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, 2009
 
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.
 
     
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
Common Stock, $.01 Par Value
  Outstanding as of July 31, 2009
1,911,974,478 shares
 


 

 
Table of Contents and Form 10-Q Cross Reference Index
 
     
Part I — Financial Information
   
   
  3
  4
  6
  26
  26
  27
   
  9
  9
  18
  18
  18
  19
  19
  20
  21
  28
   
  56
  56
  56
  56
  57
6) Exhibits
  58
 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. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions. 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. A continuation of the challenging general business and economic conditions and turbulence in the global financial markets could impact U.S. Bancorp’s performance, both directly by affecting its revenues and the value of its assets and liabilities, and indirectly by affecting its customers and counterparties. Dramatic declines in the housing market in the past year have resulted in significant write-downs of asset values by financial institutions. Concerns about the stability of the financial markets generally have reduced the availability of funding to certain financial institutions, leading to a tightening of credit, reduction of business activity, and increased market volatility. There can be no assurance that any governmental program or legislation will help to stabilize the U.S. financial system or alleviate the industry or economic factors that may adversely impact U.S. Bancorp’s business. In addition, U.S. Bancorp’s business and financial performance could be impacted as the financial industry restructures in the current environment, by increased regulation of financial institutions or other effects of recently enacted legislation, by changes in the creditworthiness and performance of its counterparties, and by changes in the competitive landscape. U.S. Bancorp’s results could also be adversely affected by 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, market risk, operational risk, legal risk, and regulatory and compliance 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, 2008, on file with the Securities and Exchange Commission, including the sections entitled “Risk Factors” and “Corporate Risk Profile,” 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
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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)   2009     2008     Change       2009     2008     Change  
Condensed Income Statement
                                                 
Net interest income (taxable-equivalent basis) (a)
  $ 2,104     $ 1,908       10.3 %     $ 4,199     $ 3,738       12.3 %
Noninterest income
    2,074       1,955       6.1         4,060       4,250       (4.5 )
Securities gains (losses), net
    (19 )     (63 )     69.8         (217 )     (314 )     30.9  
                                                   
Total net revenue
    4,159       3,800       9.4         8,042       7,674       4.8  
Noninterest expense
    2,129       1,818       17.1         4,000       3,597       11.2  
Provision for credit losses
    1,395       596       *       2,713       1,081       *
                                                   
Income before taxes
    635       1,386       (54.2 )       1,329       2,996       (55.6 )
Taxable-equivalent adjustment
    50       33       51.5         98       60       63.3  
Applicable income taxes
    100       386       (74.1 )       201       862       (76.7 )
                                                   
Net income
    485       967       (49.8 )       1,030       2,074       (50.3 )
Net income attributable to noncontrolling interests
    (14 )     (17 )     17.6         (30 )     (34 )     11.8  
                                                   
Net income attributable to U.S. Bancorp
  $ 471     $ 950       (50.4 )     $ 1,000     $ 2,040       (51.0 )
                                       
Net income applicable to U.S. Bancorp common shareholders
  $ 221     $ 926       (76.1 )     $ 640     $ 2,003       (68.0 )
                                       
Per Common Share
                                                 
Earnings per share
  $ .12     $ .53       (77.4 )%     $ .36     $ 1.15       (68.7 )%
Diluted earnings per share
    .12       .53       (77.4 )       .36       1.14       (68.4 )
Dividends declared per share
    .050       .425       (88.2 )       .100       .850       (88.2 )
Book value per share
    11.86       11.67       1.6                            
Market value per share
    17.92       27.89       (35.7 )                          
Average common shares outstanding
    1,833       1,740       5.3         1,794       1,735       3.4  
Average diluted common shares outstanding
    1,840       1,755       4.8         1,801       1,752       2.8  
Financial Ratios
                                                 
Return on average assets
    .71 %     1.58 %               .76 %     1.71 %        
Return on average common equity
    4.2       17.9                 6.4       19.6          
Net interest margin (taxable-equivalent basis) (a)
    3.60       3.61                 3.59       3.58          
Efficiency ratio (b)
    51.0       47.1                 48.4       45.0          
Average Balances
                                                 
Loans
  $ 183,878     $ 163,070       12.8 %     $ 184,786     $ 159,151       16.1 %
Loans held for sale
    6,092       3,417       78.3         5,644       4,267       32.3  
Investment securities
    42,189       42,999       (1.9 )       42,255       43,446       (2.7 )
Earning assets
    234,265       212,089       10.5         234,786       209,552       12.0  
Assets
    266,107       242,221       9.9         266,171       239,448       11.2  
Noninterest-bearing deposits
    37,388       27,851       34.2         36,707       27,485       33.6  
Deposits
    163,220       135,809       20.2         161,800       133,333       21.4  
Short-term borrowings
    27,638       38,018       (27.3 )       29,915       36,954       (19.0 )
Long-term debt
    38,768       37,879       2.3         38,279       38,851       (1.5 )
Total U.S. Bancorp shareholders’ equity
    28,202       22,320       26.4         27,514       21,899       25.6  
                                       
                                                   
      June 30,
2009
      December 31,
2008
                                   
                                                   
Period End Balances
                                                 
Loans
  $ 182,312     $ 185,229       (1.6 )%                          
Allowance for credit losses
    4,571       3,639       25.6                            
Investment securities
    40,805       39,521       3.2                            
Assets
    265,560       265,912       (.1 )                          
Deposits
    163,883       159,350       2.8                            
Long-term debt
    39,196       38,359       2.2                            
Total U.S. Bancorp shareholders’ equity
    24,171       26,300       (8.1 )                          
Capital ratios
                                                 
Tier 1 capital
    9.4 %     10.6 %                                  
Total risk-based capital
    13.0       14.3                                    
Leverage
    8.4       9.8                                    
Tier 1 common equity to risk-weighted assets (c)
    6.7       5.1                                    
Tangible common equity to tangible assets (c)
    5.1       3.3                                    
Tangible common equity to risk-weighted assets (c)
    5.7       3.7                                    
 
  * 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 securities gains (losses), net.
(c) See Non-GAAP Financial Measures on page 26.
 
