e10vq
Table of Contents

 
[FORM 10-Q] 
 
[USBANCORP LOGO] 
 


Table of Contents

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


 

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


Table of Contents

 

Table 1    Selected Financial Data
                                                         
    Three Months Ended
      Nine Months Ended
 
    September 30,       September 30,  
                  Percent
                      Percent
 
(Dollars and Shares in Millions, Except Per Share Data)   2011     2010       Change       2011       2010       Change  
Condensed Income Statement
                                                       
Net interest income (taxable-equivalent basis) (a)
  $ 2,624     $ 2,477         5.9 %     $ 7,675       $ 7,289         5.3 %
Noninterest income
    2,180       2,119         2.9         6,351         6,202         2.4  
Securities gains (losses), net
    (9 )     (9 )               (22 )       (64 )       65.6  
                                                         
Total net revenue
    4,795       4,587         4.5         14,004         13,427         4.3  
Noninterest expense
    2,476       2,385         3.8         7,215         6,898         4.6  
Provision for credit losses
    519       995         (47.8 )       1,846         3,444         (46.4 )
                                                         
Income before taxes
    1,800       1,207         49.1         4,943         3,085         60.2  
Taxable-equivalent adjustment
    58       53         9.4         169         156         8.3  
Applicable income taxes
    490       260         88.5         1,314         620         *  
                                                         
Net income
    1,252       894         40.0         3,460         2,309         49.8  
Net (income) loss attributable to noncontrolling interests
    21       14         50.0         62         34         82.4  
                                                         
Net income attributable to U.S. Bancorp
  $ 1,273     $ 908         40.2       $ 3,522       $ 2,343         50.3  
                               
Net income applicable to U.S. Bancorp common shareholders
  $ 1,237     $ 871         42.0       $ 3,407       $ 2,381         43.1  
                               
Per Common Share
                                                       
Earnings per share
  $ .65     $ .46         41.3 %     $ 1.78       $ 1.25         42.4 %
Diluted earnings per share
    .64       .45         42.2         1.77         1.24         42.7  
Dividends declared per share
    .125       .050         *         .375         .150         *  
Book value per share
    16.01       14.19         12.8                                
Market value per share
    23.54       21.62         8.9                                
Average common shares outstanding
    1,915       1,913         .1         1,918         1,911         .4  
Average diluted common shares outstanding
    1,922       1,920         .1         1,926         1,920         .3  
Financial Ratios
                                                       
Return on average assets
    1.57 %     1.26 %                 1.50 %       1.11 %          
Return on average common equity
    16.1       12.8                   15.5         12.3            
Net interest margin (taxable-equivalent basis) (a)
    3.65       3.91                   3.67         3.90            
Efficiency ratio (b)
    51.5       51.9                   51.4         51.1            
Net charge-offs as a percent of average loans outstanding
    1.31       2.05                   1.49         2.26            
Average Balances
                                                       
Loans
  $ 202,169     $ 192,541         5.0 %     $ 199,533       $ 192,192         3.8 %
Loans held for sale
    3,946       6,465         (39.0 )       4,382         4,824         (9.2 )
Investment securities
    66,252       47,870         38.4         61,907         47,080         31.5  
Earning assets
    286,269       251,916         13.6         279,305         249,408         12.0  
Assets
    321,581       286,060         12.4         314,079         283,056         11.0  
Noninterest-bearing deposits
    58,606       39,732         47.5         50,558         39,223         28.9  
Deposits
    215,369       182,660         17.9         209,735         182,837         14.7  
Short-term borrowings
    30,597       36,303         (15.7 )       30,597         33,727         (9.3 )
Long-term debt
    31,609       29,422         7.4         31,786         30,696         3.6  
Total U.S. Bancorp shareholders’ equity
    33,087       28,887         14.5         31,699         27,582         14.9  
                               
                                                         
    September 30,
  December 31,
                       
 
  2011   2010                        
Period End Balances
                                                       
Loans
  $ 204,768     $ 197,061         3.9 %                              
Investment securities
    68,378       52,978         29.1                                
Assets
    330,141       307,786         7.3                                
Deposits
    222,632       204,252         9.0                                
Long-term debt
    30,624       31,537         (2.9 )                              
Total U.S. Bancorp shareholders’ equity
    33,230       29,519         12.6                                
Asset Quality
                                                       
