e10vq
Table of Contents

 
[FORM 10-Q] 
 
[USBANCORP LOGO] 
 


Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2008
 
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
(State or other jurisdiction of
incorporation or organization)
  41-0255900
(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 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
Common Stock, $.01 Par Value
  Outstanding as of October 31, 2008
1,754,577,993 shares
 


 

 
Table of Contents and Form 10-Q Cross Reference Index
 
     
Part I — Financial Information
   
1) Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
   
  3
  4
  7
  27
  28
2) Quantitative and Qualitative Disclosures About Market Risk/Corporate Risk Profile (Item 3)
   
  9
  9
  16
  18
  18
  20
  20
  21
  22
  30
Part II — Other Information
   
  50
  51
  51
  52
  53
 EXHIBIT 12
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32
 
 
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.
This Quarterly Report on Form 10-Q contains forward-looking statements. 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, including continued deterioration in general business and economic conditions and in the financial markets; changes in interest rates; deterioration in the credit quality of our loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in our 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 the other information in this report, including the section entitled “Risk Factors,” and our Annual Report on Form 10-K for the year ended December 31, 2007, on file with the Securities and Exchange Commission, including the sections entitled “Risk Factors” and “Corporate Risk Profile.” 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.
 
 
 
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Table 1     Selected Financial Data
                                                         
    Three Months Ended
      Nine Months Ended
 
    September 30,       September 30,  
                  Percent
                      Percent
 
(Dollars and Shares in Millions, Except Per Share Data)   2008     2007       Change       2008       2007       Change  
Condensed Income Statement
                                                       
Net interest income (taxable-equivalent basis) (a)
  $ 1,967     $ 1,685         16.7 %     $ 5,705       $ 5,001         14.1 %
Noninterest income
    1,823       1,870         (2.5 )       6,073         5,474         10.9  
Securities gains (losses), net
    (411 )     7         *       (725 )       11         *
                                                         
Total net revenue
    3,379       3,562         (5.1 )       11,053         10,486         5.4  
Noninterest expense
    1,823       1,776         2.6         5,454         5,018         8.7  
Provision for credit losses
    748       199         *       1,829         567         *
                                                         
Income before taxes
    808       1,587         (49.1 )       3,770         4,901         (23.1 )
Taxable-equivalent adjustment
    34       18         88.9         94         53         77.4  
Applicable income taxes
    198       473         (58.1 )       1,060         1,466         (27.7 )
                                                         
Net income
  $ 576     $ 1,096         (47.4 )     $ 2,616       $ 3,382         (22.6 )
                               
Net income applicable to common equity
  $ 557     $ 1,081         (48.5 )     $ 2,563       $ 3,337         (23.2 )
                               
Per Common Share
                                                       
Earnings per share
  $ .32     $ .63         (49.2 )%     $ 1.47       $ 1.92         (23.4 )%
Diluted earnings per share
    .32       .62         (48.4 )       1.46         1.89         (22.8 )
Dividends declared per share
    .425       .400         6.3         1.275         1.200         6.3  
Book value per share
    11.50       11.41         .8                                
Market value per share
    36.02       32.53         10.7                                
Average common shares outstanding
    1,743       1,725         1.0         1,738         1,737         .1  
Average diluted common shares outstanding
    1,757       1,745         .7         1,754         1,762         (.5 )
Financial Ratios
                                                       
Return on average assets
    .94 %     1.95 %                 1.45 %       2.04 %          
Return on average common equity
    10.8       21.7                   16.6         22.4            
Net interest margin (taxable-equivalent basis) (a)
    3.65       3.44                   3.60         3.46            
Efficiency ratio (b)
    48.1       50.0                   46.3         47.9            
Average Balances
                                                       
Loans
  $ 166,560     $ 147,517         12.9 %     $ 161,639       $ 145,965         10.7 %
Loans held for sale
    3,495       4,547         (23.1 )       4,008         4,244         (5.6 )
Investment securities
    42,548       41,128         3.5         43,144         40,904         5.5  
Earning assets
    214,973       194,886         10.3         211,372         192,788         9.6  
Assets
    243,623       223,505         9.0         240,850         221,694         8.6  
Noninterest-bearing deposits
    28,322       26,947         5.1         27,766         27,531         .9  
Deposits
    133,539       119,145         12.1         133,402         119,610         11.5  
Short-term borrowings
    40,277       29,155         38.1         38,070         28,465         33.7  
Long-term debt
    40,000       46,452         (13.9 )       39,237         44,696         (12.2 )
Shareholders’ equity
    21,983       20,741         6.0         21,927         20,947         4.7  
                               
                                                         
      September 30,
2008
      December 31,
2007
                                         
                                                         
Period End Balances
                                                       
Loans
  $ 169,863     $ 153,827         10.4 %                              
Allowance for credit losses
    2,898       2,260         28.2                                
Investment securities
    39,349       43,116         (8.7 )                              
Assets
    247,055       237,615         4.0                                
Deposits
    139,504       131,445         6.1                                
Long-term debt
    40,110       43,440         (7.7 )                              
Shareholders’ equity
    21,675       21,046         3.0                                
Regulatory capital ratios
                                                       
Tier 1 capital
    8.5 %     8.3 %                                        
Total risk-based capital
    12.3       12.2                                          
Leverage
    8.0       7.9                                          
Tangible common equity
    5.3       5.1                                          
 
  * 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 securities gains (losses), net.
 
 
 
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Management’s Discussion and Analysis
 
OVERVIEW
 
Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income of $576 million for the third quarter of 2008 or $.32 per diluted common share, compared with $1,096 million, or $.62 per diluted common share for the third quarter of 2007. Return on average assets and return on average common equity were .94 percent and 10.8 percent, respectively, for the third quarter of 2008, compared with returns of 1.95 percent and 21.7 percent, respectively, for the third quarter of 2007. The Company’s fundamental business performance continues to be strong despite the challenging financial markets, which impacted the third quarter of 2008 results. Included in the third quarter of 2008 results were $411 million of securities losses, which included valuation impairment charges on structured investment securities, perpetual preferred stock (including the stock of government sponsored enterprises (“GSEs”)) and certain non-agency mortgage-backed securities. In addition, the Company recorded other market valuation losses related to the bankruptcy of an investment banking firm and continued to build the allowance for credit losses by recording $250 million of provision for credit losses expense in excess of net charge-offs. These items reduced earnings per diluted common share by approximately $.28. Results for the third quarter of 2007 were impacted by a $115 million charge for the Company’s proportionate share of a litigation settlement between Visa U.S.A. Inc. and American Express (“Visa Charge”).
Total net revenue, on a taxable-equivalent basis, for the third quarter of 2008, was $183 million (5.1 percent) lower than the third quarter of 2007, reflecting a 16.7 percent increase in net interest income, offset by a 24.8 percent decrease in noninterest income. The increase in net interest income from a year ago was driven by growth in earning assets and an improvement in the net interest margin. Noninterest income declined from a year ago as strong growth in the majority of revenue categories was offset by securities impairments, other market valuation losses and higher retail lease residual losses.
Total noninterest expense in the third quarter of 2008 was $47 million (2.6 percent) higher than in the third quarter of 2007, principally due to higher costs associated with business initiatives designed to expand the Company’s geographical presence and strengthen customer relationships, including acquisitions and investments in relationship managers, branch initiatives and Payment Services’ businesses. The increase also included higher credit collection costs and incremental costs associated with investments in tax-advantaged projects. The increase from a year ago was partially reduced by the Visa Charge recognized in the third quarter of 2007.
The provision for credit losses for the third quarter of 2008 increased $549 million over the third quarter of 2007. This reflected an increase to the allowance for credit losses of $250 million in the third quarter of 2008. The increases in the provision and allowance for credit losses from a year ago reflected continuing stress in the residential real estate markets, including homebuilding and related supplier industries, driven by declining home prices in most geographic regions. It also reflected changes in economic conditions and the corresponding impact on the commercial and consumer loan portfolios. Net charge-offs in the third quarter of 2008 were $498 million, compared with $199 million in the third quarter of 2007. 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 of $2,616 million for the first nine months of 2008, or $1.46 per diluted common share, compared with $3,382 million, or $1.89 per diluted common share for the first nine months of 2007. Return on average assets and return on average common equity were 1.45 percent and 16.6 percent, respectively, for the first nine months of 2008, compared with returns of 2.04 percent and 22.4 percent, respectively, for the first nine months of 2007. The Company’s results for the first nine months of 2008 declined from the same period of 2007, as strong growth in net interest income and the majority of noninterest income categories was more than offset by securities impairment charges, growth in operating expenses and higher credit costs. Included in the first nine months of 2008 was a $492 million gain related to the Visa Inc. initial public offering that occurred in March 2008 (“Visa Gain”), an unfavorable change in net securities gains (losses) of $736 million, which primarily reflected valuation impairment charges on various investment securities, and an incremental provision for credit losses, which has exceeded net charge-offs by $642 million. The first nine months of 2008 also included a $62 million reduction in pretax
 