 
 
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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 $471 million for the second quarter of 2009 or $.12 per diluted common share, compared with $950 million, or $.53 per diluted common share for the second quarter of 2008. Return on average assets and return on average common equity were .71 percent and 4.2 percent, respectively, for the second quarter of 2009, compared with 1.58 percent and 17.9 percent, respectively, for the second quarter of 2008. Significant items in the second quarter of 2009 results included a $123 million accrual for a Federal Deposit Insurance Corporation (“FDIC”) special assessment to be paid in the third quarter of 2009 and $19 million of net securities losses. The Company also continued to increase its allowance for credit losses by recording $466 million of provision for credit losses in excess of net charge-offs. In addition, on June 17, 2009, the Company redeemed the $6.6 billion of preferred stock issued to the U.S. Department of the Treasury under the Capital Purchase Program of the Emergency Economic Stabilization Act of 2008. Upon redemption, the Company recorded the remaining $154 million unaccreted discount on the preferred stock in a manner similar to a dividend, reducing earnings per common share. Significant items included in the second quarter of 2008 results were $200 million of provision for credit losses in excess of net charge-offs and net securities losses of $63 million.
Total net revenue, on a taxable-equivalent basis, for the second quarter of 2009 was $359 million (9.4 percent) higher than the second quarter of 2008, reflecting a 10.3 percent increase in net interest income and an 8.6 percent increase in noninterest income. The increase in net interest income from a year ago was principally the result of growth in average earning assets. Noninterest income increased from a year ago, principally due to strong growth in mortgage banking revenue, higher commercial products revenue and lower net securities losses, partially offset by lower payments-related revenue, trust and investment management fees and deposit service charges, all of which were affected by the impact of the slowing economy on equity markets and customer spending. Additionally, the second quarter of 2009 was impacted by lower equity investment valuations.
Total noninterest expense in the second quarter of 2009 was $311 million (17.1 percent) higher than the second quarter of 2008, primarily due to higher FDIC deposit insurance expense, including the $123 million special assessment, higher marketing and litigation-related costs and acquisitions, partially offset by focused reductions in costs as a result of the implementation of the Company’s cost containment plan in the first quarter of 2009.
The provision for credit losses for the second quarter of 2009 increased $799 million over the second quarter of 2008, reflecting continuing stress in residential real estate markets and deteriorating economic conditions and the corresponding impact on the commercial, commercial real estate and consumer loan portfolios. Net charge-offs in the second quarter of 2009 were $929 million, compared with net charge-offs of $396 million in the second quarter of 2008. 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 $1.0 billion for the first six months of 2009 or $.36 per diluted common share, compared with $2.0 billion, or $1.14 per diluted common share for the first six months of 2008. Return on average assets and return on average common equity were .76 percent and 6.4 percent, respectively, for the first six months of 2009, compared with 1.71 percent and 19.6 percent, respectively, for the first six months of 2008. The Company’s results for the first six months of 2009 reflected several significant items, including provision for credit losses in excess of net charge-offs of $996 million, $217 million of net securities losses, the $123 million FDIC special assessment and a $92 million gain from a corporate real estate transaction. Significant items included in the first six months of 2008 results were a $492 million gain related to the Company’s ownership position in Visa, Inc. (“Visa Gain”), $392 million provision for credit losses in excess of net charge-offs and net securities losses of $314 million.
Total net revenue, on a taxable-equivalent basis, for the first six months of 2009 was $368 million (4.8 percent) higher than the first six months of 2008, reflecting a 12.3 percent increase in net interest income and a 2.4 percent decrease in noninterest income. The increase in net interest income from a year ago was a
 
 
 
U.S. Bancorp
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result of growth in average earning assets. Noninterest income decreased due to the Visa Gain in the first six months of 2008, in addition to the impact of the deteriorating economy on equity markets and customer spending. These revenue declines were partially offset by higher mortgage banking and commercial products revenue, a gain from a corporate real estate transaction and a lower level of net securities losses in the first six months of 2009.
Total noninterest expense in the first six months of 2009 was $403 million (11.2 percent) higher than in the first six months of 2008, primarily due to higher FDIC deposit insurance expense, higher marketing and litigation-related costs and acquisitions, which were partially offset by focused reductions in costs as a result of the implementation of the Company’s cost containment plan in the first quarter of 2009.
The provision for credit losses for the first six months of 2009 increased $1.6 billion over the first six months of 2008. The increase in the provision for credit losses reflected continuing stress in residential real estate markets and deteriorating economic conditions and the corresponding impact on the commercial, commercial real estate and consumer loan portfolios. Net charge-offs in the first six months of 2009 were $1.7 billion, compared with net charge-offs of $689 million in the first six months of 2008. 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 $2.1 billion in the second quarter of 2009, compared with $1.9 billion in the second quarter of 2008. Net interest income, on a taxable-equivalent basis, was $4.2 billion in the first six months of 2009, compared with $3.7 billion in the first six months of 2008. The increases were due to growth in average earning assets, which were $22.2 billion (10.5 percent) higher in the second quarter of 2009 and $25.2 billion (12.0 percent) higher in the first six months of 2009, compared with the same periods of 2008, primarily driven by increases in average loans, including originated and acquired loans. The net interest margin in the second quarter and first six months of 2009 was 3.60 percent and 3.59 percent, respectively, compared with 3.61 percent and 3.58 percent, respectively, for the same periods of 2008. Given the current interest rate environment, the Company expects the net interest margin to remain relatively stable for the remainder of 2009. 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 2009 were $20.8 billion (12.8 percent) and $25.6 billion (16.1 percent) higher, respectively, than the same periods of 2008, driven by new loan originations and acquisitions. Retail loan growth, year-over-year, was driven by increases in credit card, home equity and federally-guaranteed student loans. Commercial real estate loan growth reflected new business driven by capital market conditions, slower loan payoffs and an acquisition in the second quarter of 2008. Residential mortgage growth reflected increased origination activity as a result of market interest rate declines. The increase in commercial loans was principally a result of growth in corporate and commercial banking balances as new and existing business customers used bank credit facilities to fund business growth and liquidity requirements. Assets covered by loss sharing agreements with the FDIC (“covered assets”) relate to the 2008 acquisitions of the banking operations of Downey Savings and Loan Association, F.A. and PFF Bank and Trust (“Downey” and “PFF”, respectively) and were $10.7 billion and $11.0 billion in the second quarter and first six months of 2009, respectively.
Average investment securities in the second quarter and first six months of 2009 were $.8 billion (1.9 percent) and $1.2 billion (2.7 percent) lower, respectively, than the same periods of 2008, principally a result of prepayments and sales. The composition of the Company’s investment portfolio remained essentially unchanged from a year ago.
Average total deposits for the second quarter and first six months of 2009 increased $27.4 billion (20.2 percent) and $28.5 billion (21.4 percent), respectively, over the same periods of 2008. Excluding deposits from 2008 and 2009 acquisitions, second quarter 2009 average total deposits increased $15.1 billion (11.2 percent) over the second quarter of 2008. Average noninterest-bearing deposits for the second quarter and first six months of 2009 increased $9.5 billion (34.2 percent) and $9.2 billion (33.6 percent), respectively, compared with same periods of 2008, primarily due to growth in Consumer and Wholesale Banking business lines and the impact of acquisitions. Average total savings deposits increased $12.6 billion (19.7 percent) in the second quarter and $11.0 billion (17.5 percent) in the first six months of 2009, compared with the same periods in 2008, the result of higher Consumer Banking, government, broker-dealer and institutional trust customer balances and
 
 
 
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Table 2    Noninterest Income
 
