Return to performing status
    (335 )     (14 )     (349 )
Charge-offs (d)
    (902 )     (127 )     (1,029 )
                         
Total reductions
    (2,539 )     (481 )     (3,020 )
                         
Net additions to (reductions in) nonperforming assets
    (220 )     198       (22 )
                         
Balance June 30, 2010
  $ 4,507     $ 1,378     $ 5,885  
                         
(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Excludes $475 million and $359 million at June 30, 2010, and December 31, 2009, respectively, of foreclosed GNMA loans which continue to accrue interest.
(c) Includes equity investments whose only asset is other real estate owned.
(d) Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.
(e) Residential mortgage information excludes changes related to residential mortgages serviced by others.

Other real estate, excluding covered assets, was $469 million at June 30, 2010, compared with $437 million at December 31, 2009, and was primarily related to foreclosed properties that previously secured loan balances. The increase in other real estate assets reflected continuing stress in residential construction and related supplier industries.
 
 
 
 
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Table 7    Net Charge-offs as a Percent of Average Loans Outstanding
 
                                   
    Three Months Ended
    Six Months Ended
    June 30,     June 30,
    2010   2009     2010   2009
Commercial
                                 
Commercial
    2.23 %     1.50 %       2.32 %     1.21 %
Lease financing
    1.41       3.29         1.78       3.29  
                                   
Total commercial
    2.12       1.72         2.25       1.46  
Commercial Real Estate
                                 
Commercial mortgages
    1.11       .47         .92       .35  
Construction and development
    7.31       3.79         7.06       4.30  
                                   
Total commercial real estate
    2.67       1.44         2.47       1.51  
Residential Mortgages
    2.06       1.94         2.14       1.74  
Retail
                                 
Credit card (a)
    7.79       7.36         7.76       6.86  
Retail leasing
    .37       .80         .41       .91  
Home equity and second mortgages
    1.64       1.72         1.76       1.60  
Other retail
    1.70       1.80         1.81       1.77  
                                   
Total retail
    3.16       2.99         3.23       2.81  
                                   
Total loans, excluding covered loans
    2.61       2.15         2.64       1.98  
Covered Loans
    .10       .07         .08       .15  
                                   
Total loans
    2.34 %     2.03 %       2.36 %     1.87 %
                                   
(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 8.53 percent and 8.47 percent for the three months and six months ended June 30, 2010, respectively.

The following table provides an analysis of 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  
    June 30,
    December 31,
      June 30,
    December 31,
 
(Dollars in Millions)   2010     2009       2010     2009  
Residential
                                 
Minnesota
  $ 26     $ 27         .47 %     .49 %
California
    17       15         .29       .27  
Arizona
    13       6         1.23       .58  
Illinois
    10       8         .36       .29  
Missouri
    8       7         .30       .26  
All other states
    134       110         .47       .39  
                                   
Total residential
    208       173         .45       .38  
Commercial
                                 
Nevada
    48       73         3.52       3.57  
Oregon
    33       28         .98       .81  
California
    25       43         .18       .30  
Texas
    21       3         .52       .07  
Virginia
    19       8         3.97       1.21  
All other states
    115       109         .20       .15  
                                   
Total commercial
    261       264         .32       .32  
                                   
Total OREO
  $ 469     $ 437         .27 %     .25 %
                                   
 
Analysis of Loan Net Charge-Offs Total net charge-offs were $1.1 billion and $2.2 billion for the second quarter and first six months of 2010, respectively, compared with net charge-offs of $929 million and $1.7 billion for the same periods of 2009. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the second quarter and first six months of 2010 was 2.34 percent and 2.36 percent, respectively, compared with 2.03 percent and 1.87 percent, for the same periods of 2009. The year-over-year increases in total net charge-offs were driven by the weakening economy and rising unemployment throughout most of 2009 affecting the residential housing markets, including homebuilding and related industries, commercial real estate properties and credit costs associated with credit card and other consumer and commercial loans. The Company expects the level of net charge-offs to trend lower in the third quarter of 2010.
Commercial and commercial real estate loan net charge-offs for the second quarter of 2010 were $472 million (2.35 percent of average loans outstanding on an annualized basis), compared with $353 million (1.61 percent of average loans outstanding on an annualized basis) for the second quarter of 2009. Commercial and commercial real estate loan net charge-offs for the first six months of 2010 were $941 million (2.34 percent of average loans outstanding on an annualized basis), compared with $650 million (1.48 percent of average loans outstanding on an annualized basis) for the first six months of 2009. The year-over-year increases in net charge-offs reflected stress in commercial real estate and residential housing, especially homebuilding and related industry sectors, along with the impact of current uncertain economic conditions on the Company’s commercial loan portfolios.
Residential mortgage loan net charge-offs for the second quarter of 2010 were $138 million (2.06 percent of average loans outstanding on an annualized basis), compared with $116 million (1.94 percent of average loans outstanding on an annualized basis) for the second quarter of 2009. Residential mortgage loan net charge-offs for the first six months of 2010 were $283 million (2.14 percent of average loans outstanding on an annualized basis), compared with $207 million
 
 
 
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(1.74 percent of average loans outstanding on an annualized basis) for the first six months of 2009. Retail loan net charge-offs for the second quarter of 2010 were $499 million (3.16 percent of average loans outstanding on an annualized basis), compared with $458 million (2.99 percent of average loans outstanding on an annualized basis) for the second quarter of 2009. Retail loan net charge-offs for the first six months of 2010 were $1.0 billion (3.23 percent of average loans outstanding on an annualized basis), compared with $852 million (2.81 percent of average loans outstanding on an annualized basis) for the first six months of 2009. The retail loan net charge-offs percentage was impacted by credit card portfolio purchases recorded at fair value beginning in the second quarter of 2009. The year-over-year increases in residential mortgage and retail loan net charge-offs reflected the continuing adverse impact of economic conditions on consumers, as rising unemployment levels increased losses in the prime-based residential mortgage and credit card portfolios.
 
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 retail loans:
 
                                                                               
    Three Months Ended June 30,       Six Months Ended June 30,  
            Percent of
              Percent of
 
    Average Loans       Average Loans       Average Loans       Average Loans  
       
(Dollars in Millions)   2010       2009       2010       2009       2010       2009       2010       2009  
Consumer Finance (a)
                                                                             
Residential mortgages
  $ 10,487       $ 9,751         3.71 %       3.87 %     $ 10,415       $ 9,824         3.93 %       3.43 %
Home equity and second mortgages
    2,462         2,457         5.38         7.02         2,468         2,437         5.80         6.62  
Other retail
    610         565         1.97         5.68         606         546         3.33         6.65  
Other Retail
                                                                             
Residential mortgages
  $ 16,334       $ 14,213         1.01 %       .62 %     $ 16,201       $ 14,116         1.00 %       .57 %
Home equity and second mortgages
    16,870         16,857         1.09         .95         16,899         16,826         1.17         .87  
Other retail
    22,747         22,188         1.69         1.70         22,744         22,323         1.77         1.65  
Total Company
                                                                             
Residential mortgages
  $ 26,821       $ 23,964         2.06 %       1.94 %     $ 26,616       $ 23,940         2.14 %       1.74 %
Home equity and second mortgages
    19,332         19,314         1.64         1.72         19,367         19,263         1.76         1.60  
Other retail
    23,357         22,753         1.70         1.80         23,350         22,869         1.81         1.77  
                                                                               
(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.
 
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 June 30,       Six Months Ended June 30,  
            Percent of
              Percent of
 
    Average Loans       Average Loans       Average Loans       Average Loans  
       
(Dollars in Millions)   2010       2009       2010       2009       2010       2009       2010       2009  
Residential mortgages
                                                                             
Sub-prime borrowers
  $ 2,347       $ 2,721         6.15 %       6.34 %     $ 2,390       $ 2,779         6.41 %       5.66 %
Other borrowers
    8,140         7,030         3.01         2.91         8,025         7,045         3.19         2.55  
                                                                               
Total
  $ 10,487       $ 9,751         3.71 %       3.87 %     $ 10,415       $ 9,824         3.93 %       3.43 %
Home equity and second mortgages
                                                                             
Sub-prime borrowers
  $ 581       $ 687         10.36 %       12.84 %     $ 595       $ 700         10.85 %       11.81 %
Other borrowers
    1,881         1,770         3.84         4.76         1,873         1,737         4.20         4.53  
                                                                               
Total
  $ 2,462       $ 2,457         5.38 %       7.02 %     $ 2,468       $ 2,437         5.80 %       6.62 %
                                                                               
 
Analysis and Determination of the Allowance for Credit Losses The allowance for loan 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. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses. Several factors were taken into consideration in evaluating the allowance for credit losses at June 30, 2010, including the risk profile of the portfolios, loan net charge-offs during the period, the level of nonperforming assets, accruing loans 90 days or more past due, delinquency ratios and changes in TDR loan balances. Management also considered the uncertainty related to certain industry sectors, and the extent of credit exposure to specific borrowers within the portfolio. In addition, concentration risks associated with commercial real estate and the mix of loans, including credit cards, loans originated through the consumer finance division and residential mortgage balances, and their relative credit risks, were evaluated. Finally, the Company considered current economic conditions that might impact the portfolio.
 
 
 
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Table 8    Summary of Allowance for Credit Losses
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
(Dollars in Millions)   2010     2009     2010     2009  
Balance at beginning of period
  $ 5,439     $ 4,105     $ 5,264     $ 3,639  
Charge-offs
                               
Commercial
                               
Commercial
    232       183       483       300  
Lease financing
    35       66       80       129  
                                 
Total commercial
    267       249       563       429  
Commercial real estate
                               
Commercial mortgages
    71       28       118       42  
Construction and development
    159       94       310       211  
                                 
Total commercial real estate
    230       122       428       253  
Residential mortgages
    141       116       287       209  
Retail
                               
Credit card
    333       279       661       504  
Retail leasing
    7       13       16       28  
Home equity and second mortgages
    83       85       177       157  
Other retail
    119       126       251       244  
                                 
Total retail
    542       503       1,105       933  
                                 
Covered loans (a)
    6       2       9       8  
                                 
Total charge-offs
    1,186       992       2,392       1,832  
Recoveries
                               
Commercial
                               
Commercial
    9       6       17       11  
Lease financing
    13       11       24       19  
                                 
Total commercial
    22       17       41       30  
Commercial real estate
                               
Commercial mortgages
                1       1  
Construction and development
    3       1       8       1  
                                 
Total commercial real estate
    3       1       9       2  
Residential mortgages
    3             4       2  
Retail
                               
Credit card
    16       16       32       29  
Retail leasing
    3       3       7       5  
Home equity and second mortgages
    4       2       8       4  
Other retail
    20       24       41       43  
                                 
Total retail
    43       45       88       81  
                                 
Covered loans (a)
    1             1        
                                 
Total recoveries
    72       63       143       115  
Net Charge-offs
                               
Commercial
                               
Commercial
    223       177       466       289  
Lease financing
    22       55       56       110  
                                 
Total commercial
    245       232       522       399  
Commercial real estate
                               
Commercial mortgages
    71       28       117       41  
Construction and development
    156       93       302       210  
                                 
Total commercial real estate
    227       121       419       251  
Residential mortgages
    138       116       283       207  
Retail
                               
Credit card
    317       263       629       475  
Retail leasing
    4       10       9       23  
Home equity and second mortgages
    79       83       169       153  
Other retail
    99       102       210       201  
                                 
Total retail
    499       458       1,017       852  
                                 
Covered loans (a)
    5       2       8       8  
                                 
Total net charge-offs
    1,114       929       2,249       1,717  
                                 
Provision for credit losses
    1,139       1,395       2,449       2,713  
Net change for credit losses to be reimbursed by the FDIC
    72             72        
Acquisitions and other changes
                      (64 )
                                 
Balance at end of period
  $ 5,536     $ 4,571     $ 5,536     $ 4,571  
                                 
Components
                               
Allowance for loan losses, excluding losses to be reimbursed by the FDIC
  $ 5,248     $ 4,377                  
Allowance for credit losses to be reimbursed by the FDIC
    72                        
Liability for unfunded credit commitments
    216       194                  
                                 
Total allowance for credit losses
  $ 5,536     $ 4,571                  
                                 
Allowance for credit losses as a percentage of
                               
Period-end loans, excluding covered loans
    3.18 %     2.66 %                
Nonperforming loans, excluding covered loans
    168       152                  
Nonperforming assets, excluding covered assets
    146       137                  
Annualized net charge-offs, excluding covered loans
    122       123                  
Period-end loans
    2.89       2.51                  
Nonperforming loans
    120       135                  
Nonperforming assets
    94       114                  
Annualized net charge-offs
    124       123                  
                                 
Note: At June 30, 2010, $2.4 billion of the total allowance for credit losses related to incurred losses on retail loans.
(a) Relates to covered loan charge-offs and recoveries not reimbursable by the FDIC.
 

 
 
 
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At June 30, 2010, the allowance for credit losses was $5.5 billion (2.89 percent of total loans and 3.18 percent of loans excluding covered loans), compared with an allowance of $5.3 billion (2.70 percent of total loans and 3.04 percent of loans excluding covered loans) at December 31, 2009. During the second quarter of 2010, the Company increased the allowance for credit losses by $72 million to reflect covered loan losses reimbursable by the FDIC. The ratio of the allowance for credit losses to nonperforming loans was 120 percent (168 percent excluding covered loans) at June 30, 2010, compared with 110 percent (153 percent excluding covered loans) at December 31, 2009. The ratio of the allowance for credit losses to annualized loan net charge-offs was 124 percent at June 30, 2010, compared with 136 percent of full year 2009 net charge-offs at December 31, 2009.
 
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 June 30, 2010, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2009. 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, 2009, 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, 2009, 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 following table 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 June 30, 2010, and December 31, 2009, 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, 2009, for further discussion on net interest income simulation analysis.
 
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

Sensitivity of Net Interest Income
 
                                                                   
    June 30, 2010       December 31, 2009  
    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
    *     1.00 %     *     1.65 %       *     .43 %     *     1.00 %
                                                                   
* Given the current level of interest rates, a downward rate scenario cannot be computed.