Nonperforming assets
  $ 4,339     $ 5,048         (14.0 )%                              
Allowance for credit losses
    5,190       5,531         (6.2 )                              
Allowance for credit losses as a percentage of period-end loans
    2.53 %     2.81 %                                        
Capital Ratios
                                                       
Tier 1 capital
    10.8 %     10.5 %                                        
Total risk-based capital
    13.5       13.3                                          
Leverage
    9.0       9.1                                          
Tier 1 common equity to risk-weighted assets using Basel I definition (c)
    8.5       7.8                                          
Tier 1 common equity to risk-weighted assets using anticipated Basel III definition (c)
    8.2       7.3                                          
Tangible common equity to tangible assets (c)
    6.6       6.0                                          
Tangible common equity to risk-weighted assets (c)
    8.1       7.2                                          
 
  * Not meaningful.
(a) Presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding net securities gains (losses).
(c) See Non-Regulatory Capital Ratios on page 30.
 
 
 
2
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Table of Contents

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

STATEMENT OF INCOME ANALYSIS
 
Net Interest Income Net interest income, on a taxable-equivalent basis, was $2.6 billion in the third quarter of 2011, compared with $2.5 billion in the third quarter of 2010. Net interest income, on a taxable-equivalent basis, was $7.7 billion in the first nine months of 2011, compared with $7.3 billion in the first nine months of 2010. The increases were primarily the result of growth in average earning assets and lower cost core deposit funding. Average earning assets increased $34.4 billion (13.6 percent) in the third quarter and $29.9 billion (12.0 percent) in the first nine months of 2011, compared with the same periods of 2010, driven by increases in investment securities, loans and other earning assets, which included cash balances held at the Federal Reserve. The net interest margin in the third quarter and first nine months of 2011 was 3.65 percent and 3.67 percent, respectively, compared with 3.91 percent and 3.90 percent in the third quarter and first nine months of 2010, respectively. The decreases in the net interest margin reflected higher balances in lower yielding investment securities and growth in cash balances held at the Federal Reserve. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tables for further information on net interest income.
Total average loans for the third quarter and first nine months of 2011 were $9.6 billion (5.0 percent) and $7.3 billion (3.8 percent) higher, respectively, than the same periods of 2010, driven by growth in residential mortgages, commercial loans, commercial real estate loans and other retail loans, partially offset by decreases in credit card balances and loans covered by loss sharing agreements with the FDIC (“covered” loans). The increases were driven by demand for loans and lines by new and existing credit-worthy borrowers and the impact of the FCB acquisition. Average covered loans decreased for the third quarter and first nine months of 2011, by $3.5 billion (18.2 percent) and $3.7 billion (18.1 percent), respectively, compared with the same periods of 2010.
Average investment securities in the third quarter and first nine months of 2011 were $18.4 billion (38.4 percent) and $14.8 billion (31.5 percent) higher, respectively, than the same periods of 2010, primarily due to purchases of U.S. Treasury and government agency-related securities, as the Company increased its on-balance sheet liquidity in response to anticipated regulatory requirements.
Average total deposits for the third quarter and first nine months of 2011 were $32.7 billion (17.9 percent) and $26.9 billion (14.7 percent) higher, respectively, than the same periods of 2010. Excluding deposits from acquisitions, third quarter 2011 average total deposits increased $24.2 billion (13.2 percent) over the third quarter of 2010. Average noninterest-bearing deposits for the third quarter and first nine months of 2011 were $18.9 billion (47.5 percent) and $11.3 billion (28.9 percent) higher, respectively, than the same periods of 2010, with growth in Wholesale Banking and Commercial Real Estate, Wealth Management and Securities Services, and Consumer and Small Business Banking balances. Average total savings deposits for the third quarter and first nine months of 2011 were $13.4 billion (13.5 percent) and $14.4 billion (14.5 percent) higher, respectively, than the same periods of 2010, primarily due to growth in corporate and institutional trust balances, including the impact of the December 30, 2010 acquisition of the securitization trust administration business of Bank of America, N.A. (“securitization trust administration acquisition”), as well as increases in Consumer and Small Business Banking balances, partially offset by lower broker-dealer balances. Average time certificates of deposit less than $100,000 were lower in the third quarter and first nine months of 2011 by $773 million (4.8 percent) and $1.8 billion (10.6 percent), respectively, compared with the same periods of 2010, as a result of expected decreases in acquired certificates of deposit and decreases in Consumer and Small Business Banking balances. Average time deposits greater than $100,000 were $1.2 billion (4.4 percent) and $3.0 billion (11.0 percent) higher in the third quarter and first nine months of 2011, respectively, compared with the same periods of 2010, principally due to higher balances in Wholesale Banking and Commercial Real Estate and institutional and corporate trust, including the impact of the securitization trust administration and FCB acquisitions.
 