                                                   
    Three Months Ended
      Six Months Ended
 
    June 30,       June 30,  
                Percent
                  Percent
 
(Dollars in Millions)   2009     2008     Change       2009     2008     Change  
Credit and debit card revenue
  $ 259     $ 266       (2.6 )%     $ 515     $ 514       .2 %
Corporate payment products revenue
    168       174       (3.4 )       322       338       (4.7 )
Merchant processing services
    278       309       (10.0 )       536       580       (7.6 )
ATM processing services
    104       93       11.8         206       177       16.4  
Trust and investment management fees
    304       350       (13.1 )       598       685       (12.7 )
Deposit service charges
    250       278       (10.1 )       476       535       (11.0 )
Treasury management fees
    142       137       3.6         279       261       6.9  
Commercial products revenue
    144       117       23.1         273       229       19.2  
Mortgage banking revenue
    308       81       *       541       186       *
Investment products fees and commissions
    27       37       (27.0 )       55       73       (24.7 )
Securities gains (losses), net
    (19 )     (63 )     69.8         (217 )     (314 )     30.9  
Other
    90       113       (20.4 )       259       672       (61.5 )
                                                   
Total noninterest income
  $ 2,055     $ 1,892       8.6 %     $ 3,843     $ 3,936       (2.4 )%
                                                   
*    Not meaningful

acquisitions. Contributing to the increase in savings accounts was strong participation in a new savings product introduced nationwide by Consumer Banking late in the third quarter of 2008. Average time certificates of deposit less than $100,000 were higher in the second quarter and first six months of 2009 by $5.3 billion (42.2 percent) and $4.9 billion (37.6 percent), respectively, primarily due to acquisitions. Average time deposits greater than $100,000 decreased slightly (.3 percent) in the second quarter of 2009, compared with the second quarter of 2008, due to acquisitions offset by the impact of wholesale funding decisions. Average time deposits greater than $100,000 increased $3.4 billion (11.4 percent) in the first six months of 2009, compared with the same period of the prior year, due primarily to acquisitions.
 
Provision for Credit Losses The provision for credit losses for the second quarter and first six months of 2009 increased $799 million and $1.6 billion, respectively, over the same periods of 2008, reflecting the current adverse economic conditions. The provision for credit losses exceeded net charge-offs by $466 million and $996 million in the second quarter and first six months of 2009, respectively, compared with $200 million and $392 million in the same periods of 2008. The increases in the provision and allowance for credit losses reflected continuing stress in residential real estate markets and deteriorating economic conditions and the corresponding impact on the commercial, commercial real estate and consumer loan portfolios. Net charge-offs were $929 million in the second quarter and $1.7 billion in the first six months of 2009, compared with net charge-offs of $396 million in the second quarter and $689 million in the first six months of 2008. 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 2009 was $2.1 billion and $3.8 billion, respectively, compared with $1.9 billion and $3.9 billion in the same periods of 2008. The $163 million (8.6 percent) increase during the second quarter and $93 million (2.4 percent) decrease during the first six months of 2009, compared with the same periods of 2008, were principally due to a significant rise in mortgage banking revenue as the lower rate environment drove record mortgage loan production and increased profitability on loan sales, offset by lower fee-based revenue in certain revenue categories due to weaker economic conditions adversely impacting consumer and business spending. In addition, noninterest income decreased in the first six months of 2009, compared with the first six months of 2008, due to the $492 million Visa Gain included in the first quarter of 2008. Other increases in noninterest income included higher ATM processing services related to growth in transaction volumes and business expansion, higher treasury management fees resulting from reduced earnings credit on customer compensating balances, and higher commercial products revenue due to higher standby letter of credit, capital markets and other commercial loan fees. Net securities losses for the second quarter and first six months of 2009 were also lower than the same periods a year ago. Corporate payment products revenue decreased in the second quarter and first six months of 2009, compared with the same periods of 2008, as transaction volumes declined due to
 
 
 
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Table 3    Noninterest Expense
 
                                                   
    Three Months Ended
      Six Months Ended
 
    June 30,       June 30,  
                Percent
                  Percent
 
(Dollars in Millions)   2009     2008     Change       2009     2008     Change  
Compensation
  $ 764     $ 761       .4 %     $ 1,550     $ 1,506       2.9 %
Employee benefits
    140       129       8.5         295       266       10.9  
Net occupancy and equipment
    208       190       9.5         419       380       10.3  
Professional services
    59       59               111       106       4.7  
Marketing and business development
    80       66       21.2         136       145       (6.2 )
Technology and communications
    157       149       5.4         312       289       8.0  
Postage, printing and supplies
    72       73       (1.4 )       146       144       1.4  
Other intangibles
    95       87       9.2         186       174       6.9  
Other
    554       304       82.2         845       587       44.0  
                                                   
Total noninterest expense
  $ 2,129     $ 1,818       17.1 %     $ 4,000     $ 3,597       11.2 %
                                                   
Efficiency ratio (a)
    51.0 %     47.1 %               48.4 %     45.0 %        
                                                   
 
(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.

the slowing economy. Merchant processing services revenue decreased primarily due to lower average customer purchases per transaction. Deposit service charges decreased primarily due to lower overdraft fees, with a decrease in the number of overdraft incidences more than offsetting account growth. Trust and investment management fees declined, as did investment product fees and commissions, reflecting adverse equity market conditions. Other income also decreased due to lower equity investment valuations.
 
Noninterest Expense Noninterest expense was $2.1 billion in the second quarter and $4.0 billion in the first six months of 2009, increasing $311 million (17.1 percent) and $403 million (11.2 percent), respectively, from the same periods of 2008. The increases in noninterest expense from a year ago were principally due to the impact of higher FDIC deposit insurance expense and acquisitions. Compensation expense increased primarily due to acquisitions, offset by reductions from cost containment efforts. Employee benefits expense increased primarily due to increased pension costs associated with previous declines in the value of pension assets, as well as acquisitions. Net occupancy and equipment expense, and technology and communications expense increased primarily due to acquisitions, as well as branch-based and other business expansion initiatives. Marketing and business development expense increased in the second quarter of 2009, compared with the second quarter of 2008, due to costs related to new credit card product initiatives. Marketing and business development expense for the first six months of 2009 decreased from the same period of 2008 due to a contribution to the U.S. Bancorp Foundation in the first quarter of 2008, offset by the impact of costs related to new credit card product initiatives in 2009. Other intangibles expense increased due to acquisitions. Other expense increased year-over-year due to an increase in FDIC deposit insurance expense, a result of the special assessment in the second quarter of 2009 and the use of assessment credits in 2008 and the first quarter of 2009, which have been fully utilized. In addition, other expense included increased costs for other real estate owned, mortgage servicing, litigation and acquisition integration.
 
Income Tax Expense The provision for income taxes was $100 million (an effective rate of 17.1 percent) for the second quarter and $201 million (an effective rate of 16.3 percent) for the first six months of 2009, compared with $386 million (an effective rate of 28.5 percent) and $862 million (an effective rate of 29.4 percent) for the same periods of 2008. The declines in the effective tax rates in the second quarter and first six months of 2009, compared with the same periods of the prior year, reflected the impact of the decline in pre-tax earnings and the relative level of tax-advantaged investments. 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 $182.3 billion at June 30, 2009, compared with $185.2 billion at December 31, 2008, a decrease of $2.9 billion (1.6 percent). The decrease was driven primarily by lower commercial loans and covered assets, partially offset by growth in retail loans, residential mortgages and commercial real estate loans. The $3.9 billion (6.9 percent) decrease in commercial loans was primarily driven by lower capital spending and lower utilization of bank credit facilities by business customers, along with improved access to the short-term and long-term bond markets to refinance their bank debt.
 
