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(U.S. BANCORP LOGO 
 


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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 March 31, 2008
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from (not applicable)
 
Commission file number 1-6880
 
U.S. BANCORP
(Exact name of registrant as specified in its charter)
 
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  41-0255900
(I.R.S. Employer
Identification No.)
 
800 Nicollet Mall
Minneapolis, Minnesota 55402
(Address of principal executive offices, including zip code)
 
651-466-3000
(Registrant’s telephone number, including area code)
 
(not applicable)
(Former name, former address and former fiscal year, if changed since last report)
 
 
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
 
YES þ  NO o
 
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
     
Large accelerated filer þ
  Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
YES o  NO þ
 
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
     
Class
Common Stock, $.01 Par Value
  Outstanding as of April 30, 2008
1,740,566,065 shares
 


 

 
Table of Contents and Form 10-Q Cross Reference Index
 
     
Part I — Financial Information
   
   
  3
  3
  6
  23
  23
   
  7
  8
  14
  14
  14
  18
  18
  19
  19
  24
Part II — Other Information
   
  41
  41
  41
  41
  42
  43
 Restated Certificate of Incorporation
 Computation of Ratio of Earnings to Fixed Charges
 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
 Certification of Chief Executive Officer and Chief Fiancial Officer pursuant to 18 U.S.C. Section 1350
 
 
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.
This Quarterly Report on Form 10-Q contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including changes in general business and economic conditions, changes in interest rates, deterioration in the credit quality of our loan portfolios or in the value of the collateral securing those loans, deterioration in the value of securities held in our investment securities portfolio, legal and regulatory developments, increased competition from both banks and non-banks, changes in customer behavior and preferences, effects of mergers and acquisitions and related integration, effects of critical accounting policies and judgments, and management’s ability to effectively manage credit risk, market risk, operational risk, legal risk and regulatory and compliance risk. For discussion of these and other risks that may cause actual results to differ from expectations, refer to our Annual Report on Form 10-K for the year ended December 31, 2007, on file with the Securities and Exchange Commission, including the sections entitled “Risk Factors” and “Corporate Risk Profile.” Forward-looking statements speak only as of the date they are made, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.
 
 
 
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Table 1    Selected Financial Data
                           
    Three Months Ended
 
    March 31,  
                  Percent
 
(Dollars and Shares in Millions, Except Per Share Data)   2008     2007       Change  
Condensed Income Statement
                         
Net interest income (taxable-equivalent basis) (a)
  $ 1,830     $ 1,666         9.8 %
Noninterest income
    2,295       1,722         33.3  
Securities gains (losses), net
    (251 )     1         *  
                           
Total net revenue
    3,874       3,389         14.3  
Noninterest expense
    1,796       1,572         14.2  
Provision for credit losses
    485       177         *  
                           
Income before taxes
    1,593       1,640         (2.9 )
Taxable-equivalent adjustment
    27       17         58.8  
Applicable income taxes
    476       493         (3.4 )
                           
Net income
  $ 1,090     $ 1,130         (3.5 )
               
Net income applicable to common equity
  $ 1,078     $ 1,115         (3.3 )
               
Per Common Share
                         
Earnings per share
  $ .62     $ .64         (3.1 )%
Diluted earnings per share
    .62       .63         (1.6 )
Dividends declared per share
    .425       .400         6.3  
Book value per share
    11.55       11.37         1.6  
Market value per share
    32.36       34.97         (7.5 )
Average common shares outstanding
    1,731       1,752         (1.2 )
Average diluted common shares outstanding
    1,749       1,780         (1.7 )
Financial Ratios
                         
Return on average assets
    1.85 %     2.09 %          
Return on average common equity
    21.3       22.4            
Net interest margin (taxable-equivalent basis) (a)
    3.55       3.51            
Efficiency ratio (b)
    43.5       46.4            
Average Balances
                         
Loans
  $ 155,232     $ 144,693         7.3 %
Loans held for sale
    5,118       3,843         33.2  
Investment securities
    43,891       40,879         7.4  
Earning assets
    207,014       191,135         8.3  
Assets
    236,675       219,512         7.8  
Noninterest-bearing deposits
    27,119       27,677         (2.0 )
Deposits
    130,858       120,728         8.4  
Short-term borrowings
    35,890       26,687         34.5  
Long-term debt
    39,822       42,944         (7.3 )
Shareholders’ equity
    21,479       21,210         1.3  
               
                           
    March 31,
    December 31,
         
    2008     2007          
Period End Balances
                         
Loans
  $ 158,300     $ 153,827         2.9 %
Allowance for credit losses
    2,435       2,260         7.7  
Investment securities
    41,696       43,116         (3.3 )
Assets
    241,781       237,615         1.8  
Deposits
    138,270       131,445         5.2  
Long-term debt
    36,229       43,440         (16.6 )
Shareholders’ equity
    21,572       21,046         2.5  
Regulatory capital ratios
                         
Tier 1 capital
    8.6 %     8.3 %          
Total risk-based capital
    12.6       12.2            
Leverage
    8.1       7.9            
Tangible common equity
    5.3       5.1            
 
  * Not meaningful.
(a) Presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.
 