 
 
 
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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 3.4 percent decrease in the market value of equity at June 30, 2010, compared with a 4.3 percent decrease at December 31, 2009. A 200 bps decrease, where possible given current rates, would have resulted in a 6.7 percent decrease in the market value of equity at June 30, 2010, compared with a 2.8 percent decrease at December 31, 2009. 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, 2009, 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, issued to finance the Company, from fixed-rate payments to floating-rate payments;
•  To convert the cash flows associated with floating-rate debt, issued to finance the Company, 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 accommodate 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. In particular, the Company enters into U.S. Treasury futures, options on U.S. Treasury futures contracts 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 June 30, 2010, the Company had $10.3 billion of forward commitments to sell mortgage loans hedging $4.7 billion of mortgage loans held for sale and $10.6 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 hedge 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 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 11 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 related to its trading activities, which are principally customer-based, supporting their management of foreign currency, interest rate risks 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 amount the Company has at risk of loss to adverse market movements over a specified time horizon. The Company measures VaR at the ninety-ninth percentile using distributions derived from past market data. On average, the Company expects the one day VaR to be exceeded two to three times per year. The Company monitors the effectiveness of its risk program by back-testing the performance of its VaR models, regularly updating the historical data used by the VaR models and stress testing. The
 
 
 
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Table 9    Regulatory Capital Ratios
 
                 
    June 30,
    December 31,
 
(Dollars in Millions)   2010     2009  
Tier 1 capital
  $ 24,021     $ 22,610  
As a percent of risk-weighted assets
    10.1 %     9.6 %
As a percent of adjusted quarterly average assets (leverage ratio)
    8.8 %     8.5 %
Total risk-based capital
  $ 31,890     $ 30,458  
As a percent of risk-weighted assets
    13.4 %     12.9 %
                 

Company’s trading VaR did not exceed $5 million during the first six months of 2010 and $2 million during the first six months of 2009.
 
Liquidity Risk Management The ALCO establishes policies and guidelines, as well as analyzes and manages liquidity, to ensure adequate funds are available to meet normal operating requirements, and unexpected customer demands for funds in a timely and cost-effective manner. Liquidity management is viewed from long-term and short-term perspectives, including various stress scenarios, as well as from an asset and liability perspective. Management monitors liquidity through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk.
Since 2008, the financial markets have been challenging for many financial institutions. As a result of these financial market conditions, many banks experienced liquidity constraints, substantially increased pricing to retain deposits or utilized the Federal Reserve System discount window to secure adequate funding. The Company’s profitable operations, sound credit quality and strong capital position have enabled it to develop a large and reliable base of core deposit funding within its market areas and in domestic and global capital markets. This has allowed the Company to maintain a strong liquidity position, as depositors and investors in the wholesale funding markets seek stable financial institutions. 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, 2009, for further discussion on liquidity risk management.
At June 30, 2010, parent company long-term debt outstanding was $11.9 billion, compared with $14.5 billion at December 31, 2009. The $2.6 billion decrease was primarily due to repayments and maturities of $3.9 billion of medium-term notes and the extinguishment of $.6 billion of junior subordinated debentures in connection with the ITS exchange, partially offset by $1.8 billion of medium-term note issuances. As of June 30, 2010, total parent company debt scheduled to mature in the remainder of 2010 was $.9 billion.
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 $4.1 billion at June 30, 2010.
 
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 June 30, 2010, and December 31, 2009. All regulatory ratios exceeded regulatory “well-capitalized” requirements. Total U.S. Bancorp shareholders’ equity was $28.2 billion at June 30, 2010, compared with $26.0 billion at December 31, 2009. The increase was primarily the result of corporate earnings, the issuance of $.4 billion of perpetual preferred stock in connection with the ITS exchange, and changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income, partially offset by dividends.
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 and tangible common equity, as a percent of risk-weighted assets, were 7.4 percent and 6.9 percent, respectively, at June 30, 2010, compared with 6.8 percent and 6.1 percent, respectively, at December 31, 2009. The Company’s tangible common equity divided by tangible assets was 6.0 percent at June 30, 2010, compared with 5.3 percent at December 31, 2009. Refer to “Non-Regulatory Capital Ratios” for further information regarding the calculation of these measures.
On December 9, 2008, the Company announced its Board of Directors had approved an authorization to repurchase 20 million shares of common stock through December 31, 2010. All shares repurchased during the second quarter of 2010 were repurchased under this authorization in connection with the administration of
 
 
 
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the Company’s employee benefit plans in the ordinary course of business.
The following table provides a detailed analysis of all shares repurchased during the second quarter of 2010:
 
                         
    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  
April
    26,509     $ 27.55       19,049,008  
May
    3,415       24.16       19,045,593  
June
    1,855       24.21       19,043,738  
                         
Total
    31,779     $ 26.99       19,043,738  
                         
 
LINE OF BUSINESS FINANCIAL REVIEW
 
The Company’s major lines of business are Wholesale Banking, Consumer Banking, Wealth Management & 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, 2009, for further discussion on the business lines’ basis for financial presentation.
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 2010, certain organization and methodology changes were made and, accordingly, 2009 results were restated and presented on a comparable basis.
 
Wholesale Banking Wholesale Banking 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 contributed $82 million of the Company’s net income in the second quarter and $84 million in the first six months of 2010, or increases of $14 million (20.6 percent) and $27 million (47.4 percent), respectively, compared with the same periods of 2009. The increases were primarily driven by higher net revenue, partially offset by higher noninterest expense.
Total net revenue increased $50 million (6.7 percent) in the second quarter and $86 million (5.9 percent) in the first six months of 2010, compared with the same periods of 2009. Net interest income, on a taxable-equivalent basis, increased $5 million (1.0 percent) in the second quarter and decreased $24 million (2.4 percent) in the first six months of 2010, compared with the same periods of 2009. The decrease in the first six months of 2010, compared with the same period of 2009, was driven by a reduction in average loans as a result of lower utilization of existing commitments and reduced demand for new loans, as well as the impact of declining rates on the margin benefit from deposits, which were partially offset by improved spreads on loans and higher average deposit balances. Total noninterest income increased $45 million (18.4 percent) in the second quarter and $110 million (24.2 percent) in the first six months of 2010, compared with the same periods of 2009, due to strong growth in commercial products revenue, including standby letters of credit, syndication, commercial loan and capital markets fees and a favorable variance in income from equity investments relative to the prior year.
Total noninterest expense increased $38 million (13.4 percent) in the second quarter and $53 million (9.6 percent) in the first six months of 2010, compared with the same periods of 2009, primarily due to higher compensation and employee benefits expense and increased costs related to OREO. The provision for credit losses decreased $9 million (2.6 percent) in the second quarter and $5 million (.6 percent) in the first six months of 2010, compared with the same periods of 2009. The favorable changes were primarily due to decreases in the reserve allocation, partially offset by higher net charge-offs. Nonperforming assets were $2.2 billion at June 30, 2010, $2.5 billion at March 31, 2010, and $2.2 billion at June 30, 2009. Nonperforming assets as a percentage of period-end loans were 3.90 percent at June 30, 2010, 4.43 percent at March 31, 2010, and 3.60 percent at June 30, 2009. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.
 
Consumer Banking Consumer Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail and ATM processing. 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 Banking contributed $178 million of the Company’s net income in the second
 
 
 
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quarter and $374 million in the first six months of 2010, or decreases of $33 million (15.6 percent) and $53 million (12.4 percent), respectively, compared with the same periods of 2009.
Within Consumer Banking, the retail banking division contributed $42 million of the total net income in the second quarter and $137 million in the first six months of 2010, or decreases of $9 million (17.6 percent) and $9 million (6.2 percent) over the same periods of 2009. Mortgage banking contributed $136 million of the business line’s net income in the second quarter and $237 million in the first six months of 2010, or decreases of $24 million (15.0 percent) and $44 million (15.7 percent) from the same periods of 2009, reflecting lower mortgage loan production, including lower interest income on average mortgage loans held for sale.
Total net revenue decreased $60 million (3.4 percent) in the second quarter and $55 million (1.6 percent) in the first six months of 2010, compared with the same periods of 2009. Net interest income, on a taxable-equivalent basis, increased $34 million (3.4 percent) in the second quarter and $40 million (2.0 percent) in the first six months of 2010, compared with the same periods of 2009. The year-over-year increases in net interest income were due to increases in deposit balances and loan spreads, partially offset by a decline in the margin benefit of deposits. The year-over-year increases in average deposits primarily reflected increases in savings accounts. Total noninterest income decreased $94 million (12.0 percent) in the second quarter and $95 million (6.6 percent) in the first six months of 2010, compared with the same periods of 2009. The year-over-year decreases in noninterest income were driven by lower mortgage banking revenue, principally due to lower production, and lower deposit service charges due to the impact of Company-initiated revisions to overdraft fee policies and lower overdraft incidences, partially offset by improvement in retail lease residual valuation losses and higher ATM processing servicing fees.
Total noninterest expense increased $84 million (9.0 percent) in the second quarter and $160 million (8.8 percent) in the first six months of 2010, compared with the same periods of 2009. The increases reflected higher compensation and employee benefits expense, higher processing costs and net occupancy and equipment expenses related to business expansion, and higher servicing costs associated with OREO and foreclosures.
The provision for credit losses decreased $93 million (18.1 percent) in the second quarter and $133 million (14.4 percent) in the first six months of 2010, compared with the same periods of 2009, as stress within the residential mortgage, home equity, installment and other consumer loan portfolios moderated. As a percentage of average loans outstanding on an annualized basis, net charge-offs increased to 1.55 percent in the second quarter of 2010, compared with 1.46 percent in the second quarter of 2009. Nonperforming assets were $1.5 billion at June 30, 2010, $1.5 billion at March 31, 2010, and $1.2 billion at June 30, 2009. Nonperforming assets as a percentage of period-end loans were 1.51 percent at June 30, 2010, 1.52 percent at March 31, 2010, and 1.23 percent at June 30, 2009. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.
 
Wealth Management & Securities Services Wealth Management & Securities Services provides trust, private banking, financial advisory, investment management, retail brokerage services, insurance, custody and fund servicing through five businesses: Wealth Management, Corporate Trust, FAF Advisors, Institutional Trust & Custody and Fund Services.
In July 2010, the Company announced a strategic alliance with a third party under which it will receive an ownership interest in the third party in exchange for the long-term asset management business of FAF Advisors, primarily representing the equity and fixed income mutual funds. U.S. Bancorp Asset Management will retain the Company’s money market fund business.
Wealth Management & Securities Services contributed $60 million of the Company’s net income in the second quarter and $113 million in the first six months of 2010, or decreases of $25 million (29.4 percent) and $69 million (37.9 percent), respectively, compared with the same periods of 2009. The decreases were primarily attributable to lower net revenue and higher total noninterest expense.
Total net revenue decreased $10 million (2.7 percent) in the second quarter and $74 million (9.5 percent) in the first six months of 2010, compared with the same periods of 2009. Net interest income, on a taxable-equivalent basis, increased $11 million (15.5 percent) in the second quarter and decreased $13 million (8.0 percent) in the first six months of 2010, compared with the same periods of 2009. The increase in net interest income in the second quarter, compared with the same period of 2009, was primarily due to higher deposit volumes, partially offset by a decline in the related margin benefit. The decrease in net interest income in the first six months of 2010, compared with the same period of 2009, was primarily due to a decline in the margin benefit from deposits, partially offset by higher deposit volumes. Noninterest income decreased $21 million (6.9 percent) in the second quarter and $61 million (9.9 percent) in the first six months of 2010, compared with the same periods of 2009, as low interest rates negatively impacted money market investment fees and lower money market fund balances led to a decline in account-level fees.
 
 
 
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Table 10    Line of Business Financial Performance
 
                                                   
    Wholesale
      Consumer
 
    Banking       Banking  
Three Months Ended June 30
              Percent
                  Percent
 
(Dollars in Millions)   2010     2009     Change       2010     2009     Change  
Condensed Income Statement
                                                 
Net interest income (taxable-equivalent basis)
  $ 503     $ 498       1.0 %     $ 1,028     $ 994       3.4 %
Noninterest income
    290       245       18.4         692       786       (12.0 )
Securities gains (losses), net
                                     
                                                   
Total net revenue
    793       743       6.7         1,720       1,780       (3.4 )
Noninterest expense
    317       277       14.4         1,002       911       10.0  
Other intangibles
    4       6       (33.3 )       17       24       (29.2 )
                                                   
Total noninterest expense
    321       283       13.4         1,019       935       9.0  
                                                   
Income before provision and income taxes
    472       460       2.6         701       845       (17.0 )
Provision for credit losses
    343       352       (2.6 )       420       513       (18.1 )
                                                   
Income before income taxes
    129       108       19.4         281       332       (15.4 )
Income taxes and taxable-equivalent adjustment
    47       39       20.5         102       121       (15.7 )
                                                   
Net income
    82       69       18.8         179       211       (15.2 )
Net (income) loss attributable to noncontrolling interests
          (1 )     *       (1 )           *
                                                   
Net income attributable to U.S. Bancorp
  $ 82     $ 68       20.6       $ 178     $ 211       (15.6 )
                                                   
                                                   
Average Balance Sheet
                                                 
Commercial
  $ 34,002     $ 41,080       (17.2 )%     $ 5,987     $ 6,306       (5.1 )%
Commercial real estate
    21,561       21,499       .3         11,748       11,498       2.2  
Residential mortgages
    77       80       (3.8 )       26,363       23,494       12.2  
Retail
    45       58       (22.4 )       44,322       44,392       (.2 )
                                                   
Total loans, excluding covered loans
    55,685       62,717       (11.2 )       88,420       85,690       3.2  
Covered loans
                        7,494       9,906       (24.3 )
                                                   
Total loans
    55,685       62,717       (11.2 )       95,914       95,596       .3  
Goodwill
    1,475       1,475               3,254       3,108       4.7  
Other intangible assets
    71       93       (23.7 )       1,880       1,570       19.7  
Assets
    61,081       67,528       (9.5 )       108,397       109,212       (.7 )
Noninterest-bearing deposits
    18,159       17,343       4.7         14,604       14,296       2.2  
Interest checking
    10,687       12,369       (13.6 )       22,724       20,868       8.9  
Savings products
    10,036       7,076       41.8         32,073       25,672       24.9  
Time deposits
    10,890       12,630       (13.8 )       19,233       26,576       (27.6 )
                                                   
Total deposits
    49,772       49,418       .7         88,634       87,412       1.4  
Total U.S. Bancorp shareholders’ equity
    5,455       5,003       9.0         8,230       7,349       12.0  
                                                   
 
                                                   
    Wholesale
      Consumer
 
    Banking       Banking  
Six Months Ended June 30
              Percent
                  Percent
 
(Dollars in Millions)   2010     2009     Change       2010     2009     Change  
Condensed Income Statement
                                                 
Net interest income (taxable-equivalent basis)
  $ 985     $ 1,009       (2.4 )%     $ 2,017     $ 1,977       2.0 %
Noninterest income
    564       457       23.4         1,345       1,440       (6.6 )
Securities gains (losses), net
          (3 )     *                    
                                                   
Total net revenue
    1,549       1,463       5.9         3,362       3,417       (1.6 )
Noninterest expense
    597       539       10.8         1,948       1,775       9.7  
Other intangibles
    8       13       (38.5 )       34       47       (27.7 )
                                                   
Total noninterest expense
    605       552       9.6         1,982       1,822       8.8  
                                                   