 
 
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Commercial real estate loans increased $.5 billion (1.5 percent) at June 30, 2009, compared with December 31, 2008, reflecting new business growth, as current market conditions have limited borrower access to capital markets, and slower loan payoffs.
Residential mortgages held in the loan portfolio increased $.4 billion (1.7 percent) at June 30, 2009, compared with December 31, 2008, reflecting an increase in mortgage banking origination activity as a result of market interest rate declines. 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, increased $1.1 billion (1.8 percent) at June 30, 2009, compared with December 31, 2008. The increase was primarily driven by growth in credit card balances and home equity and second mortgages, partially offset by decreases in student and installment loans and retail leasing balances.
 
Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages and student loans to be sold in the secondary market, were $7.4 billion at June 30, 2009, compared with $3.2 billion at December 31, 2008. The increase in loans held for sale was principally due to an increase in mortgage loan origination activity as a result of a decline in rates.
 
Investment Securities Investment securities, including available-for-sale and held-to-maturity, totaled $40.8 billion at June 30, 2009, compared with $39.5 billion at December 31, 2008. The $1.3 billion increase reflected securities purchases of $6.7 billion and a decrease in unrealized losses, partially offset by sales, maturities, prepayments and securities impairments. At June 30, 2009, adjustable-rate financial instruments comprised 45 percent of the investment securities portfolio, compared with 40 percent at December 31, 2008.
The Company conducts a regular assessment of its investment securities to determine whether any securities are other-than-temporarily impaired. During the first six months of 2009, the Financial Accounting Standards Board issued new accounting guidance, which the Company adopted effective January 1, 2009, for the measurement and recognition of other-than-temporary impairment for debt securities. This guidance requires the portion of other-than-temporary impairment related to factors other than credit losses be recognized in other comprehensive income (loss), rather than earnings. The effect of the adoption of this guidance was not significant.
Net unrealized losses included in accumulated other comprehensive income (loss) were $1.7 billion at June 30, 2009, compared with $2.8 billion at December 31, 2008. The decrease in unrealized losses was primarily due to increases in fair value of agency mortgage-backed securities and obligations of state and political subdivisions, and to amounts recognized as other-than-temporary impairment.
As of June 30, 2009, approximately 1 percent of the available-for-sale securities portfolio consisted of perpetual preferred securities, primarily issued by financial institutions. The net unrealized losses for these securities were $134 million at June 30, 2009, compared to $387 million at December 31, 2008. The decrease was principally a result of impairment charges recognized on these securities during the second quarter and first six months of 2009 of $12 million and $210 million, respectively. Impairment charges recognized for the first six months of 2009 were primarily related to the perpetual preferred stock of a large domestic bank downgraded during the first quarter of 2009.
There is limited market activity for the remaining structured investment security and the 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 market factors, which are judgmental in nature. The Company recorded $76 million and $132 million of impairment charges on non-agency mortgage-backed and structured investment related securities during the second quarter and first six months of 2009, respectively. These impairment charges were due to changes in expected cash flows resulting from the continuing decline in housing prices and an increase in foreclosure activity. 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 $163.9 billion at June 30, 2009, compared with $159.3 billion at December 31, 2008, an increase of $4.6 billion (2.8 percent) that reflected customer flight to quality. The increase in total deposits was primarily the result of increases in money market savings, savings accounts and interest checking balances, partially offset by decreases in noninterest-bearing deposit accounts and time deposits greater than $100,000. Money market savings balances increased $5.6 billion (21.6 percent) due to higher corporate trust, trust and custody, and broker-dealer balances. Savings account balances increased $3.7 billion (40.8 percent) due primarily to strong participation in a new savings
 
 
 
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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, 2009 (Dollars in Millions)   Cost     Value     Years     Yield (d)       Cost     Value     Years     Yield (d)  
                                                                   
U.S. Treasury and Agencies
                                                                 
Maturing in one year or less
  $ 595     $ 602       .5       3.22 %     $     $             %
Maturing after one year through five years
    1,003       998       4.1       2.88                            
Maturing after five years through ten years
    28       28       7.6       4.88                            
Maturing after ten years
    906       895       15.1       2.35                            
                                                                   
Total
  $ 2,532     $ 2,523       7.3       2.79 %     $     $             %
                                                                   
Mortgage-Backed Securities (a)
                                                                 
Maturing in one year or less
  $ 879     $ 873       .6       2.39 %     $     $             %
Maturing after one year through five years
    23,704       23,708       3.1       3.66         5       5       4.9       5.07  
Maturing after five years through ten years
    5,097       4,764       6.6       2.93                            
Maturing after ten years
    504       346       11.9       2.14                            
                                                                   
Total
  $ 30,184     $ 29,691       3.7       3.48 %     $ 5     $ 5       4.9       5.07 %
                                                                   
Asset-Backed Securities (a)
                                                                 
Maturing in one year or less
  $ 1     $ 1       .6       3.11 %     $     $             %
Maturing after one year through five years
    616       483       3.6       2.26                            
Maturing after five years through ten years
    31       28       6.9       2.78                            
Maturing after ten years
    22       9       22.7       1.99                            
                                                                   
Total
  $ 670     $ 521       4.4       2.28 %     $     $             %
                                                                   
Obligations of State and Political Subdivisions (b)
                                                                 
Maturing in one year or less
  $ 11     $ 11       .2       6.79 %     $ 1     $ 1       .4       7.04 %
Maturing after one year through five years
    210       209       2.4       3.01         6       6       2.9       6.71  
Maturing after five years through ten years
    1,195       1,174       6.7       6.74         11       13       6.9       7.36  
Maturing after ten years
    5,309       4,856       22.3       6.81         16       15       17.4       5.52  
                                                                   
Total
  $ 6,725     $ 6,250       18.9       6.68 %     $ 34     $ 35       10.8       6.39 %
                                                                   
Other Debt Securities
                                                                 
Maturing in one year or less
  $     $ 1       .4       8.01 %     $ 3     $ 3       .7       1.96 %
Maturing after one year through five years
    80       56       2.6       5.46         7       7       3.5       2.06  
Maturing after five years through ten years
    61       45       8.0       6.33                            
Maturing after ten years
    1,481       986       33.8       4.86                            
                                                                   
Total
  $ 1,622     $ 1,088       31.3       4.94 %     $ 10     $ 10       2.6       2.03 %
                                                                   
Other Investments
  $ 698     $ 683       8.7       1.93 %     $     $             %
                                                                   