 
 
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income related to the adoption of a new accounting standard, a $25 million contribution to the U.S. Bancorp Foundation and a $22 million accrual for certain litigation matters. Included in the Company’s results for the first nine months of 2007 was the $115 million Visa Charge.
Total net revenue, on a taxable-equivalent basis, for the first nine months of 2008, was $567 million (5.4 percent) higher than the first nine months of 2007, reflecting a 14.1 percent increase in net interest income, partially offset by a 2.5 percent decrease in noninterest income. The increase in net interest income from a year ago was driven by growth in earning assets and an improved net interest margin. The decrease in noninterest income included fundamentally strong organic business growth and the Visa Gain, more than offset by valuation impairment charges on investment securities, other valuation losses, higher retail lease residual losses and the adoption of a new accounting standard during the first nine months of 2008.
Total noninterest expense in the first nine months of 2008 was $436 million (8.7 percent) higher than in the first nine months of 2007, primarily due to investments in business initiatives, higher credit collection costs and incremental expenses associated with investments in tax-advantaged projects, partially offset by the Visa Charge recognized in the first nine months of 2007.
The provision for credit losses for the first nine months of 2008 increased $1,262 million over the same period of 2007. This reflected an increase to the allowance for credit losses of $638 million in the first nine months of 2008. The increases in the provision and allowance for credit losses from a year ago reflected continuing stress in the residential real estate markets, including homebuilding and related supplier industries, driven by declining home prices in most geographic regions. It also reflected changing economic conditions and the corresponding impact on the commercial and consumer loan portfolios. Net charge-offs in the first nine months of 2008 were $1,187 million, compared with $567 million in the first nine months of 2007. 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 $1,967 million in the third quarter of 2008, compared with $1,685 million in the third quarter of 2007. Net interest income, on a taxable-equivalent basis, was $5,705 million in the first nine months of 2008, compared with $5,001 million in the first nine months of 2007. The increases were due to strong growth in average earning assets, as well as an improved net interest margin from a year ago. Average earning assets increased $20.1 billion (10.3 percent) and $18.6 billion (9.6 percent) in the third quarter and first nine months of 2008, respectively, compared with the same periods of 2007, primarily driven by increases in average loans and investment securities. The net interest margin in the third quarter and first nine months of 2008 was 3.65 percent and 3.60 percent, respectively, compared with 3.44 percent and 3.46 percent, respectively, for the same periods of 2007. The improvement in the net interest margin was due to several factors, including growth in higher spread assets, the benefit of the Company’s current asset/liability position in a declining interest rate environment and related asset/liability repricing dynamics. Also, given current market conditions, short-term funding rates were lower due to volatility and changing liquidity in the overnight federal funds markets. In addition, the Company’s net interest margin benefited from an increase in yield-related loan fees. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” table for further information on net interest income.
Average loans for the third quarter and first nine months of 2008 were $19.0 billion (12.9 percent) and $15.7 billion (10.7 percent) higher, respectively, than the same periods of 2007, driven by growth in all major loan categories. The increase in commercial loans was primarily driven by growth in corporate and commercial banking balances as business customers utilize bank credit facilities, rather than the capital markets, to fund business growth and liquidity requirements. Retail loans experienced strong growth in installment products, home equity lines and credit card balances, offset somewhat by lower retail leasing balances. In addition, retail loan growth in the third quarter and first nine months of 2008 included increases of $3.4 billion and $2.1 billion, respectively, in average federally guaranteed student loan balances due to both the transfer of balances from loans held for sale and a portfolio purchase during the first nine months of 2008. The growth in commercial real estate loans reflected strong new business growth driven by capital market conditions and the impact of an acquisition late in the second quarter of 2008. The increase in residential mortgages reflected an increase in mortgage banking activity and higher consumer finance originations.
Average investment securities in the third quarter and first nine months of 2008 were $1.4 billion
 
 
 
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(3.5 percent) and $2.2 billion (5.5 percent) higher, respectively, than the same periods of 2007. The increases were driven by the purchase in the fourth quarter of 2007 of structured investment securities from certain money market funds managed by an affiliate and an increase in tax-exempt municipal securities, partially offset by maturities of mortgage-backed and government agency securities, as well as realized and unrealized losses on certain investment securities recorded in the first nine months of 2008.
Average noninterest-bearing deposits for the third quarter and first nine months of 2008 increased $1.4 billion (5.1 percent) and $.2 billion (.9 percent), respectively, compared with the same periods of 2007. The increases reflected higher balances within Wealth Management & Securities Services and Corporate Banking and the impact of an acquisition near the end of the second quarter of 2008.
Average total savings deposits increased $7.6 billion (13.6 percent) in the third quarter and $7.0 billion (12.4 percent) in the first nine months of 2008, compared with the same periods of 2007, due primarily to an increase in interest checking balances driven by higher broker-dealer and institutional trust balances, and an increase in money market savings balances driven by higher broker-dealer and Consumer Banking balances and an acquisition near the end of the second quarter of 2008.
Average time certificates of deposit less than $100,000 were lower in the third quarter and first nine months of 2008 by $1.9 billion (13.2 percent) and $1.7 billion (11.7 percent), respectively, compared with the same periods of 2007. The decline in time certificates of deposit less than $100,000 was due to the Company’s funding and pricing decisions and competition for these deposits by other financial institutions that have more limited access to wholesale funding sources given the current market environment. Average time deposits greater than $100,000 increased by $7.3 billion (34.3 percent) and $8.3 billion (39.2 percent) in the third quarter and first nine months of 2008, respectively, compared with the same periods of 2007, as a result of both the Company’s wholesale funding decisions and the business lines’ ability to attract larger customer deposits, given current market conditions.
 
Provision for Credit Losses The provision for credit losses for the third quarter and first nine months of 2008 increased $549 million and $1,262 million, respectively, compared with the same periods of 2007. This reflected increases to the allowance for credit losses of $250 million in the third quarter and $638 million during the first nine months of 2008. The increases in the provision and allowance for credit losses from a year ago reflected continuing stress in the residential re al estate markets, including homebuilding and related supplier industries, driven by declining home prices in most geographic regions. It also reflected changing economic conditions and the corresponding impact on the commercial and consumer loan portfolios. Net charge-offs were $498 million in the third quarter and $1,187 million in the first nine months of 2008, compared with $199 million in the third quarter and $567 million in the first nine months of 2007. Given current economic conditions and the continuing decline in home and other collateral values, the Company expects net charge-offs to increase in the fourth 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.
 