Provision for Credit Losses The provision for credit losses for the third quarter and first nine months of 2011 decreased $476 million (47.8 percent) and $1.6 billion (46.4 percent), respectively, from the same periods of 2010. Net charge-offs decreased $326 million (32.8 percent) and $1.0 billion (31.5 percent) in the third quarter and first nine months of 2011, respectively, compared with the same periods of 2010, principally due to improvement in the commercial, commercial real estate, credit card and other retail loan portfolios. The provision for credit losses was lower than net charge-offs by $150 million in the third quarter and $375 million in the first nine months of 2011, equaled net charge-offs in the third quarter of 2010, and exceeded net charge-offs by $200 million in the first nine months of 2010. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
 
 
 
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Table 2    Noninterest Income
 
                                                         
    Three Months Ended
      Nine Months Ended
 
    September 30,       September 30,  
                  Percent
                      Percent
 
(Dollars in Millions)   2011     2010       Change       2011       2010       Change  
Credit and debit card revenue
  $ 289     $ 274         5.5 %     $ 842       $ 798         5.5 %
Corporate payment products revenue
    203       191         6.3         563         537         4.8  
Merchant processing services
    338       318         6.3         977         930         5.1  
ATM processing services
    115       105         9.5         341         318         7.2  
Trust and investment management fees
    241       267         (9.7 )       755         798         (5.4 )
Deposit service charges
    183       160         14.4         488         566         (13.8 )
Treasury management fees
    137       139         (1.4 )       418         421         (.7 )
Commercial products revenue
    212       197         7.6         621         563         10.3  
Mortgage banking revenue
    245       310         (21.0 )       683         753         (9.3 )
Investment products fees and commissions
    31       27         14.8         98         82         19.5  
Securities gains (losses), net
    (9 )     (9 )               (22 )       (64 )       65.6  
Other
    186       131         42.0         565         436         29.6  
                                                         
Total noninterest income
  $ 2,171     $ 2,110         2.9 %     $ 6,329       $ 6,138         3.1 %
                                                         
 
Noninterest Income Noninterest income in the third quarter and first nine months of 2011 was $2.2 billion and $6.3 billion, respectively, compared with $2.1 billion and $6.1 billion in the same periods of 2010, or increases of $61 million (2.9 percent) and $191 million (3.1 percent), respectively. Payments-related revenues and ATM processing services income were higher largely due to increased transaction volumes. Commercial products revenue increased due to higher commercial leasing revenue, syndication fees and other commercial loan fees. Investment products fees and commissions also increased due to business initiatives. Deposit service charges increased in the third quarter of 2011, compared with the third quarter of 2010, primarily due to new account growth, higher transaction volumes and recent product redesign initiatives, partially offset by 2010 legislative and pricing changes. Deposit service charges were lower in the first nine months of 2011, compared with the same period of the prior year, due to the 2010 legislative and pricing changes, partially offset by account growth. Other income increased in the third quarter and first nine months of 2011, compared with the same periods of the prior year, primarily due to higher retail lease residual revenue and customer-related derivative revenue. In addition, other income for the first nine months of 2011 also increased over the same period of the prior year due to a gain recognized on the FCB acquisition in the first quarter of 2011. Trust and investment management fees decreased as a result of the sale of the Company’s long-term asset management business in the fourth quarter of 2010 and increased money market investment fee waivers, partially offset by the positive impact of the securitization trust administration acquisition and improved market conditions. In addition, mortgage banking revenue decreased due to lower origination and sales revenue.
The Company anticipates the implementation of recently passed legislation, under the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, will reduce future noninterest income by approximately $300 million on an annualized basis beginning in the fourth quarter of 2011, based on anticipated transaction volume excluding any mitigating actions the Company may take.
 