Total investment securities (c)
  $ 42,431     $ 40,756       7.5       3.96 %     $ 49     $ 50       8.5       5.35 %
                                                                   
 
(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 7.7 years at December 31, 2008, with a corresponding weighted-average yield of 4.56 percent. The weighted-average maturity of the held-to-maturity investment securities was 8.5 years at December 31, 2008, with a corresponding weighted-average yield of 5.78 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, 2009         December 31, 2008    
    Amortized
    Percent
        Amortized
    Percent
   
(Dollars in Millions)   Cost     of Total         Cost     of Total    
U.S. Treasury and agencies
  $ 2,532       6.0   %     $ 664       1.6   %
Mortgage-backed securities
    30,189       71.0           31,271       73.9    
Asset-backed securities
    670       1.6           616       1.4    
Obligations of state and political subdivisions
    6,759       15.9           7,258       17.1    
Other debt securities and investments
    2,330       5.5           2,527       6.0    
                                       
Total investment securities
  $ 42,480       100.0   %     $ 42,336       100.0   %
                                       

 
 
 
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product offered by Consumer Banking and higher broker-dealer balances. Interest checking balances increased $3.2 billion (9.9 percent) due to higher government and branch-based balances. Noninterest-bearing deposits decreased $1.8 billion (4.8 percent) due primarily to decreases in broker-dealer and corporate trust balances. Time deposits greater than $100,000 decreased $5.5 billion (15.2 percent) at June 30, 2009, compared with December 31, 2008. Time deposits greater than $100,000 are managed as an alternative to other funding sources, such as wholesale borrowing, based largely on relative pricing.
 
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 $29.7 billion at June 30, 2009, compared with $34.0 billion at December 31, 2008. The decrease principally reflected reduced borrowing needs as a result of increases in deposits due to customer flight to quality.
Long-term debt was $39.2 billion at June 30, 2009, compared with $38.4 billion at December 31, 2008, primarily reflecting issuances of $3.7 billion of medium-term notes, partially offset by $2.2 billion of medium-term note maturities and a $.6 billion net decrease in Federal Home Loan Bank advances in the first six months of 2009. The $.8 billion (2.2 percent) increase in long-term debt reflected the Company’s issuance of non-guaranteed debt to qualify for redemption of the preferred stock from the U.S. Department of the Treasury. 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 or investment 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 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. 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, 2008, for a more detailed discussion on credit risk management processes.
The Company manages its credit risk, in part through diversification of its loan portfolio. 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, 2009 (excluding covered assets):
 
                                 
Residential mortgages
  Interest
                Percent
 
(Dollars in Millions)   Only     Amortizing     Total     of Total  
   
 
Consumer Finance
                               
Less than or equal to 80%
  $ 1,056     $ 2,976     $ 4,032       41.3 %
Over 80% through 90%
    668       1,540       2,208       22.7  
Over 90% through 100%
    681       2,695       3,376       34.6  
Over 100%
          141       141       1.4  
     
     
Total
  $ 2,405     $ 7,352     $ 9,757       100.0 %
Other Retail
                               
Less than or equal to 80%
  $ 2,160     $ 10,734     $ 12,894       90.7 %
Over 80% through 90%
    86       569       655       4.6  
Over 90% through 100%
    121       543       664       4.7  
Over 100%
                       
     
     
Total
  $ 2,367     $ 11,846     $ 14,213       100.0 %
Total Company
                               
Less than or equal to 80%
  $ 3,216     $ 13,710     $ 16,926       70.6 %
Over 80% through 90%
    754       2,109       2,863       11.9  
Over 90% through 100%
    802       3,238       4,040       16.9  
Over 100%
          141       141       .6  
     
     
Total
  $ 4,772     $ 19,198     $ 23,970       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%
  $ 762     $ 200     $ 962       39.1 %
Over 80% through 90%
    364       184       548       22.2  
Over 90% through 100%
    391       384       775       31.5  
Over 100%
    65       113       178       7.2  
     
     
Total
  $ 1,582     $ 881     $ 2,463       100.0 %
Other Retail
                               
Less than or equal to 80%
  $ 11,638     $ 1,537     $ 13,175       78.1 %
Over 80% through 90%
    1,877       452       2,329       13.8  
Over 90% through 100%
    900       388       1,288       7.7  
Over 100%
    51       22       73       .4  
     
     
Total
  $ 14,466     $ 2,399     $ 16,865       100.0 %
Total Company
                               
Less than or equal to 80%
  $ 12,400     $ 1,737     $ 14,137       73.1 %
Over 80% through 90%
    2,241       636       2,877       14.9  
Over 90% through 100%
    1,291       772       2,063       10.7  
Over 100%
    116       135       251       1.3  
     
     
Total
  $ 16,048     $ 3,280     $ 19,328       100.0 %
 
 
(a) Consumer finance category included credit originated and managed by the consumer finance division, as well as the majority of home equity and second mortgages with a loan-to-value greater than 100 percent that were originated in the branches.
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, 2009, approximately $2.7 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 $2.9 billion at December 31, 2008.
 
The following table provides further information on residential mortgages for the consumer finance division:
 
                                 
    Interest
                Percent of
 
(Dollars in Millions)   Only     Amortizing     Total     Division  
   
 
Sub-Prime Borrowers
                               
Less than or equal to 80%
  $ 4     $ 1,056     $ 1,060       10.8 %
Over 80% through 90%
    6       644       650       6.7  
Over 90% through 100%
    17       887       904       9.3  
Over 100%
          73       73       .7  
     
     
Total
  $ 27     $ 2,660     $ 2,687       27.5 %
Other Borrowers
                               
Less than or equal to 80%
  $ 1,052     $ 1,920     $ 2,972       30.5 %
Over 80% through 90%
    662       896       1,558       16.0  
Over 90% through 100%
    664       1,808       2,472       25.3  
Over 100%
          68       68       .7  
     
     
Total
  $ 2,378     $ 4,692     $ 7,070       72.5 %
     
     
Total Consumer Finance
  $ 2,405     $ 7,352     $ 9,757       100.0 %
 
 
In addition to residential mortgages, at June 30, 2009, the consumer finance division had $.7 billion of home equity and second mortgage loans to customers that may be defined as sub-prime borrowers, unchanged from December 31, 2008.
 