Noninterest Income Noninterest income in the third quarter and first nine months of 2008 was $1,412 million and $5,348 million, respectively, compared with $1,877 million and $5,485 million in the same periods of 2007. The $465 million (24.8 percent) decrease during the third quarter and $137 million (2.5 percent) decrease during the first nine months of 2008, compared with the same periods in 2007, were driven by strong fee-based revenue growth in a majority of revenue categories, offset by impairment charges related to structured investment securities, perpetual preferred stock (including the stock of GSEs), and certain non-agency mortgage-backed securities. In addition, retail lease residual losses increased from a year ago. Noninterest income for the first nine months of 2008 was also impacted by the recognition of the $492 million Visa Gain in the first quarter of 2008 and the adoption of Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”, effective January 1, 2008. Upon adoption of SFAS 157, trading revenue decreased $62 million, as primary market and nonperformance risk is now required to be considered when determining the fair value of customer derivatives. In addition, under SFAS 157 mortgage production gains increased, because the deferral of costs related to the origination of mortgage loans held for sale (“MLHFS”) is not permitted under the new accounting standard.
The strong growth in credit and debit card revenue was primarily driven by an increase in customer accounts and higher customer transaction volumes over a year ago. Corporate payment products revenue growth reflected growth in sales volumes and business expansion. ATM processing services increased primarily due to growth in transaction volumes. Merchant
 
 
 
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Table 2     Noninterest Income
 
                                                         
    Three Months Ended September 30,       Nine Months Ended September 30,  
                  Percent
                      Percent
 
(Dollars in Millions)   2008     2007       Change       2008       2007       Change  
   
Credit and debit card revenue
  $ 269     $ 237         13.5 %     $ 783       $ 673         16.3 %
Corporate payment products revenue
    179       166         7.8         517         472         9.5  
ATM processing services
    94       84         11.9         271         243         11.5  
Merchant processing services
    300       289         3.8         880         827         6.4  
Trust and investment management fees
    329       331         (.6 )       1,014         995         1.9  
Deposit service charges
    286       276         3.6         821         800         2.6  
Treasury management fees
    128       118         8.5         389         355         9.6  
Commercial products revenue
    132       107         23.4         361         312         15.7  
Mortgage banking revenue
    61       76         (19.7 )       247         211         17.1  
Investment products fees and commissions
    37       36         2.8         110         108         1.9  
Securities gains (losses), net
    (411 )     7         *       (725 )       11         *
Other
    8       150         (94.7 )       680         478         42.3  
                                 
Total noninterest income
  $ 1,412     $ 1,877         (24.8 )%     $ 5,348       $ 5,485         (2.5 )%
                                                         
*    Not meaningful

processing services revenue growth reflected higher transaction volume and business expansion. Deposit service charges increased year-over-year primarily due to account growth and higher transaction-related fees. Higher transaction-related fees and the impact of continued growth in net new checking accounts were muted somewhat as deposit account-related revenue continued to migrate to yield-related loan fees, as customers utilized new consumer products. Treasury management fees increased due primarily to the favorable impact of declining rates on customer compensating balances, as well as core business growth. Commercial products revenue increased year-over-year due to higher customer syndication fees, letters of credit, capital markets and other commercial loan fees. Mortgage banking revenue for the third quarter of 2008 decreased from the same period of the prior year, due to an unfavorable net change in the valuation of mortgage servicing rights (“MSRs”) and related economic hedging activities, partially offset by increases in mortgage servicing income and production revenue. Mortgage banking revenue for the first nine months of 2008 increased from the same period of the prior year, due to an increase in mortgage servicing income and production revenue, partially offset by the unfavorable net change in the valuation of MSRs and related economic hedging activities. Securities gains (losses) were lower year-over-year due primarily to the impact of the impairment charges on various investment securities recognized in the third quarter and during the first nine months of 2008. Other income for the third quarter of 2008 declined from the third quarter of 2007, due to the adverse impact of higher retail lease residual losses, lower equity investment revenue and market valuation losses related to the bankruptcy of an investment banking firm. Other income for the first nine months of 2008 was higher than the same period of the prior year due to the $492 million Visa Gain recognized in the first quarter of 2008, partially offset by higher retail lease residual losses, lower equity investment revenue, market valuation losses and the $62 million unfavorable impact to trading income upon adoption of SFAS 157.
 
Noninterest Expense Noninterest expense was $1,823 million in the third quarter and $5,454 million in the first nine months of 2008, reflecting increases of $47 million (2.6 percent) and $436 million (8.7 percent), respectively, from the same periods of 2007. Compensation expense was higher due to growth in ongoing bank operations, acquired businesses and other bank initiatives and the adoption of SFAS 157 in the first quarter of 2008. Under this new accounting standard, compensation expense is no longer deferred for the origination of MLHFS. Employee benefits expense increased year-over-year as higher payroll taxes and medical costs were partially offset by lower pension costs. Net occupancy and equipment expense increased over the prior year primarily due to acquisitions and branch-based and other business expansion initiatives. Professional services expense increased over the prior year due to increased litigation-related costs. Marketing and business development expense increased year-over-year due to costs incurred in the third quarter of 2008 for a national advertising campaign. In addition, marketing and business development expense further increased for the first nine months of 2008, due to $25 million recognized in the first quarter of 2008 for a charitable contribution to the Company’s foundation. Technology and communications expense increased primarily due to higher processing volumes and business expansion. Other expense decreased in the third quarter
 
 
 
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Table 3     Noninterest Expense
 
 
                                                         
    Three Months Ended September 30,       Nine Months Ended September 30,  
                  Percent
                      Percent
 
(Dollars in Millions)   2008     2007       Change       2008       2007       Change  
   
Compensation
  $ 763     $ 656         16.3 %     $ 2,269       $ 1,950         16.4 %
Employee benefits
    125       119         5.0         391         375         4.3  
Net occupancy and equipment
    199       189         5.3         579         550         5.3  
Professional services
    61       56         8.9         167         162         3.1  
Marketing and business development
    75       71         5.6         220         191         15.2  
Technology and communications
    153       140         9.3         442         413         7.0  
Postage, printing and supplies
    73       70         4.3         217         210         3.3  
Other intangibles
    88       94         (6.4 )       262         283         (7.4 )
Other
    286       381         (24.9 )       907         884         2.6  
                                 
Total noninterest expense
  $ 1,823     $ 1,776         2.6 %     $ 5,454       $ 5,018         8.7 %
                                                         
Efficiency ratio (a)
    48.1 %     50.0 %                 46.3 %       47.9 %          
                                                         
(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.

of 2008, compared with the same period in the prior year, due primarily to the $115 million Visa Charge recognized in the third quarter of 2007. Other expense was higher in the first nine months of 2008, compared with the same period of the prior year, as increases in credit-related costs for other real estate owned and loan collection activities, investments in tax-advantaged projects, and litigation and fraud costs, were partially offset by the $115 million Visa Charge recognized in the prior year.
 
Income Tax Expense The provision for income taxes was $198 million (an effective rate of 25.6 percent) for the third quarter and $1,060 million (an effective rate of 28.8 percent) for the first nine months of 2008, compared with $473 million (an effective rate of 30.1 percent) and $1,466 million (an effective rate of 30.2 percent) for the same periods of 2007. The decreases in the effective rates for the third quarter and first nine months of 2008, compared with the same periods of the prior year, reflected the marginal impact of lower pre-tax income, higher tax-exempt income from investment securities and insurance products, and incremental tax credits from affordable housing and other tax-advantaged investments. For further information on income taxes, refer to Note 8 of the Notes to Consolidated Financial Statements.
 
BALANCE SHEET ANALYSIS
 
Loans The Company’s total loan portfolio was $169.9 billion at September 30, 2008, compared with $153.8 billion at December 31, 2007, an increase of $16.1 billion (10.4 percent). The increase was driven by growth in all major loan categories. The $5.4 billion (10.5 percent) increase in commercial loans was primarily driven by new and existing business customers utilizing bank credit facilities, rather than the capital markets, to fund business growth and liquidity requirements, as well as growth in corporate payment card balances.
Commercial real estate loans increased $3.0 billion (10.2 percent) at September 30, 2008, compared with December 31, 2007, reflecting changing market conditions that have limited borrower access to the capital markets, and the impact of an acquisition late in the second quarter of 2008.
Residential mortgages held in the loan portfolio increased $.6 billion (2.5 percent) at September 30, 2008, compared with December 31, 2007, reflecting an increase in mortgage banking activity and higher consumer finance originations.
Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, increased $7.1 billion (14.0 percent) at September 30, 2008, compared with December 31, 2007. The increase reflected higher student loans due to the purchase of a portfolio during the first nine months of 2008 and the reclassification of certain student loans held for sale into the student loan portfolio in response to a change in business strategy. The increase also reflected growth in home equity, credit card and installment loans. These increases were partially offset by a decrease in retail leasing balances.
 