Income before provision and income taxes
    944       911       3.6         1,380       1,595       (13.5 )
Provision for credit losses
    813       818       (.6 )       791       924       (14.4 )
                                                   
Income before income taxes
    131       93       40.9         589       671       (12.2 )
Income taxes and taxable-equivalent adjustment
    48       36       33.3         214       244       (12.3 )
                                                   
Net income
    83       57       45.6         375       427       (12.2 )
Net (income) loss attributable to noncontrolling interests
    1             *       (1 )           *
                                                   
Net income attributable to U.S. Bancorp
  $ 84     $ 57       47.4       $ 374     $ 427       (12.4 )
                                                   
                                                   
Average Balance Sheet
                                                 
Commercial
  $ 34,604     $ 42,021       (17.7 )%     $ 6,006     $ 6,380       (5.9 )%
Commercial real estate
    21,584       21,352       1.1         11,711       11,542       1.5  
Residential mortgages
    77       84       (8.3 )       26,156       23,461       11.5  
Retail
    45       65       (30.8 )       44,440       44,519       (.2 )
                                                   
Total loans, excluding covered loans
    56,310       63,522       (11.4 )       88,313       85,902       2.8  
Covered loans
                        7,702       9,970       (22.7 )
                                                   
Total loans
    56,310       63,522       (11.4 )       96,015       95,872       .1  
Goodwill
    1,474       1,475       (.1 )       3,252       3,171       2.6  
Other intangible assets
    73       96       (24.0 )       1,896       1,527       24.2  
Assets
    61,419       68,647       (10.5 )       108,326       109,182       (.8 )
Noninterest-bearing deposits
    17,568       16,773       4.7         14,340       14,098       1.7  
Interest checking
    11,247       10,449       7.6         22,438       20,387       10.1  
Savings products
    10,746       7,362       46.0         31,303       24,931       25.6  
Time deposits
    10,991       14,047       (21.8 )       19,645       26,714       (26.5 )
                                                   
Total deposits
    50,552       48,631       4.0         87,726       86,130       1.9  
Total U.S. Bancorp shareholders’ equity
    5,493       4,982       10.3         8,250       7,438       10.9  
                                                   
*  Not meaningful
 
 
 
24
U.S. Bancorp


Table of Contents

 
                                                                                                 
Wealth Management &
    Payment
    Treasury and
    Consolidated
     
Securities Services     Services     Corporate Support     Company      
            Percent
                Percent
                Percent
                Percent
     
2010     2009     Change     2010     2009     Change     2010     2009     Change     2010     2009     Change      
$ 82     $ 71       15.5 %   $ 332     $ 276       20.3 %   $ 464     $ 265       75.1 %   $ 2,409     $ 2,104       14.5 %    
  283       304       (6.9 )     788       723       9.0       78       16       *     2,131       2,074       2.7      
                                      (21 )     (19 )     (10.5 )     (21 )     (19 )     (10.5 )    
                                                                                                 
  365       375       (2.7 )     1,120       999       12.1       521       262       98.9       4,519       4,159       8.7      
  255       218       17.0       415       352       17.9       297       276       7.6       2,286       2,034       12.4      
  13       17       (23.5 )     49       46       6.5       8       2       *     91       95       (4.2 )    
                                                                                                 
  268       235       14.0       464       398       16.6       305       278       9.7       2,377       2,129       11.6      
                                                                                                 
  97       140       (30.7 )     656       601       9.2       216       (16 )     *     2,142       2,030       5.5      
  2       6       (66.7 )     359       509       (29.5 )     15       15             1,139       1,395       (18.4 )    
                                                                                                 
  95       134       (29.1 )     297       92       *     201       (31 )     *     1,003       635       58.0      
  35       49       (28.6 )     108       33       *     (41 )     (92 )     55.4       251       150       67.3      
                                                                                                 
  60       85       (29.4 )     189       59       *     242       61       *     752       485       55.1      
                    (9 )     (5 )     (80.0 )     24       (8 )     *     14       (14 )     *    
                                                                                                 
$ 60     $ 85       (29.4 )   $ 180     $ 54       *   $ 266     $ 53       *   $ 766     $ 471       62.6      
                                                                                                 
                                                                                                 
                                                                                                 
$ 1,091     $ 1,199       (9.0 )%   $ 5,162     $ 4,500       14.7 %   $ 98     $ 974       (89.9 )%   $ 46,340     $ 54,059       (14.3 )%    
  580       569       1.9                         275       161       70.8       34,164       33,727       1.3      
  372       387       (3.9 )                       9       3       *     26,821       23,964       11.9      
  1,661       1,560       6.5       17,338       15,414       12.5       16       3       *     63,382       61,427       3.2      
                                                                                                 
  3,704       3,715       (.3 )     22,500       19,914       13.0       398       1,141       (65.1 )     170,707       173,177       (1.4 )    
                                      12,960       795       *     20,454       10,701       91.1      
                                                                                                 
  3,704       3,715       (.3 )     22,500       19,914       13.0       13,358       1,936       *     191,161       183,878       4.0      
  1,522       1,512       .7       2,335       2,348       (.6 )     413             *     8,999       8,443       6.6      
  208       265       (21.5 )     971       873       11.2       132       8       *     3,262       2,809       16.1      
  5,886       6,006       (2.0 )     27,231       24,093       13.0       78,745       59,268       32.9       281,340       266,107       5.7      
  5,740       4,925       16.5       611       491       24.4       803       333       *     39,917       37,388       6.8      
  4,817       4,071       18.3       115       83       38.6       1,160       2       *     39,503       37,393       5.6      
  14,546       6,623       *     23       18       27.8       3,613       139       *     60,291       39,528       52.5      
  5,880       6,575       (10.6 )     1       1             7,603       3,129       *     43,607       48,911       (10.8 )    
                                                                                                 
  30,983       22,194       39.6       750       593       26.5       13,179       3,603       *     183,318       163,220       12.3      
  2,121       2,067       2.6       5,286       4,717       12.1       6,327       9,066       (30.2 )     27,419       28,202       (2.8 )    
                                                                                                 
 
                                                                                                 
Wealth Management &
    Payment
    Treasury and
    Consolidated
     
Securities Services     Services     Corporate Support     Company      
            Percent
                Percent
                Percent
                Percent
     
2010     2009     Change     2010     2009     Change     2010     2009     Change     2010     2009     Change      
$ 150     $ 163       (8.0 )%   $ 677     $ 546       24.0 %   $ 983     $ 504       95.0 %   $ 4,812     $ 4,199       14.6 %    
  556       617       (9.9 )     1,529       1,414       8.1       89       132       (32.6 )     4,083       4,060       .6      
                                      (55 )     (214 )     74.3       (55 )     (217 )     74.7      
                                                                                                 
  706       780       (9.5 )     2,206       1,960       12.6       1,017       422       *     8,840       8,042       9.9      
  494       449       10.0       795       682       16.6       491       369       33.1       4,325       3,814       13.4      
  27       33       (18.2 )     101       91       11.0       18       2       *     188       186       1.1      
                                                                                                 
  521       482       8.1       896       773       15.9       509       371       37.2       4,513       4,000       12.8      
                                                                                                 
  185       298       (37.9 )     1,310       1,187       10.4       508       51       *     4,327       4,042       7.1      
  6       14       (57.1 )     815       942       (13.5 )     24       15       60.0       2,449       2,713       (9.7 )    
                                                                                                 
  179       284       (37.0 )     495       245       *     484       36       *     1,878       1,329       41.3      
  66       102       (35.3 )     180       88       *     (45 )     (171 )     73.7       463       299       54.8      
                                                                                                 
  113       182       (37.9 )     315       157       *     529       207       *     1,415       1,030       37.4      
                    (16 )     (12 )     (33.3 )     36       (18 )     *     20       (30 )     *    
                                                                                                 
$ 113     $ 182       (37.9 )   $ 299     $ 145       *   $ 565     $ 189       *   $ 1,435     $ 1,000       43.5      
                                                                                                 
                                                                                                 
                                                                                                 
$ 1,065     $ 1,289       (17.4 )%   $ 5,023     $ 4,394       14.3 %   $ 107     $ 1,007       (89.4 )%   $ 46,805     $ 55,091       (15.0 )%    
  578       571       1.2                         280       98       *     34,153       33,563       1.8      
  374       392       (4.6 )                       9       3       *     26,616       23,940       11.2      
  1,630       1,536       6.1       17,375       15,045       15.5       12       5       *     63,502       61,170       3.8      
                                                                                                 
  3,647       3,788       (3.7 )     22,398       19,439       15.2       408       1,113       (63.3 )     171,076       173,764       (1.5 )    
                                      13,237       1,052       *     20,939       11,022       90.0      
                                                                                                 
  3,647       3,788       (3.7 )     22,398       19,439       15.2       13,645       2,165       *     192,015       184,786       3.9      
  1,518       1,512       .4       2,348       2,342       .3       413             *     9,005       8,500       5.9      
  214       273       (21.6 )     987       886       11.4       140       4       *     3,310       2,786       18.8      
  5,850       6,106       (4.2 )     27,113       23,724       14.3       78,822       58,512       34.7       281,530       266,171       5.8      
  5,557       4,950       12.3       610       532       14.7       889       354       *     38,964       36,707       6.1      
  4,825       3,812       26.6       110       80       37.5       1,127       2       *     39,747       34,730       14.4      
  13,990       6,466       *     22       18       22.2       3,554       123       *     59,615       38,900       53.3      
  5,642       6,496       (13.1 )     1             *     8,322       4,286       94.2       44,601       51,543       (13.5 )    
                                                                                                 
  30,014       21,724       38.2       743       630       17.9       13,892       4,765       *     182,927       161,880       13.0      
  2,120       2,081       1.9       5,318       4,706       13.0       5,738       8,307       (30.9 )     26,919       27,514       (2.2 )    
                                                                                                 
 
 
 
U.S. Bancorp
25


Table of Contents

Total noninterest expense increased $33 million (14.0 percent) in the second quarter and $39 million (8.1 percent) in the first six months of 2010, compared with the same periods of 2009. The increases in noninterest expense were primarily due to higher compensation and employee benefits expense.
 
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 $180 million of the Company’s net income in the second quarter and $299 million in the first six months of 2010, or increases of $126 million and $154 million, respectively, compared with the same periods of 2009. The increases were primarily due to increases in total net revenue and decreases in the provision for credit losses, partially offset by higher noninterest expense.
Total net revenue increased $121 million (12.1 percent) in the second quarter and $246 million (12.6 percent) in the first six months of 2010, compared with the same periods of 2009. Net interest income, on a taxable-equivalent basis, increased $56 million (20.3 percent) in the second quarter and $131 million (24.0 percent) in the first six months of 2010, compared with the same periods of 2009, primarily due to strong growth in credit card loan balances and improved loan spreads, partially offset by the cost of rebates on the government card program. Noninterest income increased $65 million (9.0 percent) in the second quarter and $115 million (8.1 percent) in the first six months of 2010, compared with the same periods of 2009, driven by higher volumes across all products.
Total noninterest expense increased $66 million (16.6 percent) in the second quarter and $123 million (15.9 percent) in the first six months of 2010, compared with the same periods of 2009, due to higher compensation and employee benefits expense, higher technology and communications expense, the result of increased volume, and higher intangibles expense.
The provision for credit losses decreased $150 million (29.5 percent) in the second quarter and $127 million (13.5 percent) in the first six months of 2010, compared with the same periods of 2009, due to a favorable change in the reserve allocation due to lower delinquencies, partially offset by higher net charge-offs. As a percentage of average loans outstanding, net charge-offs were 6.72 percent in the second quarter of 2010, compared with 6.55 percent in the second quarter of 2009.
 
Treasury and Corporate Support Treasury and Corporate Support includes the Company’s investment portfolios, funding, recently acquired assets and assumed liabilities prior to assignment to business lines, 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 $266 million in the second quarter and $565 million in the first six months of 2010, compared with $53 million in the second quarter and $189 million in the first six months of 2009.
Total net revenue increased $259 million (98.9 percent) in the second quarter and $595 million in the first six months of 2010, compared with the same periods of 2009. Net interest income, on a taxable-equivalent basis, increased $199 million (75.1 percent) in the second quarter and $479 million (95.0 percent) in the first six months of 2010, compared with the same periods of 2009, reflecting the impact of the FBOP acquisition, the current interest rate environment, wholesale funding decisions and the Company’s asset/liability position. Total noninterest income increased $60 million in the second quarter of 2010, compared with the second quarter of 2009, primarily due to the $28 million gain related to the Company’s investment in Visa Inc. and higher syndication revenue on tax-advantaged transactions. Total noninterest income increased $116 million in the first six months of 2010, compared with the same period of 2009, primarily due to lower net securities losses in the current year and the $28 million gain on the Company’s investment in Visa Inc., partially offset by a gain on a corporate real estate transaction recognized in the first quarter of 2009.
Total noninterest expense increased $27 million (9.7 percent) in the second quarter and $138 million (37.2 percent) in the first six months of 2010, compared with the same periods of 2009. The increases in noninterest expense were driven by the FBOP acquisition, debt extinguishment costs and higher costs related to affordable housing and other tax advantaged projects, partially offset by the FDIC special assessment recognized in the second quarter of 2009.
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. The consolidated effective tax rate of the Company was 20.9 percent in the second quarter and 20.3 percent in the first six months of 2010, compared with 17.1 percent in the second quarter and 16.3 percent in the first six months of 2009. The year-over-year increases in the effective tax rate reflected the marginal impact of higher pre-tax earnings.
 
NON-REGULATORY CAPITAL RATIOS
 
In addition to capital ratios defined by banking regulators, the Company considers various other
 
 
 
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measures when evaluating capital utilization and adequacy, including:
  •  Tangible common equity to tangible assets,
  •  Tier 1 common equity to risk-weighted assets, and
  •  Tangible common equity to risk-weighted assets.
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 shareholders’ equity associated with 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.
 
                 
    June 30,
    December 31,
 
(Dollars in Millions)   2010     2009  
Total equity
  $ 28,940     $ 26,661  
Preferred stock
    (1,930)       (1,500)  
Noncontrolling interests
    (771)       (698)  
Goodwill (net of deferred tax liability)
    (8,425)       (8,482)  
Intangible assets, other than mortgage servicing rights
    (1,525)       (1,657)  
     
     
Tangible common equity (a)
    16,289       14,324  
Tier 1 capital, determined in accordance with prescribed regulatory requirements
    24,021       22,610  
Trust preferred securities
    (3,949)       (4,524)  
Preferred stock
    (1,930)       (1,500)  
Noncontrolling interests, less preferred stock not eligible for Tier 1 capital
    (694)       (692)  
     
     
Tier 1 common equity (b)
    17,448       15,894  
Total assets
    283,243       281,176  
Goodwill (net of deferred tax liability)
    (8,425)       (8,482)  
Intangible assets, other than mortgage servicing rights
    (1,525)       (1,657)  
     
     
Tangible assets (c)
    273,293       271,037  
Risk-weighted assets, determined in accordance with prescribed regulatory requirements (d)
    237,145       235,233  
Ratios
               
Tangible common equity to tangible assets (a)/(c)
    6.0 %     5.3 %
Tier 1 common equity to risk-weighted assets (b)/(d)
    7.4       6.8  
Tangible common equity to risk-weighted assets (a)/(d)
    6.9       6.1  
                 
 
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, 2009.
 