Noninterest Expense Noninterest expense was $2.5 billion in the third quarter and $7.2 billion in the first nine months of 2011, compared with $2.4 billion in the third quarter and $6.9 billion in the first nine months of 2010, or increases of $91 million (3.8 percent) and $317 million (4.6 percent), respectively. The increase in noninterest expense from a year ago was principally due to increased total compensation, employee benefits, net occupancy and equipment expense, and professional services expense, partially offset by decreases in other intangibles expense and other expense. Total compensation increased primarily due to an increase in staffing related to branch expansion and other business initiatives, and merit increases. Employee benefits expense increased due to higher pension costs and the impact of additional staff. Net occupancy and equipment expense increased principally due to business expansion and technology initiatives. Professional services expense increased due to mortgage servicing-related and other projects across multiple business lines. These increases were partially offset by decreases in other intangibles expense due to the reduction or completion of the amortization of certain intangibles. Other expense was also lower due to lower costs related to other real estate owned, insurance and litigation matters.
 
 
 
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Table 3    Noninterest Expense
 
                                                         
    Three Months Ended
      Nine Months Ended
 
    September 30,       September 30,  
                  Percent
                      Percent
 
(Dollars in Millions)   2011     2010       Change       2011       2010       Change  
Compensation
  $ 1,021     $ 973         4.9 %     $ 2,984       $ 2,780         7.3 %
Employee benefits
    203       171         18.7         643         523         22.9  
Net occupancy and equipment
    252       229         10.0         750         682         10.0  
Professional services
    100       78         28.2         252         209         20.6  
Marketing and business development
    102       108         (5.6 )       257         254         1.2  
Technology and communications
    189       186         1.6         563         557         1.1  
Postage, printing and supplies
    76       74         2.7         226         223         1.3  
Other intangibles
    75       90         (16.7 )       225         278         (19.1 )
Other
    458       476         (3.8 )       1,315         1,392         (5.5 )
                                                         
Total noninterest expense
  $ 2,476     $ 2,385         3.8 %     $ 7,215       $ 6,898         4.6 %
                                                         
Efficiency ratio (a)
    51.5 %     51.9 %                 51.4 %       51.1 %          
                                                         
(a) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.

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


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

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

The following table provides an analysis of other real estate owned (“OREO”), excluding covered assets, as a percent of their related loan balances, including geographical location detail for residential (residential mortgage, home equity and second mortgage) and commercial (commercial and commercial real estate) loan balances:
 
                                   
            As a Percent of Ending
 
    Amount       Loan Balances  
    September 30,
    December 31,
      September 30,
    December 31,
 
(Dollars in Millions)   2011     2010       2011     2010  
Residential
                                 
Minnesota
  $ 22     $ 28         .40 %     .53 %
California
    16       21         .23       .34  
Illinois
    15       16         .49       .57  
Washington
    8       9         .25       .29  
Colorado
    8       9         .22       .27  
All other states
    110       135         .35       .47  
                                   
Total residential
    179       218         .33       .44  
Commercial
                                 
Nevada
    63       58         4.79       3.93  
California
    38       23         .28       .18  
Ohio
    20       20         .45       .48  
Oregon
    19       26         .54       .74  
Utah
    18       11         .93       .64  
All other states
    115       155         .18       .26  
                                   