Loans Held for Sale At September 30, 2008, loans held for sale, consisting primarily of residential mortgages and student loans to be sold in the secondary market, were $3.1 billion, compared with $4.8 billion at December 31, 2007. The decrease in loans held for sale was principally due to a change in business strategy to discontinue selling federally guaranteed student loans in the secondary market, and instead, hold them in the loan portfolio.
 
 
 
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Investment Securities Investment securities, both available-for-sale and held-to-maturity, totaled $39.3 billion at September 30, 2008, compared with $43.1 billion at December 31, 2007, reflecting purchases of $3.5 billion of securities, more than offset by sales, maturities, prepayments, securities impairments realized by the Company and unrealized losses on the available-for-sale portfolio due to changes in interest rates and liquidity premiums given current market conditions. As of September 30, 2008, approximately 38 percent of the investment securities portfolio represented adjustable-rate financial instruments, compared with 39 percent at December 31, 2007. Adjustable-rate financial instruments include collateralized mortgage obligations, mortgage-backed securities, agency securities, money market accounts, asset-backed securities, corporate debt securities and preferred stock.
The Company conducts a regular assessment of its investment portfolios to determine whether any securities are other-than-temporarily impaired. At September 30, 2008, the available-for-sale securities portfolio included a $2.5 billion net unrealized loss, compared with a net unrealized loss of $1.1 billion at December 31, 2007. The substantial portion of securities with unrealized losses were either government securities, issued by government-backed agencies or privately issued securities with high investment grade credit ratings and limited credit exposure. Some securities classified within obligations of state and political subdivisions are supported by mono-line insurers. As mono-line insurers have experienced credit rating downgrades, management continuously monitors the underlying credit quality of the issuers and the support of the mono-line insurers. As of September 30, 2008, approximately 8 percent of the available-for-sale securities portfolio represented perpetual preferred securities and trust preferred securities, primarily issued by the financial services sector, or structured investment securities. The unrealized losses for these securities were approximately $827 million at the end of the third quarter of 2008.
During the third quarter and first nine months of 2008, the Company’s assessment of the investment securities portfolio has resulted in the realization of other-than-temporary impairments for several classes of investment securities.
In the third quarter and first nine months of 2008, the Company recorded $196 million and $207 million, respectively, of other-than-temporarily impaired charges on certain investment securities, including certain non-agency mortgage-backed securities and perpetual preferred stock, representing the stock of GSEs and certain failed institutions.
With respect to structured investment securities held by the Company, there is no active market for these securities so their valuation is determined through discounted cash flows using estimates of expected cash flows, discount rates and management’s assessment of various market factors, which are judgmental in nature. The lack of an active market for these structured investment securities is reflected in the rate used to discount the expected cash flows. As a result of the valuation of these securities and impairment assessment, the Company has recorded $215 million and $534 million of impairment charges during the third quarter and first nine months of 2008, respectively. These impairment charges were a result of wider market spreads for these types of securities due to market illiquidity, as well as 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. The Company expects that approximately $439 million of principal payments will not be received for certain structured investment and non-agency mortgage-backed securities. During the first nine months of 2008, the Company exchanged its interest in certain structured investment securities and received its pro rata share of the underlying investment securities as an in-kind distribution according to the applicable restructuring agreements.
Refer to Note 3 in the Notes to Consolidated Financial Statements for further information on investment securities.
 
Deposits Total deposits were $139.5 billion at September 30, 2008, compared with $131.4 billion at December 31, 2007, an increase of $8.1 billion (6.1 percent). The increase in total deposits was primarily the result of increases in interest checking accounts, non-interest-bearing deposits, money market savings accounts and time deposits greater than $100,000, partially offset by a decrease in time certificates of deposit less than $100,000. The $2.5 billion (8.5 percent) increase in interest checking account balances was due primarily to higher broker-dealer balances. Noninterest-bearing deposits increased $2.1 billion (6.4 percent), primarily reflecting higher trust demand deposit balances. The $2.1 billion (8.8 percent) increase in money market savings account balances reflected higher broker-dealer and branch-based balances and the impact of an acquisition. Time deposits greater than $100,000 increased $1.7 billion (6.5 percent) at September 30, 2008, compared with December 31, 2007. Time deposits greater than $100,000 are largely viewed as purchased funds and are
 
 
 
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managed to levels deemed appropriate given alternative funding sources. Time certificates of deposit less than $100,000 decreased $1.3 billion (9.2 percent) at September 30, 2008, compared with December 31, 2007, primarily within Consumer Banking, reflecting the Company’s funding and pricing decisions and competition for these deposits by other financial institutions that have more limited access to wholesale funding sources given the current market environment.
 
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 $37.4 billion at September 30, 2008, compared with $32.4 billion at December 31, 2007. Short-term funding is managed within approved liquidity policies. The increase of $5.0 billion (15.6 percent) in short-term borrowings reflected wholesale funding associated with the Company’s asset growth and asset/liability management activities. Long-term debt was $40.1 billion at September 30, 2008, compared with $43.4 billion at December 31, 2007, primarily reflecting repayments of $3.3 billion of convertible senior debentures and maturities of $6.2 billion of medium-term notes and $.3 billion of subordinated debt, partially offset by the issuance of $7.0 billion of medium-term notes, in the first nine months of 2008. The $3.3 billion (7.7 percent) decrease in long-term debt reflected asset/liability management decisions to fund balance sheet growth with other funding sources. 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 or the residual cash flows related to asset securitization and other off-balance sheet structures. 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 repricing of assets and liabilities differently, as well as their market value. 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, 2007, 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 monitoring loan-to-values 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 September 30, 2008:
 
                                 
Residential mortgages
  Interest
                Percent
 
(Dollars in Millions)   Only     Amortizing     Total     of Total  
   
 
Consumer Finance
                               
Less than or equal to 80%
  $ 886     $ 2,639     $ 3,525       35.6 %
Over 80% through 90%
    754       1,588       2,342       23.6  
Over 90% through 100%
    790       3,092       3,882       39.2  
Over 100%
          158       158       1.6  
     
     
Total
  $ 2,430     $ 7,477     $ 9,907       100.0 %
Other Retail
                               
Less than or equal to 80%
  $ 2,362     $ 9,746     $ 12,108       90.1 %
Over 80% through 90%
    88       568       656       4.9  
Over 90% through 100%
    152       518       670       5.0  
Over 100%
                       
     
     
Total
  $ 2,602     $ 10,832     $ 13,434       100.0 %
Total Company
                               
Less than or equal to 80%
  $ 3,248     $ 12,385     $ 15,633       67.0 %
Over 80% through 90%
    842       2,156       2,998       12.8  
Over 90% through 100%
    942       3,610       4,552       19.5  
Over 100%
          158       158       .7  
     
     
Total
  $ 5,032     $ 18,309     $ 23,341       100.0 %
Note:   Loan-to-values determined as of the date of origination 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%
  $ 332     $ 170     $ 502       23.4 %
Over 80% through 90%
    287       173       460       21.5  
Over 90% through 100%
    423       527       950       44.3  
Over 100%
    75       157       232       10.8  
     
     
Total
  $ 1,117     $ 1,027     $ 2,144       100.0 %
Other Retail
                               
Less than or equal to 80%
  $ 10,446     $ 1,976     $ 12,422       77.3 %
Over 80% through 90%
    1,581       552       2,133       13.3  
Over 90% through 100%
    887       546       1,433       8.9  
Over 100%
    52       23       75       .5  
     
     
Total
  $ 12,966     $ 3,097     $ 16,063       100.0 %
Total Company
                               
Less than or equal to 80%
  $ 10,778     $ 2,146     $ 12,924       71.0 %
Over 80% through 90%
    1,868       725       2,593       14.2  
Over 90% through 100%
    1,310       1,073       2,383       13.1  
Over 100%
    127       180       307       1.7  
     
     
Total
  $ 14,083     $ 4,124     $ 18,207       100.0 %
(a) Consumer finance category included credit originated and managed by U.S. Bank Consumer Finance, 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 at current amortized loan balance, or maximum of current commitment or current balance on lines.
 