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 control 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
 
                 
    June 30,
    December 31,
 
(Dollars in Millions)   2010     2009  
    (Unaudited)        
Assets
               
Cash and due from banks
  $ 5,033     $ 6,206  
Investment securities
               
Held-to-maturity (fair value $519 and $48, respectively)
    590       47  
Available-for-sale
    47,777       44,721  
Loans held for sale (included $4,650 and $4,327 of mortgage loans carried at fair value, respectively)
    4,912       4,772  
Loans
               
Commercial
    46,766       48,792  
Commercial real estate
    33,944       34,093  
Residential mortgages
    27,252       26,056  
Retail
    63,639       63,955  
                 
Total loans, excluding covered loans
    171,601       172,896  
Covered loans
    19,983       21,859  
                 
Total loans
    191,584       194,755  
Less allowance for loan losses
    (5,320 )     (5,079 )
                 
Net loans
    186,264       189,676  
Premises and equipment
    2,257       2,263  
Goodwill
    9,002       9,011  
Other intangible assets
    3,068       3,406  
Other assets
    24,340       21,074  
                 
Total assets
  $ 283,243     $ 281,176  
                 
Liabilities and Shareholders’ Equity
               
Deposits
               
Noninterest-bearing
  $ 41,673     $ 38,186  
Interest-bearing
    113,024       115,135  
Time deposits greater than $100,000
    28,426       29,921  
                 
Total deposits
    183,123       183,242  
Short-term borrowings
    33,797       31,312  
Long-term debt
    29,137       32,580  
Other liabilities
    8,246       7,381  
                 
Total liabilities
    254,303       254,515  
Shareholders’ equity
               
Preferred stock
    1,930       1,500  
Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares;
issued: 6/30/10 and 12/31/09 — 2,125,725,742 shares
    21       21  
Capital surplus
    8,292       8,319  
Retained earnings
    25,367       24,116  
Less cost of common stock in treasury: 6/30/10 — 208,740,074 shares; 12/31/09 — 212,786,937 shares
    (6,381 )     (6,509 )
Accumulated other comprehensive income (loss)
    (1,060 )     (1,484 )
                 
Total U.S. Bancorp shareholders’ equity
    28,169       25,963  
Noncontrolling interests
    771       698  
                 
Total equity
    28,940       26,661  
                 
Total liabilities and equity
  $ 283,243     $ 281,176  
                 
See Notes to Consolidated Financial Statements.
 
 
 
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U.S. Bancorp
Consolidated Statement of Income
 
                                 
    Three Months Ended
    Six Months Ended
 
(Dollars and Shares in Millions, Except Per Share Data)   June 30,     June 30,  
(Unaudited)   2010     2009     2010     2009  
Interest Income
                               
Loans
  $ 2,515     $ 2,345     $ 5,020     $ 4,695  
Loans held for sale
    47       71       91       134  
Investment securities
    394       402       804       836  
Other interest income
    39       22       73       42  
                                 
Total interest income
    2,995       2,840       5,988       5,707  
Interest Expense
                               
Deposits
    229       314       465       638  
Short-term borrowings
    137       131       265       274  
Long-term debt
    272       341       549       694  
                                 
Total interest expense
    638       786       1,279       1,606  
                                 
Net interest income
    2,357       2,054       4,709       4,101  
Provision for credit losses
    1,139       1,395       2,449       2,713  
                                 
Net interest income after provision for credit losses
    1,218       659       2,260       1,388  
Noninterest Income
                               
Credit and debit card revenue
    266       259       524       515  
Corporate payment products revenue
    178       168       346       322  
Merchant processing services
    320       278       612       536  
ATM processing services
    108       104       213       206  
Trust and investment management fees
    267       304       531       598  
Deposit service charges
    199       250       406       476  
Treasury management fees
    145       142       282       279  
Commercial products revenue
    205       144       366       273  
Mortgage banking revenue
    243       308       443       541  
Investment products fees and commissions
    30       27       55       55  
Securities gains (losses), net
                               
Realized gains (losses), net
          69       12       125  
Total other-than-temporary impairment
    (30 )     (331 )     (117 )     (712 )
Portion of other-than-temporary impairment recognized in other comprehensive income
    9       243       50       370  
                                 
Total securities gains (losses), net
    (21 )     (19 )     (55 )     (217 )
Other
    170       90       305       259  
                                 
Total noninterest income
    2,110       2,055       4,028       3,843  
Noninterest Expense
                               
Compensation
    946       764       1,807       1,550  
Employee benefits
    172       140       352       295  
Net occupancy and equipment
    226       208       453       419  
Professional services
    73       59       131       111  
Marketing and business development
    86       80       146       136  
Technology and communications
    186       157       371       312  
Postage, printing and supplies
    75       72       149       146  
Other intangibles
    91       95       188       186  
Other
    522       554       916       845  
                                 
Total noninterest expense
    2,377       2,129       4,513       4,000  
                                 
Income before income taxes
    951       585       1,775       1,231  
Applicable income taxes
    199       100       360       201  
                                 
Net income
    752       485       1,415       1,030  
Net (income) loss attributable to noncontrolling interests
    14       (14 )     20       (30 )
                                 
Net income attributable to U.S. Bancorp
  $ 766     $ 471     $ 1,435     $ 1,000  
                                 
Net income applicable to U.S. Bancorp common shareholders
  $ 862     $ 221     $ 1,510     $ 640  
                                 
Earnings per common share
  $ .45     $ .12     $ .79     $ .36  
Diluted earnings per common share
  $ .45     $ .12     $ .79     $ .36  
Dividends declared per common share
  $ .05     $ .05     $ .10     $ .10  
Average common shares outstanding
    1,912       1,833       1,911       1,794  
Average diluted common shares outstanding
    1,921       1,840       1,920       1,801  
                                 
See Notes to Consolidated Financial Statements.
 
 
 
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U.S. Bancorp
Consolidated Statement of Shareholders’ Equity
 
                                                                                 
    U.S. Bancorp Shareholders              
                                        Other
    Total
             
(Dollars and Shares in Millions)
  Common Shares
    Preferred
    Common
    Capital
    Retained
    Treasury
    Comprehensive
    Shareholders’
    Noncontrolling
    Total
 
(Unaudited)   Outstanding     Stock     Stock     Surplus     Earnings     Stock     Income     Equity     Interests     Equity  
Balance December 31, 2008
    1,755     $ 7,931     $ 20     $ 5,830     $ 22,541     $ (6,659 )   $ (3,363 )   $ 26,300     $ 733     $ 27,033  
Change in accounting principle
                                    141               (141 )                    
Net income
                                    1,000                       1,000       30       1,030  
Changes in unrealized gains and losses on securities available-for-sale
                                                    1,520       1,520               1,520  
Other-than-temporary impairment not recognized in earnings on securities available-for-sale
                                                    (370 )     (370 )             (370 )
Unrealized gain on derivatives
                                                    394       394               394  
Foreign currency translation
                                                    40       40               40  
Reclassification for realized losses
                                                    222       222               222  
Income taxes
                                                    (686 )     (686 )             (686 )
                                                                                 
Total comprehensive income
                                                            2,120       30       2,150  
Redemption of preferred stock
            (6,599 )                                             (6,599 )             (6,599 )
Preferred stock dividends and discount accretion
            168                       (358 )                     (190 )             (190 )
Common stock dividends
                                    (184 )                     (184 )             (184 )
Issuance of common and treasury stock
    157               1       2,562               123               2,686               2,686  
Purchase of treasury stock
                                            (4 )             (4 )             (4 )
Net other changes in noncontrolling interests
                                                                  (18 )     (18 )
Distributions to noncontrolling interests
                                                                  (30 )     (30 )
Stock option and restricted stock grants
                            42                               42               42  
                                                                                 
Balance June 30, 2009
    1,912     $ 1,500     $ 21     $ 8,434     $ 23,140     $ (6,540 )   $ (2,384 )   $ 24,171     $ 715     $ 24,886  
                                                                                 
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
                                    (73 )                     (73 )     (16 )     (89 )
Net income
                                    1,435                       1,435       (20 )     1,415  
Changes in unrealized gains and losses on securities available-for-sale
                                                    855       855               855  
Other-than-temporary impairment not recognized in earnings on securities available-for-sale
                                                    (50 )     (50 )             (50 )
Unrealized loss on derivatives
                                                    (206 )     (206 )             (206 )
Foreign currency translation
                                                    30       30               30  
Reclassification for realized losses
                                                    56       56               56  
Income taxes
                                                    (261 )     (261 )             (261 )
                                                                                 
Total comprehensive income
                                                            1,859       (20 )     1,839  
Preferred stock dividends and discount accretion
                                    (37 )                     (37 )             (37 )
Common stock dividends
                                    (192 )                     (192 )             (192 )
Issuance of preferred stock
            430               10       118                       558               558  
Issuance of common and treasury stock
    5                       (97 )             143               46               46  
Purchase of treasury stock
    (1 )                                     (15 )             (15 )             (15 )
Net other changes in noncontrolling interests
                                                                  145       145  
Distributions to noncontrolling interests
                                                                  (36 )     (36 )
Stock option and restricted stock grants
                            60                               60               60  
                                                                                 
Balance June 30, 2010
    1,917     $ 1,930     $ 21     $ 8,292     $ 25,367     $ (6,381 )   $ (1,060 )   $ 28,169     $ 771     $ 28,940  
                                                                                 
See Notes to Consolidated Financial Statements.
 
 
 
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U.S. Bancorp
Consolidated Statement of Cash Flows
 
                 
    Six Months Ended
 
(Dollars in Millions)
  June 30,  
(Unaudited)   2010     2009  
Operating Activities
               
Net cash provided by operating activities
    $3,960       $774  
Investing Activities
               
Proceeds from sales of available-for-sale investment securities
    1,060       3,810  
Proceeds from maturities of investment securities
    6,714       3,658  
Purchases of investment securities
    (9,968 )     (6,727 )
Net decrease in loans outstanding
    507       366  
Proceeds from sales of loans
    1,030       1,881  
Purchases of loans
    (1,807 )     (1,277 )
Acquisitions, net of cash acquired
    832       222  
Other, net
    (779 )     838  
                 
Net cash provided by (used in) investing activities
    (2,411 )     2,771  
Financing Activities
               
Net increase (decrease) in deposits
    (602 )     4,307  
Net increase (decrease) in short-term borrowings
    1,832       (4,285 )
Proceeds from issuance of long-term debt
    2,923       4,682  
Principal payments or redemption of long-term debt
    (6,684 )     (3,741 )
Fees paid on exchange of income trust securities for perpetual preferred stock
    (4 )      
Proceeds from issuance of common stock
    43       2,684  
Redemption of preferred stock
          (6,599 )
Cash dividends paid on preferred stock
    (38 )     (237 )
Cash dividends paid on common stock
    (192 )     (834 )
                 
Net cash used in financing activities
    (2,722 )     (4,023 )
                 
Change in cash and due from banks
    (1,173 )     (478 )
Cash and due from banks at beginning of period
    6,206       6,859  
                 
Cash and due from banks at end of period
    $5,033       $6,381  
                 
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, 2009. 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
 
Accounting for Transfers of Financial Assets Effective January 1, 2010, the Company adopted accounting guidance issued by the Financial Accounting Standards Board (“FASB”) related to transfers of financial assets. This guidance removes the concept of qualifying special-purpose entities and the exception for guaranteed mortgage securitizations when a transferor had not surrendered control over the transferred financial assets. In addition, the guidance provides clarification of the requirements for isolation and limitations on sale accounting for portions of financial assets. The guidance also requires additional disclosure about transfers of financial assets and a transferor’s continuing involvement with transferred assets. The adoption of this guidance was not significant to the Company’s financial statements.
 
Variable Interest Entities Effective January 1, 2010, the Company adopted accounting guidance issued by the FASB related to variable interest entities (“VIEs”). Generally, a VIE is an entity with insufficient equity at risk requiring additional subordinated financial support, or an entity in which equity investors as a group, either (i) lack the power through voting or other similar rights, to direct the activities of the entity that most significantly impact its performance, (ii) lack the obligation to absorb the expected losses of the entity or (iii) lack the right to receive the expected residual returns of the entity. The new guidance replaces the previous quantitative-based risks and rewards calculation for determining whether an entity must consolidate a VIE with an assessment of whether the entity has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. This guidance requires reconsideration of whether an entity is a VIE upon occurrence of certain events, as well as ongoing assessments of whether a variable interest holder is the primary beneficiary of a VIE. The Company consolidated approximately $1.6 billion of assets of previously unconsolidated entities, and deconsolidated approximately $84 million of assets of previously consolidated entities upon adoption of this guidance. Additionally, the adoption of this guidance reduced total equity by $89 million.
 