The following table provides further information on home equity and second mortgages for the consumer finance division:
 
                                 
                      Percent
 
(Dollars in Millions)   Lines     Loans     Total     of Total  
   
 
Sub-Prime Borrowers
                               
Less than or equal to 80%
  $ 29     $ 128     $ 157       6.4 %
Over 80% through 90%
    37       119       156       6.3  
Over 90% through 100%
    2       239       241       9.8  
Over 100%
    42       82       124       5.0  
     
     
Total
  $ 110     $ 568     $ 678       27.5 %
Other Borrowers
                               
Less than or equal to 80%
  $ 733     $ 72     $ 805       32.7 %
Over 80% through 90%
    327       65       392       15.9  
Over 90% through 100%
    389       145       534       21.7  
Over 100%
    23       31       54       2.2  
     
     
Total
  $ 1,472     $ 313     $ 1,785       72.5 %
     
     
Total Consumer Finance
  $ 1,582     $ 881     $ 2,463       100.0 %
 
 
 
The total amount of residential mortgage, home equity and second mortgage loans, other than covered assets, to customers that may be defined as sub-prime borrowers represented only 1.3 percent of total assets at June 30, 2009, compared with 1.4 percent at December 31, 2008. Covered assets include $2.7 billion in loans with negative-amortization payment options at June 30, 2009, compared with $3.3 billion at December 31, 2008. The Company’s risk on covered assets is limited by loss sharing agreements with the FDIC. Other than covered assets, 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   2009     2008  
   
 
Commercial
               
Commercial
    .19 %     .15 %
Lease financing
           
     
     
Total commercial
    .16       .13  
Commercial Real Estate
               
Commercial mortgages
           
Construction and development
    .76       .36  
     
     
Total commercial real estate
    .22       .11  
Residential Mortgages
    2.11       1.55  
Retail
               
Credit card
    2.37       2.20  
Retail leasing
    .10       .16  
Other retail
    .53       .45  
     
     
Total retail
    .94       .82  
     
     
Total loans, excluding covered assets
    .72       .56  
     
     
Covered Assets
    7.60       5.13  
     
     
Total loans
    1.12 %     .84 %
 
 
 
                 
    June 30,
    December 31,
 
90 days or more past due including nonperforming loans   2009     2008  
   
 
Commercial
    1.89 %     .82 %
Commercial real estate
    5.05       3.34  
Residential mortgages (a)
    3.46       2.44  
Retail (b)
    1.19       .97  
     
     
Total loans, excluding covered assets
    2.48       1.57  
     
     
Covered assets
    14.10       10.74  
     
     
Total loans
    3.15 %     2.14 %
 
 
(a) Delinquent loan ratios exclude advances made pursuant to servicing agreements to 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 10.05 percent at June 30, 2009, and 6.95 percent at December 31, 2008.
(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 1.36 percent at June 30, 2009, and 1.10 percent at December 31, 2008.

 
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 $2.0 billion ($1.2 billion excluding covered assets) at June 30, 2009, compared with $1.6 billion ($967 million excluding covered assets) at December 31, 2008. The increase in 90 day delinquent loans related to covered assets was $210 million. The $278 million increase excluding covered assets reflected stress in residential mortgages, commercial loans, construction loans, credit cards and home equity loans. 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 1.12 percent (.72 percent excluding covered assets) at June 30, 2009, compared with .84 percent (.56 percent excluding covered assets) at December 31, 2008. The Company expects delinquencies to continue to increase as difficult economic conditions affect more borrowers within both the consumer and commercial loan portfolios.
 
 
 
 
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The following table provides summary delinquency information for residential mortgages and retail loans, excluding covered assets:
 
                                   
            As a Percent of Ending
 
    Amount       Loan Balances  
    June 30,
    December 31,
      June 30,
    December 31,
 
(Dollars in Millions)   2009     2008       2009     2008  
Residential mortgages
                                 
30-89 days
  $ 552     $ 536         2.30 %     2.28 %
90 days or more
    505       366         2.11       1.55  
Nonperforming
    324       210         1.35       .89  
                                   
Total
  $ 1,381     $ 1,112         5.76 %     4.72 %
                                   
Retail
                                 
Credit card
                                 
30-89 days
  $ 354     $ 369         2.38 %     2.73 %
90 days or more
    352       297         2.37       2.20  
Nonperforming
    107       67         .72       .49  
                                   
Total
  $ 813     $ 733         5.47 %     5.42 %
Retail leasing
                                 
30-89 days
  $ 42     $ 49         .85 %     .95 %
90 days or more
    5       8         .10       .16  
Nonperforming
                         
                                   
Total
  $ 47     $ 57         .95 %     1.11 %
Home equity and second mortgages
                                 
30-89 days
  $ 179     $ 170         .92 %     .89 %
90 days or more
    137       106         .71       .55  
Nonperforming
    27       14         .14       .07  
                                   
Total
  $ 343     $ 290         1.77 %     1.51 %
Other retail
                                 
30-89 days
  $ 243     $ 255         1.09 %     1.13 %
90 days or more
    85       81         .38       .36  
Nonperforming
    21       11         .10       .05  
                                   
Total
  $ 349     $ 347         1.57 %     1.54 %
                                   
 
Within these product categories, the following table provides information on delinquent and nonperforming loans as a percent of ending loan balances, by channel:
                                   
    Consumer Finance (a)       Other Retail  
    June 30,
    December 31,
      June 30,
    December 31,
 
    2009     2008       2009     2008  
Residential mortgages
                                 
30-89 days
    3.75 %     3.96 %       1.31 %     1.06 %
90 days or more
    2.98       2.61         1.50       .79  
Nonperforming
    2.29       1.60         .71       .38  
                                   
Total
    9.02 %     8.17 %       3.52 %     2.23 %
                                   
Retail
                                 
Credit card
                                 
30-89 days
    %     %       2.38 %     2.73 %
90 days or more
                  2.37       2.20  
Nonperforming
                  .72       .49  
                                   
Total
    %     %       5.47 %     5.42 %
Retail leasing
                                 
30-89 days
    %     %       .85 %     .95 %
90 days or more
                  .10       .16  
Nonperforming
                         
                                   
Total
    %     %       .95 %     1.11 %
Home equity and second mortgages
                                 
30-89 days
    2.52 %     3.24 %       .69 %     .59 %
90 days or more
    2.07       2.36         .51       .32  
Nonperforming
    .24       .14         .13       .07  
                                   
Total
    4.83 %     5.74 %       1.33 %     .98 %
Other retail
                                 
30-89 days
    5.38 %     6.91 %       .98 %     1.00 %
90 days or more
    1.04       1.98         .36       .32  
Nonperforming
                  .10       .05  
                                   
Total
    6.42 %     8.89 %       1.44 %     1.37 %
                                   
(a) Consumer finance category included credit originated and managed by the consumer finance division, as well as the majority of home equity and second mortgages with a loan-to-value greater than 100 percent that were originated in the branches.
 
 
 
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Within the consumer finance division at June 30, 2009, approximately $456 million and $99 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 $467 million and $121 million, respectively, at December 31, 2008.
 
The following table provides summary delinquency information for covered assets:
 
                                   
            As a Percent of
 
            Ending
 
    Amount       Loan Balances  
    June 30,
    December 31,
      June 30,
    December 31,
 
(Dollars in Millions)   2009     2008       2009     2008  
Covered assets
                                 
30-89 days
  $ 365     $ 740         3.48 %     6.46 %
90 days or more
    797       587         7.60       5.13  
Nonperforming
    682       643         6.50       5.62  
                                   
Total
  $ 1,844     $ 1,970         17.58 %     17.21 %
                                   
 
Restructured Loans Accruing Interest In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due. In most cases, the modification is either a reduction in interest rate, extension of the maturity date or a reduction in the principal balance. Restructured loans, except those where the principal balance has been reduced, 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.
 