Within the consumer finance division approximately $3.0 billion of residential mortgages were to customers that may be defined as sub-prime borrowers at September 30, 2008, compared with $3.3 billion at December 31, 2007. 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     $ 1,113     $ 1,117       11.3 %
Over 80% through 90%
    6       745       751       7.6  
Over 90% through 100%
    20       1,049       1,069       10.8  
Over 100%
          105       105       1.0  
     
     
Total
  $ 30     $ 3,012     $ 3,042       30.7 %
Other Borrowers
                               
Less than or equal to 80%
  $ 882     $ 1,526     $ 2,408       24.3 %
Over 80% through 90%
    748       843       1,591       16.1  
Over 90% through 100%
    770       2,043       2,813       28.4  
Over 100%
          53       53       .5  
     
     
Total
  $ 2,400     $ 4,465     $ 6,865       69.3 %
     
     
Total Consumer Finance
  $ 2,430     $ 7,477     $ 9,907       100.0 %
 
In addition to residential mortgages, the consumer finance division had $.8 billion of home equity and second mortgage loans to customers that may be defined as sub-prime borrowers at September 30, 2008, compared with $.9 billion at December 31, 2007. 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%
  $ 25     $ 116     $ 141       6.6 %
Over 80% through 90%
    25       116       141       6.6  
Over 90% through 100%
    9       335       344       16.0  
Over 100%
    51       106       157       7.3  
     
     
Total
  $ 110     $ 673     $ 783       36.5 %
Other Borrowers
                               
Less than or equal to 80%
  $ 307     $ 54     $ 361       16.8 %
Over 80% through 90%
    262       57       319       14.9  
Over 90% through 100%
    414       192       606       28.3  
Over 100%
    24       51       75       3.5  
     
     
Total
  $ 1,007     $ 354     $ 1,361       63.5 %
     
     
Total Consumer Finance
  $ 1,117     $ 1,027     $ 2,144       100.0 %
Including residential mortgages, and home equity and second mortgage loans, the total amount of loans to customers that may be defined as sub-prime borrowers represented only 1.5 percent of total assets at September 30, 2008, compared with 1.7 percent at December 31, 2007. The Company does not have any residential mortgages whose payment schedule would cause balances to increase over time.
 
 
 
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Table 4      Delinquent Loan Ratios as a Percent of Ending Loan Balances
 
                 
    September 30,
    December 31,
 
90 days or more past due excluding nonperforming loans   2008     2007  
Commercial
               
Commercial
    .13 %     .08 %
Lease financing
           
                 
Total commercial
    .11       .07  
Commercial real estate
               
Commercial mortgages
    .02       .02  
Construction and development
    .13       .02  
                 
Total commercial real estate
    .05       .02  
Residential mortgages
    1.34       .86  
Retail
               
Credit card
    1.92       1.94  
Retail leasing
    .12       .10  
Other retail
    .37       .37  
                 
Total retail
    .68       .68  
                 
Total loans
    .46 %     .38 %
                 
 
                 
    September 30,
    December 31,
 
90 days or more past due including nonperforming loans   2008     2007  
Commercial
    .76 %     .43 %
Commercial real estate
    2.25       1.02  
Residential mortgages (a)
    2.00       1.10  
Retail (b)
    .81       .73  
                 
Total loans
    1.23 %     .74 %
                 
(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 5.65 percent at September 30, 2008, and 3.78 percent at December 31, 2007.
(b) Beginning in 2008, 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 .92 percent at September 30, 2008.
 
Loan Delinquencies Trends in delinquency ratios represent 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 $787 million at September 30, 2008, compared with $584 million at December 31, 2007. Consistent with banking industry practices, these loans are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. The ratio of accruing loans 90 days or more past due to total loans was .46 percent at September 30, 2008, compared with .38 percent at December 31, 2007.
 
 
 
 
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To monitor credit risk associated with retail loans, the Company monitors delinquency ratios in the various stages of collection, including nonperforming status. The following table provides summary delinquency information for residential mortgages and retail loans:
 
                                   
            As a Percent of Ending
 
    Amount       Loan Balances  
    September 30,
    December 31,
      September 30,
    December 31,
 
(Dollars in Millions)   2008     2007       2008     2007  
Residential Mortgages
                                 
30-89 days
    $418       $233         1.79 %     1.02 %
90 days or more
    312       196         1.34       .86  
Nonperforming
    155       54         .66       .24  
                                   
Total
    $885       $483         3.79 %     2.12 %
                                   
Retail
                                 
Credit card
                                 
30-89 days
    $315       $268         2.52 %     2.44 %
90 days or more
    240       212         1.92       1.94  
Nonperforming
    51       14         .41       .13  
                                   
Total
    $606       $494         4.85 %     4.51 %
Retail leasing
                                 
30-89 days
    $42       $39         .83 %     .65 %
90 days or more
    6       6         .12       .10  
Nonperforming
                         
                                   
Total
    $48       $45         .95 %     .75 %
Home equity and second mortgages
                                 
30-89 days
    $127       $107         .70 %     .65 %
90 days or more
    85       64         .47       .39  
Nonperforming
    13       11         .07       .07  
                                   
Total
    $225       $182         1.24 %     1.11 %
Other retail
                                 
30-89 days
    $208       $177         .94 %     1.02 %
90 days or more
    64       62         .29       .36  
Nonperforming
    10       4         .04       .02  
                                   
Total
    $282       $243         1.27 %     1.40 %
                                   
 
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  
    September 30,
    December 31,
      September 30,
    December 31,
 
    2008     2007       2008     2007  
Residential mortgages
                                 
30-89 days
    3.03 %     1.58 %       .88 %     .61 %
90 days or more
    2.15       1.33         .74       .51  
Nonperforming
    1.14       .31         .31       .18  
                                   
Total
    6.32 %     3.22 %       1.93 %     1.30 %
                                   
                                   
Retail
                                 
Credit card
                                 
30-89 days
    %     %       2.52 %     2.44 %
90 days or more
                  1.92       1.94  
Nonperforming
                  .41       .13  
                                   
Total
    %     %       4.85 %     4.51 %
Retail leasing
                                 
30-89 days
    %     %       .83 %     .65 %
90 days or more
                  .12       .10  
Nonperforming
                         
                                   
Total
    %     %       .95 %     .75 %
Home equity and second mortgages
                                 
30-89 days
    2.66 %     2.53 %       .44 %     .41 %
90 days or more
    1.86       1.78         .28       .21  
Nonperforming
    .14       .11         .06       .06  
                                   
Total
    4.66 %     4.42 %       .78 %     .68 %
Other retail
                                 
30-89 days
    6.09 %     6.38 %       .83 %     .88 %
90 days or more
    1.68       1.66         .26       .33  
Nonperforming
                  .04       .02  
                                   
Total
    7.77 %     8.04 %       1.13 %     1.23 %
                                   
(a) Consumer finance category included credit originated and managed by U.S. Bancorp Consumer Finance, 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 September 30, 2008, approximately $381 million and $102 million of these delinquent and nonperforming residential mortgages and retail loans, respectively, were with customers that may be defined as sub-prime borrowers, compared with $227 million and $89 million, respectively, at December 31, 2007.
 
The Company expects delinquencies to continue to increase due to deteriorating economic conditions and continuing stress in the residential mortgage portfolio and residential construction industry.
 