Total commercial
    273       293         .31       .35  
                                   
Total OREO
  $ 452     $ 511         .24 %     .29 %
                                   
 
Analysis of Loan Net Charge-Offs  Total net charge-offs were $669 million for the third quarter and $2.2 billion for the first nine months of 2011, compared with net charge-offs of $995 million and $3.2 billion for the same periods of 2010. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the third quarter and first nine months of 2011 was 1.31 percent and 1.49 percent, respectively, compared with 2.05 percent and 2.26 percent, for the same periods of 2010. The year-over-year decreases in total net charge-offs were principally due to stabilizing economic conditions. The Company expects the level of net charge-offs to continue to trend lower in the fourth quarter of 2011.
Commercial and commercial real estate loan net charge-offs for the third quarter of 2011 were $224 million (1.01 percent of average loans outstanding on an annualized basis), compared with $378 million (1.85 percent of average loans outstanding on an annualized basis) for the third quarter of 2010. Commercial and commercial real estate loan net charge-offs for the first nine months of 2011 were $748 million (1.17 percent of average loans outstanding on an annualized basis), compared with $1.3 billion (2.18 percent of average loans outstanding on an annualized basis) for the first nine months of 2010. The decreases reflected the impact of efforts to resolve and reduce exposure to problem assets in the Company’s commercial real estate portfolios and improvement in the other commercial portfolios due to the stabilizing economy.
Residential mortgage loan net charge-offs for the third quarter of 2011 were $122 million (1.42 percent of average loans outstanding on an annualized basis), compared with $132 million (1.88 percent of average loans outstanding on an annualized basis) for the third quarter of 2010. Residential mortgage loan net charge-offs for the first nine months of 2011 were $370 million (1.51 percent of average loans outstanding on an annualized basis), compared with $415 million (2.05 percent of average loans outstanding on an annualized basis) for the first nine months of 2010. Credit card loan net charge-offs for the third quarter of 2011 were $178 million (4.40 percent of average loans
 
 
 
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outstanding on an annualized basis), compared with $296 million (7.11 percent of average loans outstanding on an annualized basis) for the third quarter of 2010. Credit card loan net charge-offs for the first nine months of 2011 were $641 million (5.35 percent of average loans outstanding on an annualized basis), compared with $925 million (7.54 percent of average loans outstanding on an annualized basis) for the first nine months of 2010. Other retail loan net charge-offs for the third quarter of 2011 were $142 million (1.16 percent of average loans outstanding on an annualized basis), compared with $182 million (1.51 percent of average loans outstanding on an annualized basis) for the third quarter of 2010. Other retail loan net charge-offs for the first nine months of 2011 were $452 million (1.25 percent of average loans outstanding on an annualized basis), compared with $570 million (1.61 percent of average loans outstanding on an annualized basis) for the first nine months of 2010. The year-over-year decreases in residential mortgage, credit card and other retail loan net charge-offs reflected the impact of more stable economic conditions.
 
The following table provides an analysis of net charge-offs as a percent of average loans outstanding managed by the consumer finance division, compared with other consumer lending loans:
 
                                                                               
    Three Months Ended September 30,       Nine Months Ended September 30,  
            Percent of
              Percent of
 
    Average Loans       Average Loans       Average Loans       Average Loans  
       
(Dollars in Millions)   2011       2010       2011       2010       2011       2010       2011       2010  
Consumer Finance (a)
                                                                             
Residential mortgages
  $ 12,397       $ 10,805         2.59 %       3.49 %     $ 12,127       $ 10,546         2.87 %       3.78 %
Home equity and second mortgages
    2,442         2,448         3.57         4.86         2,476         2,461         4.32         5.49  
Other
    501         608         3.96         3.92         536         607         2.99         3.52  
Other Consumer Lending
                                                                             
Residential mortgages
  $ 21,629       $ 17,085         .75 %       .86 %     $ 20,727       $ 16,499          .71 %       .95 %
Home equity and second mortgages
    16,068         16,841         1.28         1.15         16,172         16,879         1.25         1.16  
Other
    24,272         23,673         1.05         1.59         24,118         23,057         1.16         1.71  
Total Company
                                                                             
Residential mortgages
  $ 34,026       $ 27,890         1.42 %       1.88 %     $ 32,854       $ 27,045         1.51 %       2.05 %
Home equity and second mortgages
    18,510         19,289         1.59         1.62         18,648         19,340         1.66         1.71  
Other (b)
    24,773         24,281         1.11         1.65         24,654         23,664         1.20         1.76