The following table provides a summary of restructured loans, excluding covered assets, that are performing in accordance with 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)   2009     2008       2009     2008  
Commercial
  $ 56     $ 35         .11 %     .06 %
Commercial real estate
    132       138         .39       .42  
Residential mortgages
    1,289       813         5.38       3.45  
Credit card
    541       450         3.64       3.33  
Other retail
    89       73         .19       .16  
                                   
Total loans
  $ 2,107     $ 1,509         1.16 %     .81 %
                                   
Restructured loans, excluding covered assets, were $598 million higher at June 30, 2009, compared with December 31, 2008, reflecting the impact of restructurings for certain residential mortgage and credit card customers in light of current economic conditions. The Company expects this trend to continue as the Company works to modify loans for borrowers who are having financial difficulties.
The Company has also modified certain covered loans in accordance with the terms of agreements with the FDIC in connection with the acquisitions of Downey and PFF. Losses associated with modifications on these loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss sharing agreements.
 
Nonperforming Assets The level of nonperforming assets represents another indicator of the potential for future credit losses. At June 30, 2009, total nonperforming assets were $4.0 billion, compared with $2.6 billion at December 31, 2008. Nonperforming assets at June 30, 2009 included $682 million of covered assets, compared with $643 million at December 31, 2008. The ratio of total nonperforming assets to total loans and other real estate was 2.20 percent (1.94 percent excluding covered assets) at June 30, 2009, compared with 1.42 percent (1.14 percent excluding covered assets) at December 31, 2008. The increase in nonperforming assets was driven primarily by the residential construction portfolio and related industries, the residential mortgage and credit card portfolios, an increase in foreclosed residential properties and the impact of the economic slowdown on other commercial customers.
Included in nonperforming loans were restructured loans that are not accruing interest of $189 million at June 30, 2009, compared with $151 million at December 31, 2008.
Other real estate, excluding covered assets, was $293 million at June 30, 2009, compared with $190 million at December 31, 2008, and was primarily related to foreclosed properties that previously secured residential mortgages, home equity and second mortgage loan balances. The increase in other real estate assets reflected continuing stress in residential construction and related supplier industries and higher residential mortgage loan foreclosures.
 
 
 
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Table 6     Nonperforming Assets (a)
 
 
                 
    June 30,
    December 31,
 
(Dollars in Millions)   2009     2008  
                 
Commercial
               
Commercial
  $ 785     $ 290  
Lease financing
    123       102  
                 
Total commercial
    908       392  
Commercial Real Estate
               
Commercial mortgages
    471       294  
Construction and development
    1,156       780  
                 
Total commercial real estate
    1,627       1,074  
Residential Mortgages
    324       210  
Retail
               
Credit card
    107       67  
Retail leasing
           
Other retail
    48       25  
                 
Total retail
    155       92  
                 
Total nonperforming loans, excluding covered assets
    3,014       1,768  
Covered Assets
    682       643  
     
     
Total nonperforming loans
    3,696       2,411  
Other Real Estate (b)
    293       190  
Other Assets
    27       23  
                 
Total nonperforming assets
  $ 4,016     $ 2,624  
                 
Accruing loans 90 days or more past due, excluding covered assets
  $ 1,245     $ 967  
Accruing loans 90 days or more past due
  $ 2,042     $ 1,554  
Nonperforming loans to total loans, excluding covered assets
    1.75 %     1.02 %
Nonperforming loans to total loans
    2.03 %     1.30 %
Nonperforming assets to total loans plus other real estate, excluding covered assets (b)
    1.94 %     1.14 %
Nonperforming assets to total loans plus other real estate (b)
    2.20 %     1.42 %
                 
Changes in Nonperforming Assets
                         
    Commercial and
    Retail and
       
    Commercial
    Residential
       
(Dollars in Millions)   Real Estate     Mortgages (d)     Total  
Balance December 31, 2008
  $ 1,896     $ 728     $ 2,624  
Additions to nonperforming assets
                       
New nonaccrual loans and foreclosed properties
    2,001       720       2,721  
Advances on loans
    44             44  
                         
Total additions
    2,045       720       2,765  
Reductions in nonperforming assets
                       
Paydowns, payoffs
    (206 )     (325 )     (531 )
Net sales
    (11 )           (11 )
Return to performing status
    (64 )     (7 )     (71 )
Charge-offs (c)
    (640 )     (120 )     (760 )
                         
Total reductions
    (921 )     (452 )     (1,373 )
                         
Net additions to nonperforming assets
    1,124       268       1,392  
                         
Balance June 30, 2009
  $ 3,020     $ 996     $ 4,016  
                         
(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Excludes $282 million and $209 million at June 30, 2009, and December 31, 2008, respectively of foreclosed GNMA loans which continue to accrue interest.
(c) Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.
(d) Residential mortgage information excludes changes related to residential mortgages serviced by others.

 
The following table provides an analysis of other real estate owned (“OREO”) excluding covered assets, as a percent of their related loan balances, including further detail for residential mortgages and home equity and second mortgage loan balances by geographical location:
 
                                   
            As a Percent of Ending
 
    Amount       Loan Balances  
    June 30,
    December 31,
      June 30,
    December 31,
 
(Dollars in Millions)   2009     2008       2009     2008  
Residential
                                 
Minnesota
  $ 24     $ 18         .44 %     .34 %
California
    19       13         .36       .29  
Michigan
    12       12         2.42       2.39  
Arizona
    10       5         .97       .53  
Ohio
    9       9         .36       .37  
All other states
    109       88         .38       .30  
                                   
Total residential
    183       145         .42       .34  
Commercial
    110       45         .33       .14  
                                   
Total OREO
  $ 293     $ 190         .16 %     .10 %
                                   
 
 
 
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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,  
    2009     2008       2009     2008  
                                   
Commercial
                                 
Commercial
    1.50 %     .43 %       1.21 %     .39 %
Lease financing
    3.29       1.14         3.29       1.09  
                                   
Total commercial
    1.72       .51         1.46       .47  
Commercial Real Estate
                                 
Commercial mortgages
    .47       .11         .35       .10  
Construction and development
    3.79       .52         4.30       .44  
                                   
Total commercial real estate
    1.44       .24         1.51       .20  
Residential Mortgages
    1.94       .91         1.74       .69  
Retail
                                 
Credit card
    7.36       4.84         6.86       4.39  
Retail leasing
    .80       .58         .91       .53  
Home equity and second mortgages
    1.72       1.13         1.60       .93  
Other retail
    1.80       1.16         1.77       1.20  
                                   
Total retail
    2.99       1.86         2.81       1.73  
                                   
Total loans, excluding covered assets
    2.15       .98         1.98       .87  
Covered Assets
    .07               .15        
                                   
Total loans
    2.03 %     .98 %       1.87 %     .87 %
                                   

The Company expects nonperforming assets, including OREO, to continue to increase, however at a decreasing rate as compared with prior periods, as difficult economic conditions affect more borrowers within both the consumer and commercial loan portfolios.
 