Restructured Loans Accruing Interest In certain circumstances, management may modify the terms of a loan to maximize the collection of the loan balance. In most cases, the modification is either a reduction in interest rate, extension of the maturity date or a reduction in the principal balance. Generally, the borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term so concessionary modification is granted to the borrower that would otherwise not be considered. 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. Loans restructured at a rate equal to or greater than a market rate for a new loan with comparable risk at the time the contract is modified, are classified as restructured loans in the calendar year the restructuring occurs, but are excluded from restructured loans in subsequent years once repayment performance, in accordance with the modified agreement, has been demonstrated. Loans that have interest rates reduced below market rates for borrowers with comparable risk remain classified as restructured loans for the remaining life of the loan.
 
The majority of the Company’s loan restructurings occur on a case-by-case basis in connection with ongoing loan collection processes. However, in late 2007, the Company began implementing a mortgage loan restructuring program for certain qualifying borrowers. In general, certain borrowers in the consumer finance division facing an interest rate reset that 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 following table provides a summary of restructured loans that are performing, and therefore, continue to accrue interest:
 
                                   
            As a Percent of Ending
 
    Amount       Loan Balances  
    September 30,
    December 31,
      September 30,
    December 31,
 
(Dollars in Millions)   2008     2007       2008     2007  
Commercial
  $ 35     $ 21         .06 %     .04 %
Commercial real estate
    81               .25        
Residential mortgages
    589       157         2.52       .69  
Credit card
    412       324         3.30       2.96  
Other retail
    63       49         .14       .12  
                                   
Total
  $ 1,180     $ 551         .69 %     .36 %
                                   
Restructured loans that continue to accrue interest were $629 million higher at September 30, 2008, compared with December 31, 2007, reflecting the impact of restructurings for certain commercial real estate, residential mortgage and credit card customers in light of current economic conditions. The Company expects this trend to continue in the near term as residential home valuations continue to decline and certain borrowers take advantage of the Company’s mortgage loan restructuring programs.
 
Nonperforming Assets The level of nonperforming assets represents another indicator of the potential for future credit losses. At September 30, 2008, total nonperforming assets were $1,492 million, compared with $690 million at December 31, 2007. The ratio of total nonperforming assets to total loans and other real estate was .88 percent at September 30, 2008, compared with .45 percent at December 31, 2007. The increase in nonperforming assets was driven primarily by the residential construction portfolio and related industries, as well as the residential mortgage portfolio, 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 $100 million at September 30, 2008, compared with $17 million at December 31, 2007. At September 30, 2008, the Company had $4 million of commitments to lend additional funds under restructured loans, compared with no commitments at December 31, 2007.
Other real estate included in nonperforming assets was $164 million at September 30, 2008, compared with $111 million at December 31, 2007, and was primarily related to properties that the Company has taken ownership of which previously secured residential mortgages and home equity and second mortgage loan
 
 
 
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Table 5     Nonperforming Assets (a)
 
                 
    September 30,
    December 31,
 
(Dollars in Millions)   2008     2007  
Commercial
               
Commercial
  $ 280     $ 128  
Lease financing
    85       53  
                 
Total commercial
    365       181  
Commercial real estate
               
Commercial mortgages
    164       84  
Construction and development
    545       209  
                 
Total commercial real estate
    709       293  
Residential mortgages
    155       54  
Retail
               
Credit card
    51       14  
Retail leasing
           
Other retail
    23       15  
                 
Total retail
    74       29  
                 
Total nonperforming loans
    1,303       557  
Other real estate (b)
    164       111  
Other assets
    25       22  
                 
Total nonperforming assets
  $ 1,492     $ 690  
                 
Accruing loans 90 days or more past due
  $ 787     $ 584  
Nonperforming loans to total loans
    .77 %     .36 %
Nonperforming assets to total loans plus other real estate (b)
    .88 %     .45 %
                 
Changes in Nonperforming Assets
                         
    Commercial and
    Retail and
       
    Commercial
    Residential
       
(Dollars in Millions)   Real Estate     Mortgages (d)     Total  
Balance December 31, 2007
  $ 485     $ 205     $ 690  
Additions to nonperforming assets
                       
New nonaccrual loans and foreclosed properties
    1,139       221       1,360  
Advances on loans
    18             18  
                         
Total additions
    1,157       221       1,378  
Reductions in nonperforming assets
                       
Paydowns, payoffs
    (187 )     (26 )     (213 )
Net sales
    (23 )           (23 )
Return to performing status
    (24 )     (6 )     (30 )
Charge-offs (c)
    (275 )     (35 )     (310 )
                         
Total reductions
    (509 )     (67 )     (576 )
                         
Net additions to nonperforming assets
    648       154       802  
                         
Balance September 30, 2008
  $ 1,133     $ 359     $ 1,492  
                         
     
(a)
  Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b)
  Excludes $170 million and $102 million at September 30, 2008, and December 31, 2007, 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.

 
balances. The increase in other real estate assets reflected continuing stress in the residential construction and related supplier industries and higher residential mortgage loan foreclosures as customers experienced financial difficulties, given inflationary factors, changing interest rates and other current economic conditions.
 
The following table provides an analysis of other real estate owned (“OREO”) 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  
    September 30,
    December 31,
      September 30,
    December 31,
 
(Dollars in Millions)   2008     2007       2008     2007  
Residential
                                 
Minnesota
  $ 18     $ 12         .34 %     .23 %
Michigan
    13       22         2.48       3.47  
California
    10       5         .23       .15  
Ohio
    8       10         .31       .40  
Florida
    7       6         .94       .70  
All other states
    65       55         .23       .21  
                                   
Total residential
    121       110         .29       .28  
Commercial
    43       1         .13        
                                   
Total OREO
  $ 164     $ 111         .10 %     .07 %
                                   
 
 
 
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Table 6     Net Charge-offs as a Percent of Average Loans Outstanding
 
                                   
    Three Months Ended
    Nine Months Ended
    September 30,     September 30,
    2008   2007     2008   2007
Commercial
                                 
Commercial
    .47 %     .25 %       .42 %     .25 %
Lease financing
    1.36       .76         1.18       .52  
                                   
Total commercial
    .58       .31         .51       .29  
Commercial real estate
                                 
Commercial mortgages
    .16       .02         .12       .06  
Construction and development
    2.36       .04         1.09       .04  
                                   
Total commercial real estate
    .81       .03         .41       .06  
Residential mortgages
    1.21       .30         .86       .27  
Retail
                                 
Credit card
    4.85       3.09         4.56       3.36  
Retail leasing
    .69       .19         .58       .20  
Home equity and second mortgages
    1.07       .49         .98       .44  
Other retail
    1.41       1.00         1.28       .93  
                                   
Total retail
    1.98       1.15         1.81       1.13  
                                   
Total loans
    1.19 %     .54 %       .98 %     .52 %
                                   

Within other real estate, approximately $47 million at September 30, 2008, and $61 million at December 31, 2007, were from portfolios that may be defined as sub-prime.
 
The Company expects nonperforming assets to continue to increase due to general economic conditions and continuing stress in the residential mortgage portfolio and residential construction and related industries.
 