 
 
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Note 3    Investment Securities
 
The amortized cost, other-than-temporary impairment recorded in other comprehensive income, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale securities were as follows:
 
                                                                               
    June 30, 2010       December 31, 2009  
                Unrealized Losses                         Unrealized Losses        
    Amortized
    Unrealized
    Other-than-
        Fair
      Amortized
    Unrealized
    Other-than-
        Fair
 
(Dollars in Millions)   Cost     Gains     Temporary   Other     Value       Cost     Gains     Temporary   Other     Value  
Held-to-maturity (a)
                                                                             
U.S. Treasury and agencies
  $ 63     $     $   $     $ 63       $     $     $   $     $  
Mortgage-backed securities
                                                                             
Residential
                                                                             
Agency
    4                       4         4                       4  
Non-agency
                                                                             
Non-prime
    4                       4                                
Commercial
    10                 (6 )     4                                
Asset-backed securities
                                                                   
Collateralized debt obligations/Collaterized loan obligations
    208       9           (29 )     188                                
Other
    132             (2)     (7 )     123                                
Obligations of state and political subdivisions
    30       2           (2 )     30         32       2           (1 )     33  
Other debt securities
    139                 (36 )     103         11                       11  
                                                                               
Total held-to-maturity
  $ 590     $ 11     $ (2)   $ (80 )   $ 519       $ 47     $ 2     $   $ (1 )   $ 48  
                                                                               
Available-for-sale (b)
                                                                             
U.S. Treasury and agencies
  $ 2,533     $ 14     $   $     $ 2,547       $ 3,415     $ 10     $   $ (21 )   $ 3,404  
Mortgage-backed securities
                                                                             
Residential
                                                                             
Agency
    32,461       993           (19 )     33,435         29,288       501           (47 )     29,742  
Non-agency
                                                                             
Prime (c)
    1,342       10       (104)     (51 )     1,197         1,624       8       (110)     (93 )     1,429  
Non-prime
    1,230       7       (294)     (36 )     907         1,359       11       (297)     (105 )     968  
Commercial
    14       1                 15         14             (1)           13  
Asset-backed securities
                                                                             
Collateralized debt obligations/Collaterized loan obligations
    147       24       (6)           165         199       11       (5)           205  
Other
    918       13       (6)     (9 )     916         360       12       (5)     (10 )     357  
Obligations of state and political subdivisions
    6,861       38           (115 )     6,784         6,822       30           (159 )     6,693  
Obligations of foreign governments
    6                       6         6                       6  
Corporate debt securities
    1,154                 (227 )     927         1,179                 (301 )     878  
Perpetual preferred securities
    482       29           (80 )     431         483       30           (90 )     423  
Other investments (d)
    403       45           (1 )     447         607       9           (13 )     603  
                                                                               
Total available-for-sale
  $ 47,551     $ 1,174     $ (410)   $ (538 )   $ 47,777       $ 45,356     $ 622     $ (418)   $ (839 )   $ 44,721  
                                                                               
 
(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) Includes securities covered under loss shaing agreements with the Federal Deposit Insurance Corporation (“FDIC”) with a fair value of $266 million and $231 million at June 30, 2010 and December 31, 2009, respectively.
The weighted-average maturity of the available-for-sale investment securities was 5.5 years at June 30, 2010, compared with 7.1 years at December 31, 2009. The corresponding weighted-average yields were 3.78 percent and 4.00 percent, respectively. The weighted-average maturity of the held-to-maturity investment securities was 5.9 years at June 30, 2010, and 8.4 years at December 31, 2009. The corresponding weighted-average yields were 1.38 percent and 5.10 percent, respectively.
For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale securities outstanding at June 30, 2010, 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 $31.5 billion at June 30, 2010, and $37.4 billion at December 31, 2009, 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 $8.7 billion at June 30, 2010, and $8.9 billion at December 31, 2009.
 
 
 
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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
      Six Months Ended
 
    June 30,       June 30,  
(Dollars in Millions)   2010     2009       2010     2009  
Taxable
  $ 317     $ 328       $ 650     $ 684  
Non-taxable
    77       74         154       152  
                                   
Total interest income from investment securities
  $ 394     $ 402       $ 804     $ 836  
                                   
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
      Six Months Ended
 
    June 30,       June 30,  
(Dollars in Millions)   2010     2009       2010     2009  
Realized gains
  $   –     $ 70       $ 12     $ 127  
Realized losses
          (1 )             (2 )
                                   
Net realized gains (losses)
  $     $ 69       $ 12     $ 125  
                                   
Income tax (benefit) on realized gains (losses)
  $     $ 27       $ 4     $ 48  
                                   
In the fourth quarter of 2007, the Company purchased certain structured investment securities (“SIVs”) from certain money market funds managed by FAF Advisors, Inc., an affiliate of the Company. Subsequent to the initial purchase, the Company exchanged its interests in certain 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, as well as certain acquired securities covered under loss sharing agreements with the FDIC, 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 $1.1 billion and $466 million, respectively, at June 30, 2010 and $1.2 billion and $483 million, respectively, at December 31, 2009. Changes in the accretable balance for these securities, were as follows:
 
                                   
    Three Months Ended
      Six Months Ended
 
    June, 30,       June 30,  
(Dollars in Millions)   2010     2009       2010     2009  
Balance at beginning of period
  $ 319     $ 224       $ 292     $ 349  
Impact of other-than-temporary impairment accounting change
                        (124 )
                                   
Adjusted balance at beginning of period
    319       224         292       225  
Accretion
    (8 )     (1 )       (15 )     (2 )
Other (a)
    (9 )     (49 )       25       (49 )
                                   
Balance at end of period
  $ 302     $ 174       $ 302     $ 174  
                                   
(a) Represents changes in projected future cash flows 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. To determine whether perpetual preferred securities are other-than-temporarily impaired, the Company considers the issuers’ credit ratings, historical financial performance and strength, the ability to sustain earnings, and other factors such as market presence and management experience.
 
 
 
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The following table summarizes other-than-temporary impairment by investment category:
 
                                                   
    2010       2009  
    Losses
                  Losses
             
Three Months Ended June 30,
  Recorded in
    Other Gains
            Recorded in
    Other Gains
       
(Dollars in Millions)   Earnings     (Losses)     Total       Earnings     (Losses)     Total  
Available-for-sale
                                                 
Mortgage-backed securities
                                                 
Non-agency residential
                                                 
Prime (a)
  $ (1 )   $ (1 )   $ (2 )     $ (1 )   $ (10 )   $ (11 )
Non-prime
    (11 )     (11 )     (22 )       (49 )     (96 )     (145 )
Asset-backed securities
                                                 
Collateralized debt obligations/Collaterized loan obligations
    (4 )           (4 )             (1 )     (1 )
Other
    (5 )     3       (2 )       (26 )     (136 )     (162 )
Perpetual preferred securities
                        (12 )           (12 )
                                                   
Total available-for-sale
  $ (21 )   $ (9 )   $ (30 )     $ (88 )   $ (243 )   $ (331 )
                                                   
 
                                                   
    2010       2009  
    Losses
                  Losses
             
Six Months Ended June 30,
  Recorded in
    Other Gains
            Recorded in
    Other Gains
       
(Dollars in Millions)   Earnings     (Losses)     Total       Earnings     (Losses)     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)
  $ (3 )   $ (10 )   $ (13 )     $ (8 )   $ (129 )   $ (137 )
Non-prime
    (46 )     (43 )     (89 )       (77 )     (199 )     (276 )
Commercial
                        (1 )     (1 )     (2 )
Asset-backed securities
                                                 
Collateralized debt obligations/Collaterized loan obligations
    (5 )           (5 )       (5 )           (5 )
Other
    (10 )     2       (8 )       (41 )     (41 )     (82 )
Perpetual preferred securities
                        (207 )           (207 )
Corporate debt securities
                        (3 )           (3 )
Other debt securities
    (1 )     1                            
                                                   
Total available-for-sale
  $ (65 )   $ (50 )   $ (115 )     $ (342 )   $ (370 )   $ (712 )
                                                   
(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.
The Company determined the other-than-temporary impairment recorded in earnings for securities other than perpetual preferred 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 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 at June 30, 2010 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  
Estimated lifetime prepayment rates
    4 %     15 %     13 %       1 %     13 %     6 %
Lifetime probability of default rates
    3       10       4         2       20       8  
Lifetime loss severity rates
    38       69       43         37       70       57  
                                                   
 
 
 
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Changes in the credit losses on non-agency mortgage-backed securities, including SIV-related investments, and other debt securities attributed to credit loss are summarized as follows:
 
                                   
    Three Months Ended
      Six Months Ended
 
    June 30,       June 30,  
(Dollars in Millions)   2010     2009       2010     2009  
Balance at beginning of period
  $ 391     $ 358       $ 335     $ 299  
Credit losses on securities not previously considered other-than-temporarily impaired
    2       21         15       75  
Decreases in expected cash flows on securities for which other-than-temporary impairment was previously recognized
    19       55         52       60  
Increases in expected cash flows
    (12 )     (27 )       (13 )     (27 )
Realized losses
    (18 )     (7 )       (25 )     (7 )
Other
                  18        
                                   
Balance at end of period
  $ 382     $ 400       $ 382     $ 400  
                                   
At June 30, 2010, 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 June 30, 2010:
 
                                                     
    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
                                                   
Non-agency
                                                   
Non-prime
  $     $       $ 3     $       $ 3     $  
Commercial
                  4       (6 )       4       (6 )
Asset-backed securities
                                                   
Collateralized debt obligations/Collaterized loan obligations
                  119       (29 )       119       (29 )
Other
                  22       (9 )       22       (9 )
Obligations of state and political subdivisions
    1               9       (2 )       10       (2 )
Other debt securities
                  94       (36 )       94       (36 )
                                                     
Total held-to-maturity
  $ 1     $       $ 251     $ (82 )     $ 252     $ (82 )
                                                     
Available-for-sale
                                                   
U.S. Treasury and agencies
  $ 401     $       $ 51     $       $ 452     $  
Mortgage-backed securities
                                                   
Residential
                                                   
Agency
    3,351       (18 )       100       (1 )       3,451       (19 )
Non-agency
                                                   
Prime (a)
                  1,129       (155 )       1,129       (155 )
Non-prime
    71       (10 )       779       (320 )       850       (330 )
Commercial
    2               2               4        
Asset-backed securities
                                                   
Collateralized debt obligations/Collaterized loan obligations
    23       (3 )       8       (3 )       31       (6 )
Other
    226       (2 )       27       (13 )       253       (15 )
Obligations of state and political subdivisions
    1,582       (18 )       2,261       (97 )       3,843       (115 )
Obligations of foreign governments
    6                             6        
Corporate debt securities
                  927       (227 )       927       (227 )
Perpetual preferred securities
                  317       (80 )       317       (80 )
Other investments
                  3       (1 )       3       (1 )
                                                     
Total available-for-sale
  $ 5,662     $ (51 )     $ 5,604     $ (897 )     $ 11,266     $ (948 )
                                                     
(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.
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 or non-agency mortgage-backed securities issued with high investment
 
 
 
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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 June 30, 2010, 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.
 

Note 4    Loans
 
The composition of the loan portfolio was as follows:
 
                                       
    June 30, 2010         December 31, 2009    
          Percent
              Percent
   
(Dollars in Millions)   Amount     of Total         Amount     of Total    
Commercial
                                     
Commercial
  $ 40,621       21.2   %     $ 42,255       21.7   %
Lease financing
    6,145       3.2           6,537       3.4    
                                       
Total commercial
    46,766       24.4           48,792       25.1    
Commercial real estate
                                     
Commercial mortgages
    25,573       13.3           25,306       13.0    
Construction and development
    8,371       4.4           8,787       4.5    
                                       
Total commercial real estate
    33,944       17.7           34,093       17.5    
Residential mortgages
                                     
Residential mortgages
    21,771       11.4           20,581       10.6    
Home equity loans, first liens
    5,481       2.9           5,475       2.8    
                                       
Total residential mortgages
    27,252       14.3           26,056       13.4    
Retail
                                     
Credit card
    16,762       8.7           16,814       8.6    
Retail leasing
    4,303       2.3           4,568       2.3    
Home equity and second mortgages
    19,326       10.1           19,439       10.0    
Other retail
                                     
Revolving credit
    3,467       1.8           3,506       1.8    
Installment
    5,588       2.9           5,455       2.8    
Automobile
    10,017       5.2           9,544       4.9    
Student
    4,176       2.2           4,629       2.4    
                                       
Total other retail
    23,248       12.1           23,134       11.9    
                                       
Total retail
    63,639       33.2           63,955       32.8    
                                       
Total loans, excluding covered loans
    171,601       89.6           172,896       88.8    
Covered loans
    19,983       10.4           21,859       11.2    
                                       
Total loans
  $ 191,584       100.0   %     $ 194,755       100.0   %
                                       
The Company had loans of $54.6 billion at June 30, 2010, and $55.6 billion at December 31, 2009, pledged at the Federal Home Loan Bank (“FHLB”), and loans of $43.8 billion at June 30, 2010, and $44.2 billion at December 31, 2009, pledged at the Federal Reserve Bank.
Originated loans are presented net of unearned interest and deferred fees and costs, which amounted to $1.3 billion at June 30, 2010, and December 31, 2009. In accordance with applicable authoritative accounting guidance effective for the Company January 1, 2009, all purchased loans and related indemnification assets are recorded at fair value at the date of purchase. The Company evaluates purchased loans for impairment 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 impaired (“purchased impaired loans”). All other purchased loans are considered nonimpaired (“purchased nonimpaired loans”).
 
 
 
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Covered assets represent loans and other assets acquired from the FDIC subject to loss sharing agreements and included expected reimbursements from the FDIC of approximately $3.8 billion at June 30, 2010 and $3.9 billion at December 31, 2009. The carrying amount of the covered assets consisted of purchased impaired loans, purchased nonimpaired loans, and other assets as shown in the following table:
 
                                                                           
    June 30, 2010         December 31, 2009    
    Purchased
    Purchased
                      Purchased
    Purchased
                 
    impaired
    nonimpaired
      Other
              impaired
    nonimpaired
      Other
         
(Dollars in Millions)   loans     loans       assets     Total         loans     loans       assets     Total    
Commercial loans
  $ 76     $ 410       $     $ 486         $ 86     $ 443       $     $ 529    
Commercial real estate loans
    2,383       6,448               8,831           3,035       6,724               9,759    
Residential mortgage loans
    4,061       1,797               5,858           4,712       1,918               6,630    
Retail loans
          974               974           30       978                 1,008    
Losses reimbursable by the FDIC
                  3,834       3,834                         3,933       3,933    
                                                                           
Covered loans
    6,520       9,629         3,834       19,983           7,863       10,063         3,933       21,859    
Foreclosed real estate
                  791       791                         653       653    
                                                                           
Total covered assets
  $ 6,520     $ 9,629       $ 4,625     $ 20,774         $ 7,863     $ 10,063       $ 4,586     $ 22,512    
                                                                           
At June 30, 2010, $.9 billion of the purchased impaired loans included in covered loans were classified as nonperforming assets, compared with $1.1 billion at December 31, 2009, 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 in covered 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 loan losses. There has not been any significant credit deterioration since the respective acquisition dates.
Changes in the accretable balance for purchased impaired loans for the Downey Savings and Loan Association, F.A., PFF Bank and Trust, and First Bank of Oak Park Corporation transactions were as follows:
 
                                       
    Three Months Ended
        Six Months Ended
   
    June 30,         June 30,    
(Dollars in Millions)   2010     2009         2010     2009    
Balance at beginning of period
  $ 2,825     $ 2,405         $ 2,845     $ 2,719    
Accretion
    (104 )     (87 )         (205 )     (183 )  
Disposals
    (11 )     (36 )         (18 )     (47 )  
Reclassifications (to) from nonaccretable difference
    68       (212 )         160       (233 )  
Other
    (29 )     4           (33 )     (182 )  
                                       
Balance at end of period
  $ 2,749     $ 2,074         $ 2,749     $ 2,074    
                                       
Net gains on the sale of loans of $92 million and $253 million for the three months ended June 30, 2010 and 2009, respectively, and $203 million and $369 million for the six months ended June 30, 2010 and 2009, respectively, were included in noninterest income, primarily in mortgage banking revenue.
 