Analysis of Loan Net Charge-Offs  Total net charge-offs were $929 million and $1.7 billion for the second quarter and first six months of 2009, respectively, compared with net charge-offs of $396 million and $689 million for the same periods of 2008. 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 2009 was 2.03 percent and 1.87 percent, respectively, compared with .98 percent and .87 percent, for the same periods of 2008. The year-over-year increases in total net charge-offs were driven by factors affecting the residential housing markets, including homebuilding and related industries, and credit costs associated with credit card and other consumer and commercial loans as the economy weakened. Given current economic conditions and the continuing weakness in home prices, rising unemployment levels and the economy in general, the Company expects net charge-offs will continue to increase for the remainder of 2009, however at a decreasing rate as compared with prior periods.
Commercial and commercial real estate loan net charge-offs for the second quarter of 2009 increased to $353 million (1.61 percent of average loans outstanding on an annualized basis), compared with $87 million (.41 percent of average loans outstanding on an annualized basis) for the second quarter of 2008. Commercial and commercial real estate loan net charge-offs for the first six months of 2009 increased to $650 million (1.48 percent of average loans outstanding on an annualized basis), compared with $154 million (.37 percent of average loans outstanding on an annualized basis) for the first six months of 2008. The year-over-year increases in net charge-offs reflected continuing stress in housing, especially residential homebuilding and related industry sectors, along with the impact of the deteriorating economic conditions on the commercial loan portfolios.
Residential mortgage loan net charge-offs for the second quarter of 2009 were $116 million (1.94 percent of average loans outstanding on an annualized basis), compared with $53 million (.91 percent of average loans outstanding on an annualized basis) for the second quarter of 2008. Residential mortgage loan net charge-offs for the first six months of 2009 were $207 million (1.74 percent of average loans outstanding on an annualized basis), compared with $79 million (.69 percent of average loans outstanding on an annualized basis) for the first six months of 2008. Total retail loan net charge-offs for the second quarter of 2009 were $458 million (2.99 percent of average loans outstanding on an annualized basis), compared with $256 million (1.86 percent of average loans outstanding on an annualized basis) for the second quarter of 2008. Total retail loan net charge-offs for the first six months of 2009 were $852 million (2.81 percent of average loans outstanding on an annualized basis), compared with $456 million (1.73 percent of average loans outstanding on an annualized basis) for the first six months of 2008. The increased residential mortgage and retail loan net charge-offs reflected the adverse impact of current economic conditions and rising unemployment levels.
 
 
 
U.S. Bancorp
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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)   2009     2008     2009     2008       2009     2008     2009     2008  
Consumer Finance (a)
                                                                 
Residential mortgages
  $ 9,751     $ 9,990       3.87 %     1.69 %     $ 9,824     $ 9,944       3.43 %     1.27 %
Home equity and second mortgages
    2,457       2,031       7.02       6.93         2,437       1,952       6.62       5.67  
Other retail
    565       450       5.68       4.47         546       440       6.65       5.03  
Other Retail
                                                                 
Residential mortgages
  $ 14,213     $ 13,317       .62 %     .33 %     $ 14,116     $ 13,198       .57 %     .24 %
Home equity and second mortgages
    16,857       15,075       .95       .35         16,826       14,865       .87       .31  
Other retail
    22,188       20,673       1.70       1.09         22,323       18,937       1.65       1.12  
Total Company
                                                                 
Residential mortgages
  $ 23,964     $ 23,307       1.94 %     .91 %     $ 23,940     $ 23,142       1.74 %     .69 %
Home equity and second mortgages
    19,314       17,106       1.72       1.13         19,263       16,817       1.60       .93  
Other retail
    22,753       21,123       1.80       1.16         22,869       19,377       1.77       1.20  
                                                                   
(a) Consumer finance category included credit originated and managed by the consumer finance division, as well as the majority of home equity and second mortgages with a loan-to-value greater than 100 percent that were originated in the branches.
 
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)     2009       2008       2009       2008       2009       2008       2009     2008  
Residential mortgages
                                                                             
Sub-prime borrowers
    $ 2,721       $ 3,152         6.34 %       3.19 %     $ 2,779       $ 3,186         5.66 %     2.40 %
Other borrowers
      7,030         6,838         2.91         1.00         7,045         6,758         2.55       .74  
                                                                               
Total
    $ 9,751       $ 9,990         3.87 %       1.69 %     $ 9,824       $ 9,944         3.43 %     1.27 %
Home equity and second mortgages
                                                                             
Sub-prime borrowers
    $ 687       $ 808         12.84 %       12.44 %     $ 700       $ 831         11.81 %     9.44 %
Other borrowers
      1,770         1,223         4.76         3.29         1,737         1,121         4.53       2.87  
                                                                               
Total
    $ 2,457       $ 2,031         7.02 %       6.93 %     $ 2,437       $ 1,952         6.62 %     5.67 %
                                                                               
 
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 considers credit loss protection from loss sharing agreements with the FDIC. Management evaluates the allowance each quarter to ensure it is sufficient to cover incurred losses. Several factors were taken into consideration in evaluating the allowance for credit losses at June 30, 2009, including the risk profile of the portfolios, net charge-offs during the period, the level of nonperforming assets, accruing loans 90 days or more past due, delinquency ratios and changes in restructured 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.
At June 30, 2009, the allowance for credit losses was $4.6 billion (2.51 percent of total loans and 2.66 percent of loans excluding covered assets), compared with an allowance of $3.6 billion (1.96 percent of total loans and 2.09 percent of loans excluding covered assets) at December 31, 2008. The ratio of the allowance for credit losses to nonperforming loans was 124 percent (152 percent excluding covered assets) at June 30, 2009, compared with 151 percent (206 percent excluding covered assets) at December 31, 2008. The ratio of the allowance for credit losses to annualized loan net charge-offs was 123 percent (both including and excluding covered assets) at June 30, 2009, compared with 200 percent of full year 2008 net charge-offs (201 percent excluding covered assets) at December 31, 2008.
 
 
 
.16
U.S. Bancorp


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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)   2009     2008       2009     2008  
Balance at beginning of period
  $ 4,105     $ 2,435       $ 3,639     $ 2,260  
Charge-offs
                                 
Commercial
                                 
Commercial
    183       58         300       104  
Lease financing
    66       24         129       46  
                                   
Total commercial
    249       82         429       150  
Commercial real estate
                                 
Commercial mortgages
    28       7         42       11  
Construction and development
    94       12         211       20  
                                   
Total commercial real estate
    122       19         253       31  
Residential mortgages
    116       54         209       80  
Retail
                                 
Credit card
    279       152         504       283  
Retail leasing
    13       9         28       17  
Home equity and second mortgages
    85       49         157       81  
Other retail
    126       74         244       145  
                                   
Total retail
    503       284         933       526  
                                   
Covered assets
    2               8        
                                   
Total charge-offs
    992       439