Analysis of Loan Net Charge-Offs Total loan net charge-offs were $498 million and $1,187 million during the third quarter and first nine months of 2008, respectively, compared with net charge-offs of $199 million and $567 million, respectively, for the same periods of 2007. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis in the third quarter and first nine months of 2008 was 1.19 percent and .98 percent, respectively, compared with .54 percent and .52 percent, respectively, for the same periods of 2007. The year-over-year increases in total net charge-offs were driven by the factors affecting the residential housing markets, as well as credit costs associated with credit card and other consumer loan growth over the past several quarters.
Commercial and commercial real estate loan net charge-offs for the third quarter of 2008 increased to $144 million (.66 percent of average loans outstanding on an annualized basis), compared with $39 million (.20 percent of average loans outstanding on an annualized basis) for the third quarter of 2007. Commercial and commercial real estate loan net charge-offs for the first nine months of 2008 increased to $298 million (.47 percent of average loans outstanding on an annualized basis), compared with $113 million (.20 percent of average loans outstanding on an annualized basis) for the first nine months of 2007. The year-over-year increases in commercial and commercial real estate losses reflected the continuing stress within the portfolios, especially residential homebuilding and related industry sectors.
Residential mortgage loan net charge-offs for the third quarter of 2008 were $71 million (1.21 percent of average loans outstanding on an annualized basis), compared with $17 million (.30 percent of average loans outstanding on an annualized basis) for the third quarter of 2007. Residential mortgage loan net charge-offs for the first nine months of 2008 were $150 million (.86 percent of average loans outstanding on an annualized basis), compared with $44 million (.27 percent of average loans outstanding on an annualized basis) for the first nine months of 2007. The year-over-year increases in residential mortgage losses were primarily related to loans originated within the consumer finance division and reflected the impact of rising foreclosures on sub-prime mortgages and current economic conditions.
Retail loan net charge-offs for the third quarter of 2008 were $283 million (1.98 percent of average loans outstanding on an annualized basis), compared with $143 million (1.15 percent of average loans outstanding on an annualized basis) for the third quarter of 2007. Retail loan net charge-offs for the first nine months of 2008 were $739 million (1.81 percent of average loans outstanding on an annualized basis), compared with $410 million (1.13 percent of average loans outstanding on an annualized basis) for the first nine months of 2007. The year-over-year increase in retail loan credit losses reflected the Company’s growth in credit card and other consumer loan balances, as well as the adverse impact of current economic conditions on consumers.
 
 
 
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 related loans:
 
                                                                               
    Three Months Ended September 30,       Nine Months Ended September 30,  
            Percent of
              Percent of
 
    Average Loans       Average Loans       Average Loans       Average Loans  
       
(Dollars in Millions)   2008       2007       2008       2007       2008       2007       2008       2007  
Consumer Finance (a)
                                                                             
Residential mortgages
    $9,941         $9,360         2.40 %       .64 %       $9,943         $8,943         1.65 %       .58 %
Home equity and second mortgages
    2,139         1,837         5.77         3.02         2,015         1,848         5.70         2.53  
Other retail
    471         421         5.91         3.77         450         410         5.34         2.93  
Other Retail
                                                                             
Residential mortgages
    $13,368         $12,898         .33 %       .06 %       $13,255         $12,945         .27 %       .05 %
Home equity and second mortgages
    15,719         14,211         .43         .17         15,151         13,933         .35         .16  
Other retail
    21,184         16,619         1.31         .93         19,692         16,286         1.19         .88  
Total Company
                                                                             
Residential mortgages
    $23,309         $22,258         1.21 %       .30 %       $23,198         $21,888         .86 %       .27 %
Home equity and second mortgages
    17,858         16,048         1.07         .49         17,166         15,781         .98         .44  
Other retail
    21,655         17,040         1.41         1.00         20,142         16,696         1.28         .93  
                                                                               
(a) Consumer finance category included credit originated and managed by U.S. Bank Consumer Finance, 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.
Within the consumer finance division, the Company originates loans to customers that may be defined as sub-prime borrowers. The following table provides further information on net charge-offs as a percent of average loans outstanding for this division:
 
                                                                               
    Three Months Ended September 30,       Nine Months Ended September 30,  
            Percent of
              Percent of
 
    Average Loans       Average Loans       Average Loans       Average Loans  
       
(Dollars in Millions)   2008       2007       2008       2007       2008       2007       2008       2007  
Residential mortgages
                                                                             
Sub-prime borrowers
    $3,070         $3,203         4.28 %       1.24 %       $3,147         $3,115         3.01 %       1.16 %
Other borrowers
    6,871         6,157         1.56         .32         6,796         5,828         1.02         .28  
                                                                               
Total
    $9,941         $9,360         2.40 %       .64 %       $9,943         $8,943         1.65 %       .58 %
Home equity and second mortgages
                                                                             
Sub-prime borrowers
    $778         $914         10.23 %       3.91 %       $813         $912         9.69 %       3.23 %
Other borrowers
    1,361         923         3.22         2.15         1,202         936         3.00         1.86  
                                                                               
Total
    $2,139         $1,837         5.77 %       3.02 %       $2,015         $1,848         5.70 %       2.53 %
                                                                               
 
Analysis and Determination of the Allowance for Credit Losses The allowance for loan losses provides coverage for probable and estimable losses inherent in the Company’s loan and lease portfolio. Management evaluates the allowance each quarter to determine that it is adequate to cover these inherent losses. Several factors were taken into consideration in evaluating the allowance for credit losses at September 30, 2008, 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 restructured loan balances compared with December 31, 2007. 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 September 30, 2008, the allowance for credit losses was $2,898 million (1.71 percent of loans), compared with an allowance of $2,260 million (1.47 percent of loans) at December 31, 2007. The $638 million (28.2 percent) increase in the allowance for credit losses reflected deterioration in the credit quality within the loan portfolios related to the continued stress in the residential housing markets, homebuilding and related industry sectors. It also reflected growth of the commercial and consumer loan portfolios. The ratio of the allowance for credit losses to nonperforming loans was 222 percent at September 30, 2008, compared with 406 percent at December 31, 2007. The ratio of the allowance for credit losses to annualized loan net charge-offs was 146 percent at September 30, 2008, compared with 285 percent at December 31, 2007.
 
Residual Value Risk Management The Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of September 30, 2008, no significant change in the amount of residuals or concentration of the portfolios had occurred since December 31, 2007. 
 
 
 
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Table 7    Summary of Allowance for Credit Losses
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
(Dollars in Millions)   2008     2007     2008     2007  
Balance at beginning of period
  $ 2,648     $ 2,260     $ 2,260     $ 2,256  
Charge-offs
                               
Commercial
                               
Commercial
    63       38       167       117  
Lease financing
    29       16       75       45  
                                 
Total commercial
    92       54       242       162  
Commercial real estate
                               
Commercial mortgages
    9       3       20       13  
Construction and development
    56       1       76       3  
                                 
Total commercial real estate
    65       4       96       16  
Residential mortgages
    72       17       152       45  
Retail
                               
Credit card
    164       93       447       280  
Retail leasing
    11       5       28       16  
Home equity and second mortgages
    49       22       130       58  
Other retail
    91       61       236       168  
                                 
Total retail
    315       181       841       522  
                                 
Total charge-offs
    544       256       1,331       745  
Recoveries
                               
Commercial
                               
Commercial
    6       12       20       38  
Lease financing
    7       5       19       23  
                                 
Total commercial
    13       17       39       61  
Commercial real estate
                               
Commercial mortgages
          2       1       4  
Construction and development
                       
                                 
Total commercial real estate
          2       1       4  
Residential mortgages
    1             2       1  
Retail
                               
Credit card
    15       16       51       48  
Retail leasing
    2       2       4       6  
Home equity and second mortgages
    1       2       4       6  
Other retail
    14       18       43       52  
                                 
Total retail
    32       38       102       112  
                                 
Total recoveries
    46       57       144       178  
Net Charge-offs
                               
Commercial
                               
Commercial
    57       26       147       79  
Lease financing
    22       11       56       22  
                                 
Total commercial
    79       37       203       101  
Commercial real estate
                               
Commercial mortgages
    9       1       19       9  
Construction and development
    56       1       76       3  
                                 
Total commercial real estate
    65       2       95       12  
Residential mortgages
    71       17       150       44  
Retail
                               
Credit card
    149       77       396       232  
Retail leasing
    9       3       24       10  
Home equity and second mortgages
    48       20       126       52  
Other retail
    77       43       193       116  
                                 
Total retail
    283       143       739       410  
                                 
Total net charge-offs
    498       199       1,187       567  
                                 
Provision for credit losses
    748       199       1,829       567  
Acquisitions and other changes
                (4 )     4  
                                 
Balance at end of period
  $ 2,898     $ 2,260     $ 2,898     $ 2,260  
                                 
Components
                               
Allowance for loan losses
  $ 2,767     $ 2,041                  
Liability for unfunded credit commitments
    131       219                  
                                 
Total allowance for credit losses
  $ 2,898     $ 2,260                  
                                 
Allowance for credit losses as a percentage of
                               
Period-end loans
    1.71 %     1.52 %                
Nonperforming loans
    222       441                  
Nonperforming assets
    194       353                  
Annualized net charge-offs
    146       286                  
                                 
 
 
 
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However, the Company’s portfolio has experienced deterioration in residual values of sport utility vehicles and luxury models as higher fuel prices increased during the year through mid-third quarter of 2008. These higher fuel prices have resulted in lower used vehicle prices and higher end-of-term average losses during the past nine months. As of September 30, 2008, the Company has recognized residual value impairments of approximately 4 percent of the residual portfolio. During the third quarter of 2008, used vehicle values improved somewhat as fuel prices began to decline. As a result of recent changes in fuel prices, the Company expects residual valuations to stabilize somewhat over the next few quarters. 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, 2007, for further discussion on residual value risk management and portfolio deterioration.
 