Note 5    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, is further discussed in Note 22 in the
 
 
 
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Company’s Annual Report on Form 10-K for the year ended December 31, 2009. 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, refer to Note 6. 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 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.
As a result of adopting new accounting guidance, the Company consolidated certain community development and tax-advantaged investment entities on January 1, 2010 that it had not previously consolidated. The consolidation of these VIEs increased assets and liabilities by approximately $1.0 billion. The equity impact of consolidating these VIEs was a $9 million decrease, which represents the recognition of noncontrolling interests in the consolidated VIEs. At June 30, 2010, approximately $2.5 billion of the Company’s assets and liabilities related to community development and tax-advantaged investment entities VIEs. The majority of the assets of these consolidated VIEs are reported in other assets, and the liabilities are reported in long-term debt on the consolidated balance sheet. 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.
The Company also deconsolidated certain community development and tax-advantaged investment entities as a result of adopting the new accounting guidance, principally because the Company did not have power to direct the activities that most significantly impact the VIEs. The deconsolidation of these VIEs resulted in an $84 million decrease in assets and $77 million decrease in liabilities. The deconsolidation also resulted in a $7 million decrease to equity, which was principally the removal of the noncontrolling interests in these VIEs.
In addition, the Company sponsors a conduit to which it previously transferred high-grade investment securities. Under accounting rules effective prior to January 1, 2010, the Company was not the primary beneficiary of the conduit as it did not absorb the majority of the conduit’s expected losses or residual returns. Under the new accounting guidance, the Company consolidated the conduit on January 1, 2010, because of its ability to manage the activities of the conduit. Consolidation of the conduit increased held-to-maturity investment securities $.6 billion, decreased loans $.7 billion, and reduced retained earnings $73 million. At June 30, 2010, $.5 billion of the held-to-maturity investment securities on the Company’s consolidated balance sheet were related to the conduit.
The Company is not required to consolidate other VIEs in which it is not the primary beneficiary. In such cases, the Company does not control the entities’ most significant activities or does not have the obligation to absorb losses or right to receive benefits that are significant to the VIE. The Company’s investments in unconsolidated VIEs ranged from less than $1 million to $107 million, with an aggregate amount of approximately $2.2 billion at June 30, 2010, and from less than $1 million to $63 million, with an aggregate amount of $2.4 billion at December 31, 2009. 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 is remote, the Company’s maximum exposure to these unconsolidated VIEs, including any tax implications, was approximately $5.0 billion at June 30, 2010, compared with $4.7 billion at December 31, 2009. This maximum exposure is 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.
 
 
 
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Note 6    Mortgage Servicing Rights
 
The Company serviced $163.2 billion of residential mortgage loans for others at June 30, 2010, and $150.8 billion at December 31, 2009. The net impact included in mortgage banking revenue of assumption changes on the fair value of mortgage servicing rights (“MSRs”) and fair value changes of derivatives used to offset MSR value changes was a net gain of $55 million and $45 million for the three months ended June 30, 2010, and 2009, respectively, and a net gain of $97 million and $47 million for the six months ended June 30, 2010 and 2009, respectively. Loan servicing fees, not including valuation changes included in mortgage banking revenue, were $143 million and $126 million for the three months ended June 30, 2010 and 2009, respectively, and $285 million and $243 million for the six months ended June 30, 2010 and 2009, respectively.
 
Changes in fair value of capitalized MSRs are summarized as follows:
 
                                       
    Three Months Ended
        Six Months Ended
   
    June 30,         June 30,    
(Dollars in Millions)   2010     2009         2010     2009    
Balance at beginning of period
  $ 1,778     $ 1,182         $ 1,749     $ 1,194    
Rights purchased
    33       42           38       75    
Rights capitalized
    117       239           249       432    
Changes in fair value of MSRs:
                                     
Due to change in valuation assumptions (a)
    (314 )     131           (350 )     (4 )  
Other changes in fair value (b)
    (71 )     (112 )         (143 )     (215 )  
                                       
Balance at end of period
  $ 1,543     $ 1,482         $ 1,543     $ 1,482    
                                       
(a) Principally reflects changes in discount rates and prepayment speed 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 June 30, 2010, was as follows:
 
                                       
    Down Scenario         Up Scenario    
(Dollars in Millions)   50 bps     25 bps         25 bps     50 bps    
Net fair value
  $ 10     $ 4         $ 8     $ 15    
                                       
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. Mortgage loans originated as part of government agency and state loans programs tend to experience slower prepayment rates and better cash flows than conventional mortgage loans.
A summary of the Company’s MSRs and related characteristics by portfolio at June 30, 2010 was as follows:
 
                                       
(Dollars in Millions)   MRBP     Government         Conventional     Total    
Servicing portfolio
  $ 12,068     $ 24,454         $ 126,709     $ 163,231    
Fair value
  $ 160     $ 281         $ 1,102     $ 1,543    
Value (bps) (a)
    133       115           87       95    
Weighted-average servicing fees (bps)
    40       39           31       33    
Multiple (fair value/weighted-average servicing fees)
    3.33       2.95           2.81       2.88    
Weighted-average note rate
    5.88%       5.54   %       5.44%       5.49   %
Age (in years)
    4.1       2.2           2.6       2.7    
Expected life (in years)
    6.4       4.2           4.2       4.4    
Discount rate
    11.9%       11.4   %       10.6%       10.8   %
                                       
(a) Value is calculated as fair value divided by the servicing portfolio.
 
 
 
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Note 7    Preferred Stock
 
At June 30, 2010 and December 31, 2009, 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:
 
                                                                           
    June 30, 2010         December 31, 2009    
    Shares
                            Shares
                       
    Issued and
    Liquidation
            Carrying
        Issued and
    Liquidation
            Carrying
   
(Dollars in Millions)   Outstanding     Preference       Discount     Amount         Outstanding     Preference       Discount     Amount    
Series A
    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)
    65,746     $ 2,075       $ 145     $ 1,930           60,000     $ 1,500       $     $ 1,500    
                                                                           
(a) The par value of all shares issued and outstanding at June 30, 2010 and December 31, 2009, was $1.00 a share.
On June 10, 2010, the Company exchanged depositary shares representing an ownership interest in 5,746 shares of Series A Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $100,000 per share (the “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. 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 semi-annually, in arrears, at a rate per annum equal to 7.189 percent through a specified stock purchase date for the remaining untendered ITS expected to be April 15, 2011, and thereafter, payable quarterly, 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 subsequent to the stock purchase date, subject to prior approval by the Federal Reserve Board.
For further information on junior subordinated debentures and preferred stock, refer to Notes 14 and 15, respectively, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
 

Note 8    Earnings Per Share
 
The components of earnings per share were:
 
                                       
    Three Months Ended
        Six Months Ended
   
    June 30,         June 30,    
(Dollars and Shares in Millions, Except Per Share Data)   2010     2009         2010     2009    
Net income attributable to U.S. Bancorp
  $ 766     $ 471         $ 1,435     $ 1,000    
Preferred dividends
    (18 )     (90 )         (37 )     (190 )  
Equity portion of gain on ITS exchange transaction, net of tax
    118                 118          
Accretion of preferred stock discount
          (6 )               (14 )  
Deemed dividend on preferred stock redemption
          (154 )               (154 )  
Earnings allocated to participating stock awards
    (4 )               (6 )     (2 )  
                                       
Net income applicable to U.S. Bancorp common shareholders
  $ 862     $ 221         $ 1,510     $ 640    
                                       
Average common shares outstanding
    1,912       1,833           1,911       1,794    
Net effect of the exercise and assumed purchase of stock awards and conversion of outstanding convertible notes
    9       7           9       7    
                                       
Average diluted common shares outstanding
    1,921       1,840           1,920       1,801    
                                       
Earnings per common share
  $ .45     $ .12         $ .79     $ .36    
Diluted earnings per common share
  $ .45     $ .12         $ .79     $ .36    
                                       
Options and warrants to purchase 56 million and 109 million common shares for the three months ended June 30, 2010 and 2009, respectively, and 56 million and 109 million common shares for the six months ended June 30, 2010 and 2009, respectively, were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.
 
 
 
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Note 9    Employee Benefits
 
The components of net periodic benefit cost for the Company’s retirement plans were:
 
                                                                           
    Three Months Ended June 30,         Six Months Ended June 30,    
            Postretirement
                Postretirement
   
    Pension Plans       Welfare Plan         Pension Plans       Welfare Plan    
(Dollars in Millions)   2010     2009       2010     2009         2010     2009       2010     2009    
Service cost
  $ 23     $ 20       $ 2     $ 2         $ 46     $ 40       $ 4     $ 3    
Interest cost
    39       38         3       3           78       76         5       6    
Expected return on plan assets
    (53 )     (53 )       (1 )     (2 )         (107 )     (107 )       (2 )     (3 )  
Prior service (credit) cost and transition (asset) obligation amortization
    (3 )     (2 )                       (6 )     (3 )                
Actuarial (gain) loss amortization
    16       12         (2 )     (2 )         32       24         (3 )     (4 )  
                                                                           
Net periodic benefit cost
  $ 22     $ 15       $ 2     $ 1         $ 43     $ 30       $ 4     $ 2    
                                                                           
 

Note 10    Income Taxes
 
The components of income tax expense were:
 
                                       
    Three Months Ended
        Six Months Ended
   
    June 30,         June 30,    
(Dollars in Millions)   2010     2009         2010     2009    
Federal
                                     
Current
  $ 301     $ 310         $ 455     $ 684    
Deferred
    (123 )     (225 )         (143 )     (520 )  
                                       
Federal income tax
    178       85           312       164    
State
                                     
Current
    32       36           61       85    
Deferred
    (11 )     (21 )         (13 )     (48 )  
                                       
State income tax
    21       15           48       37    
                                       
Total income tax provision
  $ 199     $ 100         $ 360     $ 201    
                                       
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
        Six Months Ended
   
    June 30,         June 30,    
(Dollars in Millions)   2010     2009         2010     2009    
Tax at statutory rate
  $ 333     $ 205         $ 622     $ 431    
State income tax, at statutory rates, net of federal tax benefit
    14       10           31       24    
Tax effect of
                                     
Tax credits
    (110 )     (76 )         (210 )     (151 )  
Tax-exempt income
    (53 )     (49 )         (105 )     (98 )  
Noncontrolling interests
    5       (4 )         7       (10 )  
Other items
    10       14           15       5    
                                       
Applicable income taxes
  $ 199     $ 100         $ 360     $ 201    
                                       
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 June 30, 2010, 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 liability was $309 million at June 30, 2010, and $190 million at December 31, 2009.
 
 
 
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Note 11    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”); or a customer accommodation or an economic hedge for asset/liability risk management purposes (“free-standing derivative”).
Of the Company’s $46.9 billion of total notional amount of asset and liability management positions at June 30, 2010, $9.5 billion was designated as a fair value, cash flow or net investment hedge. When a derivative is designated as either a fair value, cash flow or net investment hedge, the Company performs an assessment, at inception and 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 six months ended June 30, 2010, 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 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. At June 30, 2010, the Company had $454 million of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss). The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2010 and the next 12 months is a loss of $64 million and $124 million, 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 six months ended June 30, 2010, 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 net amount of related gains or losses included in the cumulative translation adjustment for the first six months of 2010 was not material.
 
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 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 to accommodate its customers. To mitigate the market and liquidity risk associated with these customer accommodation derivatives, the Company enters into similar offsetting positions.
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:
 
                                       
    June 30, 2010         December 31, 2009    
    Asset
    Liability
        Asset
    Liability
   
(Dollars in millions)   Derivatives     Derivatives         Derivatives     Derivatives    
Total fair value of derivative positions
  $ 1,960     $ 2,440         $ 1,582     $ 1,854    
Netting (a)
    (244 )     (1,375 )         (421 )     (995 )  
                                       
Total
  $ 1,716     $ 1,065         $ 1,161     $ 859    
                                       
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 June 30, 2010, the amount of cash and money market investments collateral posted by counterparties that was netted against derivative assets was $92 million and the amount of cash collateral posted by the Company that was netted against derivative liabilities was $1.2 billion. At December 31, 2009, the amount of cash collateral posted by counterparties that was netted against derivative assets was $116 million and the amount of cash collateral posted by the Company that was netted against derivative liabilities was $691 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    
June 30, 2010
                                                       
Fair value hedges
                                                       
Interest rate contracts
                                                       
Receive fixed/pay floating swaps
  $ 2,575     $ 128         51.30       $       $          
Foreign exchange cross-currency swaps
    424       61         5.12         1,224         51       6.67    
Cash flow hedges
                                                       
Interest rate contracts
                                                       
Pay fixed/receive floating swaps
                          4,788         748       5.53    
Net investment hedges
                                                       
Foreign exchange forward contracts
                          462               .04    
Other economic hedges
                                                       
Interest rate contracts
                                                       
Futures and forwards
                                                       
Buy
    16,810       185         .08         27               .13    
Sell
    765               .17         9,520         173       .11    
Options
                                                       
Purchased
    3,500               .11                          
Written
    3,928       56         .10         7               .13    
Foreign exchange forward contracts
    505       8         .06         145               .09    
Equity contracts
                          58         6       2.05    
Credit contracts
    830       5         3.27         1,353         1       2.88    
December 31, 2009
                                                       
Fair value hedges
                                                       
Interest rate contracts
                                                       
Receive fixed/pay floating swaps
    3,235       70         32.71         1,950         32       20.52    
Foreign exchange cross-currency swaps
    1,864       272         6.81                          
Cash flow hedges
                                                       
Interest rate contracts
                                                       
Pay fixed/receive floating swaps
                          8,363         556       3.58    
Net investment hedges
                                                       
Foreign exchange forward contracts
    536       15         .08                          
Other economic hedges
                                                       
Interest rate contracts
                                                       
Futures and forwards
                                                       
Buy
    1,250       6         .07         9,862         190       .05    
Sell
    7,533       91         .11         1,260         3       .06    
Options
                                                       
Purchased
    5,250               .06                          
Written
    2,546       9         .08         594         2       .09    
Foreign exchange forward contracts
    113       1         .08         293         2       .08    
Equity contracts
    27       2         1.58         29         1       .29    
Credit contracts
    863       2         3.68         1,261         1       3.05    
                                                         
 
 
 
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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  
June 30, 2010
                                                 
Interest rate contracts
                                                 
Receive fixed/pay floating swaps
  $ 18,702     $ 1,178       4.60       $ 129     $ 2       5.93  
Pay fixed/receive floating swaps
    221       2       6.00         18,570       1,136       4.64  
Options
                                                 
Purchased
    1,959       13       1.83         294       36       .39  
Written
    495       36       .43         1,745       13       2.00  
Foreign exchange rate contracts
                                                 
Forwards, spots and swaps (a)
    5,758       280       .47         5,670       266       .47  
Options
                                                 