Operational Risk Management The Company manages operational risk through a risk management framework and its internal control processes. Within this framework, the Corporate Risk Committee (“Risk Committee”) provides oversight and assesses the most significant operational risks facing the Company within its business lines. Under the guidance of the Risk 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, 2007, 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 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 Policy Committee (“ALPC”) and approved by the Board of Directors. ALPC has the responsibility for approving and ensuring compliance with ALPC 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 Through this simulation, management estimates the impact on net interest income of gradual upward or downward changes of market interest rates over a one-year period, the effect of immediate and sustained parallel shifts in the yield curve and the effect of immediate and sustained flattening or steepening of the yield curve. The table below summarizes the interest rate risk of net interest income based on forecasts over the succeeding 12 months. At September 30, 2008, the Company’s overall interest rate risk position was liability sensitive to changes in interest rates. ALPC policy limits the estimated change in net interest income to 4.0 percent of forecasted net interest income over the succeeding 12 months. At September 30, 2008, and December 31, 2007, 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, 2007, 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. ALPC policy limits the change in market value of equity in a 200 basis point parallel rate shock to 15.0 percent of the market value of equity assuming interest rates at September 30, 2008. The up 200 basis point scenario resulted in a 7.7 percent decrease in the market value of equity at September 30, 2008, compared with a 7.6 percent decrease at December 31, 2007. The down 200 basis point scenario resulted in a 1.3 percent decrease in the market value of equity at September 30, 2008, compared with a 3.5 percent decrease at December 31, 2007. At September 30, 2008, and December 31, 2007, the Company was within its policy.
The Company also uses duration of equity as a measure of interest rate risk. The duration of equity is a measure of the net market value sensitivity of the assets,

Sensitivity of Net Interest Income
                                                                   
    September 30, 2008       December 31, 2007  
    Down 50
    Up 50
    Down 200
    Up 200
      Down 50
    Up 50
    Down 200
    Up 200
 
    Immediate     Immediate     Gradual     Gradual       Immediate     Immediate     Gradual     Gradual  
                                                                   
Net interest income
    .50%       (.48)%       *     (.68)%         .54 %     (1.01) %     1.28 %     (2.55) %
                                                                   
* Given the current level of interest rates, a downward 200 basis point scenario can not be computed.

 
 
 
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Table 8    Derivative Positions
                                                   
    September 30, 2008       December 31, 2007  
                Weighted-
                  Weighted-
 
                Average
                  Average
 
                Remaining
                  Remaining
 
    Notional
    Fair
    Maturity
      Notional
    Fair
    Maturity
 
(Dollars in Millions)   Amount     Value     In Years       Amount     Value     In Years  
Asset and Liability Management Positions
                                                 
Interest rate contracts
                                                 
Receive fixed/pay floating swaps
  $ 4,500     $ (28 )     35.17       $ 3,750     $ 17       40.87  
Pay fixed/receive floating swaps
    13,554       (331 )     3.25         15,979       (307 )     3.00  
Futures and forwards
                                                 
Buy
    10,655       (40 )     .05         12,459       (51 )     .12  
Sell
    7,225       2       .12         11,427       (33 )     .16  
Options
                                                 
Written
    13,385       3       .07         10,689       10       .12  
Foreign exchange contracts
                                                 
Cross-currency swaps
    1,830       107       8.06         1,913       196       8.80  
Forwards
    1,034       (9 )     .04         1,111       (15 )     .03  
Equity contracts
    58       12       1.57         73       (3 )     2.33  
Credit default swaps
    51       2       2.54         56       1       3.60  
                                                   
Customer-related Positions                                                  
Interest rate contracts
                                                 
Receive fixed/pay floating swaps
  $ 18,822     $ 303       4.93       $ 14,260     $ 386       5.10  
Pay fixed/receive floating swaps
    18,815       (284 )     5.01         14,253       (309 )     5.08  
Options
                                                 
Purchased
    2,162       (9 )     1.90         1,939       1       2.25  
Written
    2,158       9       1.91         1,932       1       2.25  
Risk participation agreements (a)
                                                 
Purchased
    587       1       5.08         370       1       6.23  
Written
    1,017       (1 )     3.28         628       (1 )     4.98  
Foreign exchange rate contracts
                                                 
Forwards and swaps
                                                 
Buy
    3,961       172       .37         3,486       109       .44  
Sell
    3,905       (163 )     .37         3,426       (95 )     .44  
Options
                                                 
Purchased
    456       15       .96         308       6       .68  
Written
    456       (15 )     .96         293       (6 )     .71  
                                                   
     
(a)
  At September 30, 2008, the credit equivalent amount was $6 million and $80 million, compared with $4 million and $69 million at December 31, 2007, for purchased and written risk participation agreements, respectively.
NOTE:  On September 25, 2008, the Company entered into a support agreement with a money market fund managed by FAF Advisors, Inc., an affiliate of the Company. Although this financial guarantee is a derivative and accounted for at fair value, it is excluded from the table above. Refer to Note 10, Guarantees and Contingent Liabilities in the Notes to Consolidated Financial Statements.

liabilities and derivative positions of the Company. At September 30, 2008, the duration of assets, liabilities and equity was 1.7 years, 1.7 years and 1.8 years, respectively, compared with 1.8 years, 1.9 years and 1.2 years, respectively, at December 31, 2007. The change in duration of equity reflects a change in market rates and credit spreads. 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, 2007, for further discussion on market value of equity modeling.
 
Use of Derivatives to Manage Interest Rate and Other Risks In the ordinary course of business, the Company enters into derivative transactions to manage its interest rate, prepayment, credit, price and foreign currency risks (“asset and liability management positions”) and to accommodate the business requirements of its customers (“customer-related positions”). Refer to “Management’s Discussion and Analysis — Use of Derivatives to Manage Interest Rate and Other Risks” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for further discussion on the use of derivatives to manage interest rate and other risks.
By their nature, derivative instruments are subject to market risk. The Company does not utilize derivative instruments for speculative purposes. Of the Company’s $52.3 billion of total notional amount of asset and liability management positions at September 30, 2008, $19.2 billion was designated as either fair value or cash flow hedges or net investment hedges of foreign operations. The cash flow hedge derivative positions are interest rate swaps that hedge the forecasted cash flows from the underlying variable-rate debt. The fair value
 
 
 
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hedges are primarily interest rate swaps that hedge the change in fair value related to interest rate changes of underlying fixed-rate debt and subordinated obligations.
At September 30, 2008, the Company had $204 million in accumulated other comprehensive income related to realized and unrealized losses on derivatives classified as cash flow hedges. Unrealized gains and losses are reflected in earnings when the related cash flows or hedged transactions occur and offset the related performance of the hedged items. The estimated amount to be reclassified from accumulated other comprehensive income into earnings during the remainder of 2008 and the next 12 months is a loss of $15 million and $56 million, respectively.
The change in the fair value of all other asset and liability management positions attributed to hedge ineffectiveness recorded in noninterest income was not material for the third quarter and first nine months of 2008. Gains or losses on customer-related positions were not material for the third quarter and first nine months of 2008. The impact of adopting SFAS 157 in the first quarter of 2008 reduced noninterest income by $62 million for