Purchased
    234       8       .38                      
Written
                        234       8       .38  
December 31, 2009
                                                 
Interest rate contracts
                                                 
Receive fixed/pay floating swaps
    18,700       854       4.46         1,083       19       7.00  
Pay fixed/receive floating swaps
    1,299       24       7.36         18,490       821       4.45  
Options
                                                 
Purchased
    1,841       20       1.68         231       12       .85  
Written
    477       12       .56         1,596       20       1.90  
Foreign exchange rate contracts
                                                 
Forwards, spots and swaps (a)
    5,607       193       .46         5,563       184       .45  
Options
                                                 
Purchased
    311       11       .64                      
Written
                        311       11       .64  
                                                   
(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:
 
                                                                     
      Three Months Ended June 30,       Six Months Ended June 30  
      Gains (Losses)
    Gains (Losses)
      Gains (Losses)
    Gains (Losses)
 
      Recognized in Other
    Reclassified from Other Comprehensive
      Recognized in Other
    Reclassified from Other Comprehensive
 
      Comprehensive
    Income (Loss)
      Comprehensive
    Income (Loss)
 
      Income (Loss)     into Earnings       Income (Loss)     into Earnings  
(Dollars in Millions)     2010     2009     2010     2009       2010     2009     2010     2009  
Asset and Liability Management Positions
                                                                   
Cash flow hedges
                                                                   
Interest rate contracts
                                                                   
Pay fixed/receive floating swaps (a)
    $ (103 )   $ 172     $ (36 )   $ (2 )     $ (127 )   $ 248     $ (79 )   $ (5 )
Net investment hedges
                                                                   
Foreign exchange forward contracts
      48       (29 )                   17       (9 )            
                                                                     
Note: Ineffectiveness on cash flow and net investment hedges was not material for the three months and six months ended June 30, 2010 and 2009.
(a) Gains (Losses) reclassified from other comprehensive income (loss) into interest income (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 customer-related positions:
 
                                               
            Gains (Losses) Recognized in Earnings  
    Location of
      Three Months Ended June 30,       Six Months Ended June 30,  
    Gains (Losses)
               
(Dollars in Millions)   Recognized in Earnings       2010       2009       2010     2009  
Asset and Liability Management Positions
                                             
Fair value hedges (a)
                                             
Interest rate contracts
    Other noninterest income       $ 12       $ (75 )     $ (84 )   $ (105 )
Foreign exchange cross-currency swaps
    Other noninterest income         (161 )       104         (231 )     51  
Other economic hedges
                                             
Interest rate contracts
                                             
Futures and forwards
    Mortgage banking revenue         249         116         269       273  
Purchased and written options
    Mortgage banking revenue         121         48         191       157  
Foreign exchange forward contracts
    Commercial products revenue         20         (31 )       9       (20 )
Equity contracts
    Compensation expense         2         5         2       (14 )
Credit contracts
    Other noninterest income/expense                               35  
Customer-Related Positions
                                             
Interest rate contracts
                                             
Receive fixed/pay floating swaps
    Other noninterest income         285         (440 )       354       (571 )
Pay fixed/receive floating swaps
    Other noninterest income         (282 )       451         (349 )     601  
Purchased and written options
    Other noninterest income                 (1 )             (1 )
Foreign exchange rate contracts
                                             
Forwards, spots and swaps
    Commercial products revenue         11         13         21       28  
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 $(11) million and $161 million for the three months ended June 30, 2010, respectively, and $73 million and $(104) million for the three months ended June 30, 2009, respectively. Gains (Losses) on items hedged by interest rate contracts and foreign exchange forward contracts, included in noninterest income (expense), were $83 million and $230 million for the six months ended June 30, 2010, respectively, and $103 million and $(50) million for the six months ended June 30, 2009, respectively. The ineffective portion was immaterial for the three months and six months ended June 30, 2010 and 2009.
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 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 June 30, 2010, was $1.8 billion. At June 30, 2010, the Company had $1.2 billion of cash posted as collateral against this net liability position.
 
 
 
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Note 12    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, 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 investments 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 second quarter and first six months of 2010 and 2009, there were no significant transfers of financial assets or financial liabilities between the hierarchy levels, except for the transfer of non-agency mortgage-backed securities from Level 2 to Level 3 in the first quarter of 2009, as discussed below.
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
 
 
 
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verified, where possible, to prices of observable market trades as obtained from independent sources. Securities measured at fair value by such methods are classified as Level 2.
The fair value of securities for which there are no market trades, or where trading is inactive as compared to normal market activity, are categorized as Level 3. Securities classified as Level 3 include non-agency mortgage-backed securities, SIV-related, commercial mortgage-backed and asset-backed securities, collateralized debt obligations and collateralized loan obligations, and certain corporate debt securities. Beginning in the first quarter of 2009, 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. The use of a cash flow methodology resulted in the Company transferring some non-agency mortgage-backed securities to Level 3 in the first quarter of 2009. This transfer did not impact earnings and was not significant to shareholders’ equity of the Company or the carrying amount of the securities.
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 at June 30, 2010:
 
                                                     
    Prime (a)       Non-prime  
    Minimum     Maximum     Average       Minimum       Maximum     Average  
Estimated lifetime prepayment rates
    4 %     28 %     13 %       1 %       13 %     6 %
Lifetime probability of default rates
          10       1                 20       7  
Lifetime loss severity rates
          100       45         10         79       55  
Discount margin
    3       26       6         2         27       12  
                                                     
(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. Included in mortgage banking revenue was a $84 million net gain and a $67 million net loss for the second quarter of 2010 and 2009, respectively, and a $126 million net gain and a $35 million net loss for the first six months of 2010 and 2009, 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 $4.7 billion as of June 30, 2010, which exceeded the unpaid principal balance by $198 million as of that date. MLHFS are Level 2. Related 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 in 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 appraisals. Risks inherent in MSRs valuation include higher than expected prepayment rates and/or delayed receipt of cash flows.
 
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.
 
 
 
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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 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  
June 30, 2010
                                           
Available-for-sale securities
                                           
U.S. Treasury and agencies
  $ 9     $ 2,538       $       $     $ 2,547  
Mortgage-backed securities
                                           
Residential
                                           
Agency
        $ 33,435                       33,435  
Non-agency
                                           
Prime
                  1,197               1,197  
Non-prime
                  907               907  
Commercial
                  15               15  
Asset-backed securities
                                           
Collateralized debt obligations/Collateralized loan obligations
          90         75               165  
Other
          588         328               916  
Obligations of state and political subdivisions
          6,784                       6,784  
Obligations of foreign governments
          6                       6  
Corporate debt securities
          917         10               927  
Perpetual preferred securities
          431                       431  
Other investments
    177       4         266               447  
                                             
Total available-for-sale
    186       44,793         2,798               47,777  
Mortgage loans held for sale
          4,650                       4,650  
Mortgage servicing rights
                  1,543               1,543  
Derivative assets
          632         1,328         (244 )     1,716  
Other assets
          432                       432  
                                             
Total
  $ 186     $ 50,507       $ 5,669       $ (244 )   $ 56,118  
                                             
Derivative liabilities
  $     $ 2,406       $ 34       $ (1,375 )   $ 1,065  
Other liabilities
          434                       434  
                                             
Total
  $     $ 2,840       $ 34       $ (1,375 )   $ 1,499  
                                             
December 31, 2009
                                           
Available-for-sale securities
                                           
U.S. Treasury and agencies
  $ 9     $ 3,395       $       $     $ 3,404  
Mortgage-backed securities
                                           
Residential
                                           
Agency
        $ 29,742                       29,742  
Non-agency
                                           
Prime
                  1,429               1,429  
Non-prime
                  968               968  
Commercial
                  13               13  
Asset-backed securities
                                           
Collateralized debt obligations/Collateralized loan obligations
          107         98               205  
Other
                  357               357  
Obligations of state and political subdivisions
          6,693                       6,693  
Obligations of foreign governments
          6                       6  
Corporate debt securities
          868         10               878  
Perpetual preferred securities
          423                       423  
Other investments
    372               231               603  
                                             
Total available-for-sale
    381       41,234         3,106               44,721  
Mortgage loans held for sale
          4,327                       4,327  
Mortgage servicing rights
                  1,749               1,749  
Derivative assets
          713         869         (421 )     1,161  
Other assets
          247                       247  
                                             
Total
  $ 381     $ 46,521       $ 5,724       $ (421 )   $ 52,205  
                                             
Derivative liabilities
  $     $ 1,800       $ 54       $ (995 )   $ 859  
Other liabilities
          256                       256  
                                             
Total
  $     $ 2,056       $ 54       $ (995 )   $ 1,115  
                                             
 
 
 
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The following tables below present the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
 
                                                         
                Net Gains
                      Net Change in
 
                (Losses)
    Purchases,
                Unrealized Gains
 
          Net Gains
    Included in
    Sales, Principal
                (Losses) Relating
 
    Beginning
    (Losses)
    Other
    Payments,
          End
    to Assets
 
Three Months Ended June 30,
  of Period
    Included in
    Comprehensive
    Issuances and
    Transfers into
    of Period
    Still Held at
 
(Dollars in Millions)   Balance     Net Income     Income (Loss)     Settlements     Level 3     Balance     End of Period  
2010
                                                       
Available-for-sale securities
                                                       
Mortgage-backed securities
                                                       
Residential non-agency
                                                       
Prime
  $ 1,304     $     $ 21     $ (128 )   $     $ 1,197     $ 19  
Non-prime
    900       (6 )     52       (39 )           907       52  
Commercial
    14             1                   15       1  
Asset-backed securities
                                                       
Collateralized debt obligations/Collateralized loan obligations
    79       (2 )     (2 )                 75       (1 )
Other
    335       (3 )     4       (8 )           328       5  
Corporate debt securities
    10                               10        
Other securities and investments
    237       4       34       (9 )           266       34  
                                                         
Total available-for-sale
    2,879       (7 )(a)     110       (184 )           2,798       110  
Mortgage servicing rights
    1,778       (385 )(b)           150             1,543       (385 )(b)
Net derivative assets and liabilities
    905       472 (c)           (83 )           1,294       68 (d)
2009
                                                       
Available-for-sale securities
                                                       
Mortgage-backed securities
                                                       
Residential non-agency
                                                       
Prime
  $ 2,560     $ 1     $ 100     $ (230 )   $     $ 2,431     $ 100  
Non-prime
    1,060       (49 )     103       (56 )           1,058       103  
Commercial
    15                               15        
Asset-backed securities
                                                       
Collateralized debt obligations/Collateralized loan obligations
    82             3       (1 )           84       3  
Other
    502       (25 )     (41 )     (1 )           435       (42 )
Corporate debt securities
    10                               10        
                                                         
Total available-for-sale
    4,229       (73 )(a)     165       (288 )           4,033       164  
Mortgage servicing rights
    1,182       19 (b)           281             1,482       19 (b)
Net derivative assets and liabilities
    1,556       (602 )(b)           13       1       968       (595 )(e)
                                                         
(a) Included in securities gains (losses).
(b) Included in mortgage banking revenue.
(c) Approximately $158 million included in other noninterest income and $314 million included in mortgage banking revenue.
(d) Approximately $260 million included in other noninterest income and $(192) million included in mortgage banking revenue.
(e) Approximately $(478) million included in other noninterest income and $(117) million included in mortgage banking revenue.
 
 
 
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                Net Gains
                      Net Change in
 
                (Losses)
    Purchases,
                Unrealized Gains
 
          Net Gains
    Included in
    Sales, Principal
                (Losses) Relating
 
    Beginning
    (Losses)
    Other
    Payments,
          End
    to Assets
 
Six Months Ended June 30,
  of Period
    Included in
    Comprehensive
    Issuances and
    Transfers into
    of Period
    Still Held at
 
(Dollars in Millions)   Balance     Net Income     Income (Loss)     Settlements     Level 3     Balance     End of Period  
2010
                                                       
Available-for-sale securities
                                                       
Mortgage-backed securities
                                                       
Residential non-agency
                                                       
Prime
  $ 1,429     $     $ 50     $ (282 )   $     $ 1,197     $ 44  
Non-prime
    968       (37 )     68       (92 )           907       68  
Commercial
    13             2                   15       1  
Asset-backed securities
                                                       
Collateralized debt obligations/Collateralized loan obligations
    98             (2 )     (21 )           75        
Other
    357       (5 )     (2 )     (22 )           328       (1 )
Corporate debt securities
    10                               10        
Other securities and investments
    231       2       47       (14 )           266       47  
                                                         
Total available-for-sale
    3,106       (40 )(a)     163       (431 )           2,798       159  
Mortgage servicing rights
    1,749       (493 )(b)           287             1,543       (493 )(b)
Net derivative assets and liabilities
    815       492 (c)           (13 )           1,294       42 (d)
2009
                                                       
Available-for-sale securities
                                                       
Mortgage-backed securities
                                                       
Residential non-agency
                                                       
Prime
  $ 183     $ (5 )   $ 368     $ (363 )   $ 2,248     $ 2,431     $ 360  
Non-prime
    1,022       (75 )     81       (103 )     133       1,058       (42 )
Commercial
    17       (1 )     (1 )                 15       (1 )
Asset-backed securities
                                                       
Collateralized debt obligations/Collateralized loan obligations
    86       (5 )     5       (6 )     4       84       4  
Other
    523       (40 )     (37 )     (14 )     3       435       (134 )
Corporate debt securities
    13       (3 )                       10        
                                                         
Total available-for-sale
    1,844       (129 )(a)     416       (486 )     2,388       4,033       187  
Mortgage servicing rights
    1,194       (219 )(b)           507             1,482       (219 )(b)
Net derivative assets and liabilities
    1,698       (639 )(e)           (92 )     1       968       (1,002 )(f)
                                                         
(a) Included in securities gains (losses).
(b) Included in mortgage banking revenue.
(c) Approximately $46 million included in other noninterest income and $446 million included in mortgage banking revenue.
(d) Approximately $339 million included in other noninterest income and $(297) million included in mortgage banking revenue.
(e) Approximately $(921) million included in other noninterest income and $282 million included in mortgage banking revenue.
(f) Approximately $(663) million included in other noninterest income and $(339) million included in mortgage banking revenue.
 
 
 
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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:
 
                                                                   
    June 30, 2010       December 31, 2009  
(Dollars in Millions)   Level 1     Level 2     Level 3     Total       Level 1     Level 2     Level 3     Total  
Loans held for sale (a)
  $     $     $     $       $     $ 276     $     $ 276  
Loans (b)
          165       31       196               235       5       240  
Other real estate owned (c)
          164             164               183             183  
Other intangible assets
                                          3       3  
                                                                   
(a) Represents carrying value of loans held for sale for which adjustments are based on what secondary markets are currently offering for portfolios with similar characteristics.
(b) Represents carrying value of loans for which adjustments are based on the appraised value of the collateral, excluding loans fully charged-off.
(c) Represents the fair value of foreclosed properties that were measured at fair value based on the appraisal value 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
      Six Months
 
    Ended June 30,       Ended June 30,  
(Dollars in Millions)   2010     2009       2010     2009  
Loans held for sale
  $     $       $     $ 1  
Loans (a)
    92       59         213       145  
Other real estate owned (b)
    65       42         115       64  
Other intangible assets
          1               1  
                                   
(a) Represents write-downs of loans which are based on the appraised 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:
 
                                                   
    June 30, 2010       December 31, 2009  
                Excess of
                  Excess of
 
                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
  $ 4,650     $ 4,452     $ 198       $ 4,327     $ 4,264     $ 63  
Loans 90 days or more past due
    19       27       (8 )       23       30       (7 )
                                                   
 
 
 
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Disclosures about Fair Value of Financial Instruments The following table summarizes the estimated fair value for financial instruments as of June 30, 2010 and December 31, 2009, 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.
 
                                   
    June 30, 2010       December 31, 2009  
    Carrying
    Fair
      Carrying
    Fair
 
(Dollars in Millions)   Amount     Value       Amount     Value  
Financial Assets
                                 
Cash and due from banks
  $ 5,033     $ 5,033       $ 6,206     $ 6,206  
Investment securities held-to-maturity
    590       519         47       48  
Mortgages held for sale (a)
    5       5         29       29  
Other loans held for sale
    257       257         416       416  
Loans
    186,264       186,568         189,676       184,157  
Financial Liabilities
                                 
Deposits
    183,123       183,666         183,242       183,504  
Short-term borrowings
    33,797       34,204         31,312       31,674  
Long-term debt
    29,137       29,784         32,580       32,808  
                                   
(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 $356 million at June 30, 2010 and December 31, 2009, respectively. The carrying value of other guarantees was $279 million and $285 million at June 30, 2010 and December 31, 2009, respectively.
 

Note 13    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”). In addition, 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 initial 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 third quarter of 2009 and the second quarter of 2010, 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 gains of $39 million and $28 million during the third quarter of 2009 and second quarter of 2010, respectively, related to the effective repurchase of a portion of its Class B shares.
 
 
 
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At June 30, 2010, the carrying amount of the Company’s liability related to the remaining Visa Litigation matters was $91 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 in 2011 or upon resolution of the Visa Litigation, whichever is later.
The following table is a summary of other guarantees and contingent liabilities of the Company at June 30, 2010:
 
                 
          Maximum
 
          Potential
 
    Carrying
    Future
 
(Dollars in Millions)   Amount     Payments  
Standby letters of credit
  $ 111     $ 18,498  
Third-party borrowing arrangements
          133  
Securities lending indemnifications
          7,139  
Asset sales (a)
    96       1,216  
Merchant processing
    68       72,058  
Other guarantees
    3       5,794  
Other contingent liabilities
    21       2,008  
                 
(a) The maximum potential future payments does not include loan sales where the Company provides standard representations and warranties to the buyer against losses related to loan underwriting documentation. For these types of loan sales, the maximum potential future payments are not readily determinable because the Company’s obligation under these agreements depends upon the occurrence of future events.
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 June 30, 2010, the value of airline tickets purchased to be delivered at a future date was $5.6 billion. The Company held collateral of $551 million in escrow deposits, letters of credit and indemnities from financial institutions, and liens on various assets.
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, 2009.
 

Note 14    Subsequent Events
 
The Company has evaluated the impact of events that have occurred subsequent to June 30, 2010 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 in the consolidated financial statements.
 
 
 
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U.S. Bancorp
Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)
 
                                                                 
    For the Three Months Ended June 30,              
    2010       2009              
                Yields
                  Yields
      % Change
     
(Dollars in Millions)
  Average
          and
      Average
          and
      Average
     
(Unaudited)   Balances     Interest     Rates       Balances     Interest     Rates       Balances      
Assets
                                                               
Investment securities
  $ 47,140     $ 434       3.69 %     $ 42,189     $ 443       4.20 %       11.7 %    
Loans held for sale
    4,048       47       4.61         6,092       71       4.65         (33.6 )    
Loans (b)
                                                               
Commercial
    46,340       488       4.22         54,059       523       3.89         (14.3 )    
Commercial real estate
    34,164       377       4.43         33,727       361       4.29         1.3      
Residential mortgages
    26,821       351       5.24         23,964       338       5.64         11.9      
Retail
    63,382       1,061       6.71         61,427       1,011       6.60         3.2      
                                                                 
Total loans, excluding covered loans
    170,707       2,277       5.35         173,177       2,233       5.17         (1.4 )    
Covered loans
    20,454       252       4.93         10,701       124       4.66         91.1      
                                                                 
Total loans
    191,161       2,529       5.30         183,878       2,357       5.14         4.0      
Other earning assets
    5,097       39       3.03         2,106       22       4.16         *      
                                                                 
Total earning assets
    247,446       3,049       4.94         234,265       2,893       4.95         5.6      
Allowance for loan losses
    (5,443 )                       (4,260 )                       (27.8 )    
Unrealized gain (loss) on available-for-sale securities
    (19 )                       (1,857 )                       99.0      
Other assets
    39,356                         37,959                         3.7      
                                                                 
Total assets
  $ 281,340                       $ 266,107                         5.7      
                                                                 
Liabilities and Shareholders’ Equity
                                                               
Noninterest-bearing deposits
  $ 39,917                       $ 37,388                         6.8      
Interest-bearing deposits
                                                               
Interest checking
    39,503       18       .19         37,393       21       .23         5.6      
Money market savings
    40,256       33       .34         27,250       34       .50         47.7      
Savings accounts
    20,035       30       .59         12,278       16       .52         63.2      
Time certificates of deposit less than $100,000
    16,980       75       1.77         17,968       123       2.73         (5.5 )    
Time deposits greater than $100,000
    26,627       73       1.09         30,943       120       1.56         (13.9 )    
                                                                 
Total interest-bearing deposits
    143,401       229       .64         125,832       314       1.00         14.0      
Short-term borrowings
    32,286       139       1.72         27,638       134       1.96         16.8      
Long-term debt
    30,242       272       3.60         38,768       341       3.53         (22.0 )    
                                                                 
Total interest-bearing liabilities
    205,929       640       1.25         192,238       789       1.65         7.1      
Other liabilities
    7,328                         7,565                         (3.1 )    
Shareholders’ equity
                                                               
Preferred equity
    1,599                         6,951                         (77.0 )    
Common equity
    25,820                         21,251                         21.5      
                                                                 
Total U.S. Bancorp shareholders’ equity
    27,419                         28,202                         (2.8 )    
Noncontrolling interests
    747                         714                         4.6      
                                                                 
Total equity
    28,166                         28,916                         (2.6 )    
                                                                 
Total liabilities and equity
  $ 281,340                       $ 266,107                         5.7 %    
                                                                 
Net interest income
          $ 2,409                       $ 2,104                        
                                                                 
Gross interest margin
                    3.69 %                       3.30 %              
                                                                 
Gross interest margin without taxable-equivalent increments
                    3.61                         3.21                
                                                                 
Percent of Earning Assets
                                                               
Interest income
                    4.94 %                       4.95 %              
Interest expense
                    1.04                         1.35                
                                                                 
Net interest margin
                    3.90 %                       3.60 %              
                                                                 
Net interest margin without taxable-equivalent increments
                    3.82 %                       3.51 %              
                                                                 
* 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 Six Months Ended June 30,              
    2010       2009              
                Yields
                  Yields
      % Change
     
(Dollars in Millions)
  Average
          and
      Average
          and
      Average
     
(Unaudited)   Balances     Interest     Rates       Balances     Interest     Rates       Balances      
Assets
                                                               
Investment securities
  $ 46,678     $ 885       3.79 %     $ 42,255     $ 920       4.35 %       10.5 %    
Loans held for sale
    3,990       91       4.56         5,644       134       4.75         (29.3 )    
Loans (b)
                                                               
Commercial
    46,805       971       4.17         55,091       1,057       3.86         (15.0 )    
Commercial real estate
    34,153       747       4.41         33,563       718       4.31         1.8      
Residential mortgages
    26,616       698       5.25         23,940       684       5.73         11.2      
Retail
    63,502       2,125       6.75         61,170       2,003       6.60         3.8      
                                                                 
Total loans, excluding covered loans
    171,076       4,541       5.34         173,764       4,462       5.17         (1.5 )    
Covered loans
    20,939       505       4.85         11,022       255       4.66         90.0      
                                                                 
Total loans
    192,015       5,046       5.29         184,786       4,717       5.14         3.9      
Other earning assets
    5,450       73       2.69         2,101       42       4.00         *      
                                                                 
Total earning assets
    248,133       6,095       4.94         234,786       5,813       4.98         5.7      
Allowance for loan losses
    (5,378 )                       (4,009 )                       34.1      
Unrealized gain (loss) on available-for-sale securities
    (212 )                       (2,215 )                       90.4      
Other assets
    38,987                         37,609                         3.7      
                                                                 
Total assets
  $ 281,530                       $ 266,171                         5.8      
                                                                 
Liabilities and Shareholders’ Equity
                                                               
Noninterest-bearing deposits
  $ 38,964                       $ 36,707                         6.1      
Interest-bearing deposits
                                                               
Interest checking
    39,747       37       .19         34,730       36       .21         14.4      
Money market savings
    40,577       70       .35         27,586       71       .52         47.1      
Savings accounts
    19,038       55       .58         11,314       30       .54         68.3      
Time certificates of deposit less than $100,000
    17,654       155       1.77         18,050       251       2.80         (2.2 )    
Time deposits greater than $100,000
    26,947       148       1.11         33,493       250       1.50         (19.5 )    
                                                                 
Total interest-bearing deposits
    143,963       465       .65         125,173       638       1.03         15.0      
Short-term borrowings
    32,418       269       1.67         29,915       282       1.90         8.4      
Long-term debt
    31,343       549       3.52         38,279       694       3.65         (18.1 )    
                                                                 
Total interest-bearing liabilities
    207,724       1,283       1.24         193,367       1,614       1.68         7.4      
Other liabilities
    7,210                         7,863                         (8.3 )    
Shareholders’ equity
                                                               
Preferred equity
    1,550                         7,440                         (79.2 )    
Common equity
    25,369                         20,074                         26.4      
                                                                 
Total U.S. Bancorp shareholders’ equity
    26,919                         27,514                         (2.2 )    
Noncontrolling interests
    713                         720                         (1.0 )    
                                                                 
Total equity
    27,632                         28,234                         (2.1 )    
                                                                 
Total liabilities and equity
  $ 281,530                       $ 266,171                         5.8 %    
                                                                 
Net interest income
          $ 4,812                       $ 4,199                        
                                                                 
Gross interest margin
                    3.70 %                       3.30 %              
                                                                 
Gross interest margin without taxable-equivalent increments
                    3.62                         3.22                
                                                                 
Percent of Earning Assets
                                                               
Interest income
                    4.94 %                       4.98 %              
Interest expense
                    1.04                         1.39                
                                                                 
Net interest margin
                    3.90 %                       3.59 %              
                                                                 
Net interest margin without taxable-equivalent increments
                    3.82 %                       3.51 %              
                                                                 
* 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 — The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. This legislation will have an adverse impact on the Company’s financial results upon full implementation. Among other impacts, this legislation establishes a Consumer Financial Protection Bureau, changes the base for deposit insurance assessments, introduces regulatory rate-setting for interchange fees charged to merchants for debit card transactions, and excludes certain instruments currently included in determining the Tier 1 regulatory capital ratio. The capital instrument exclusion will be phased-in over a three-year period beginning in 2013. Currently the instruments subject to that exclusion increase the Company’s Tier 1 capital ratio by 1.4 percent. Using currently approved deposit insurance assessment rates, the change in assessment base would increase the assessments the Company pays by approximately $200 million annually. Most of the legislation’s other provisions require rulemaking by various regulatory agencies. The Company cannot currently quantify the future impact of this legislation and the related future rulemaking, but expects them to have a detrimental impact on revenues and expenses once fully implemented.
There are a number of other 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, 2009, 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 second quarter of 2010.
 
Capital Covenants — In December 2005, the Company entered into a Replacement Capital Covenant in connection with the issuance of USB Capital VIII’s 6.35 percent Income Capital Obligation Notes due 2035. There has been a redesignation of the series of covered debt benefiting from such Replacement Capital Covenant. Effective July 29, 2008, the Company’s 4.50 percent Medium-Term Notes, Series P ceased being the covered debt and the Company’s 5.875 percent junior subordinated debentures due 2035 became the covered debt benefiting from the Replacement Capital Covenant.
 
Item 6. Exhibits
 
           
  3 .1     Restated Certificate of Incorporation, as amended
  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 June 30, 2010, 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
Executive Vice President and Controller
(Principal Accounting Officer and Duly Authorized Officer)
DATE: August 6, 2010
 
 
 
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EXHIBIT 12
 
Computation of Ratio of Earnings to Fixed Charges
 
                             
              Three Months Ended
    Six Months Ended
 
(Dollars in Millions)   June 30, 2010     June 30, 2010  
Earnings
  1.     Net income attributable to U.S. Bancorp   $ 766     $ 1,435  
  2.     Applicable income taxes, including interest expense related to unrecognized tax positions     199       360  
                             
  3.     Net income attributable to U.S Bancorp before income taxes (1 + 2)   $ 965     $ 1,795  
                             
  4.     Fixed charges:                
        a.   Interest expense excluding interest on deposits*   $ 409     $ 814  
        b.   Portion of rents representative of interest and amortization of debt expense     26       52  
                             
        c.   Fixed charges excluding interest on deposits (4a + 4b)     435       866  
        d.   Interest on deposits     229       465  
                             
        e.   Fixed charges including interest on deposits (4c + 4d)   $ 664     $ 1,331  
                             
  5.     Amortization of interest capitalized   $     $  
  6.     Earnings excluding interest on deposits (3 + 4c + 5)     1,400       2,661  
  7.     Earnings including interest on deposits (3 + 4e + 5)     1,629       3,126  
  8.     Fixed charges excluding interest on deposits (4c)     435       866  
  9.     Fixed charges including interest on deposits (4e)     664       1,331  
Ratio of Earnings to Fixed Charges
  10.     Excluding interest on deposits (line 6/line 8)     3.22       3.07  
  11.     Including interest on deposits (line 7/line 9)     2.45       2.35  
                             
* 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: August 6, 2010
 
 
 
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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: August 6, 2010
 
 
 
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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 June 30, 2010 (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: August 6, 2010
 
 
 
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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, then 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
Steven W. Dale
Senior Vice President, Media Relations
steve.dale@usbank.com
Phone: 612-303-0784
 
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, then Ethics at 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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