 
 
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Management’s Discussion and Analysis
 
OVERVIEW
 
Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income of $1,090 million for the first quarter of 2008 or $.62 per diluted common share, compared with $1,130 million, or $.63 per diluted common share for the first quarter of 2007. Return on average assets and return on average common equity were 1.85 percent and 21.3 percent, respectively, for the first quarter of 2008, compared with returns of 2.09 percent and 22.4 percent, respectively, for the first quarter of 2007. Several significant items were reflected in the Company’s first quarter 2008 results, including a $492 million gain related to the Visa Inc. initial public offering that occurred in March 2008 (“Visa Gain”) and $253 million of impairment charges on structured investment securities. The Company’s results also included a provision for credit losses which exceeded net charge-offs by $192 million, reflecting continuing stress in the residential real estate markets and related industries, in addition to the continued growth of the consumer loan portfolios. The first quarter of 2008 also included a $62 million reduction to pretax income related to the adoption of a new accounting standard, a $25 million contribution to the U.S. Bancorp Foundation and a $22 million accrual for certain litigation matters. These items taken together had an approximate impact of ($.02) per diluted common share.
Total net revenue, on a taxable-equivalent basis, for the first quarter of 2008, was $485 million (14.3 percent) higher than the first quarter of 2007, reflecting a 9.8 percent increase in net interest income and an 18.6 percent increase in noninterest income. The increase in net interest income from a year ago was driven by growth in earning assets and improving net interest margins. The growth in noninterest income included organic growth in operating fee revenues of 7.3 percent and the net favorable impact of the Visa Gain, offset by the structured investment securities impairment and the impact of the adoption of a new accounting standard in the first quarter of 2008.
Total noninterest expense in the first quarter of 2008 was $224 million (14.2 percent) higher than in the first quarter of 2007, principally due to higher costs associated with business initiatives designed to expand the Company’s geographical presence and strengthen customer relationships, including investments in relationship managers, branch initiatives and payment services businesses. The increase in operating expenses also included higher credit collection costs, the impact of a new accounting standard, litigation costs, a charitable contribution and incremental expenses associated with tax-advantaged projects.
The provision for credit losses for the first quarter of 2008 increased $308 million over the first quarter of 2007. The increase in the provision for credit losses from a year ago reflected continuing stress in the residential real estate markets, including homebuilding and related supplier industries, driven by declining home prices in several geographic regions. It also reflected the continued growth of the consumer loan portfolios. Net charge-offs in the first quarter of 2008 were $293 million, compared with net charge-offs of $177 million in the first quarter of 2007. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
 
RECENT ACCOUNTING CHANGES
 
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”, Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities” and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 109 (“SAB 109”), “Written Loan Commitments Recorded at Fair Value Through Earnings”. Notes 2 and 10 of the Notes to Consolidated Financial Statements discuss accounting standards adopted by the Company in the first quarter of 2008, as well as accounting standards recently issued but not yet required to be adopted, including the expected impact of these changes in accounting standards on the Company’s financial statements. To the extent the adoption of new accounting standards affects the Company’s financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of Management’s Discussion and Analysis and the Notes to Consolidated Financial Statements.
 
STATEMENT OF INCOME ANALYSIS
 
Net Interest Income Net interest income, on a taxable-equivalent basis, was $1,830 million in the first quarter of 2008, compared with $1,666 million in the first
 
 
 
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quarter of 2007. The $164 million (9.8 percent) increase was due to strong growth in average earning assets, as well as an improving net interest margin from a year ago. Average earning assets increased $15.9 billion (8.3 percent) in the first quarter of 2008, compared with the first quarter of 2007, primarily driven by an increase in average loans of $10.5 billion (7.3 percent) and average investment securities of $3.0 billion (7.4 percent). During the first quarter of 2008, the net interest margin increased to 3.55 percent, compared with 3.51 percent in the first quarter of 2007. The improvement in the net interest margin was due to several factors, including growth in higher spread assets, the benefit of the Company’s current asset/liability position in a declining interest rate environment and related asset/liability re-pricing dynamics. Short-term funding rates were marginally lower due to market volatility and changing liquidity in the overnight fed fund markets given current market conditions. In addition, the Company’s net interest margin benefited from an increase in yield-related loan fees. The Company expects the net interest margin to remain relatively stable throughout the remainder of the year, given the current rate environment and yield curve. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” table for further information on net interest income.
Average loans for the first quarter of 2008 were $10.5 billion (7.3 percent) higher than the first quarter of 2007, driven by growth in a majority of the loan categories. This included growth in average commercial loans of $4.7 billion (10.0 percent), retail loans of $3.5 billion (7.4 percent), residential mortgages of $1.4 billion (6.5 percent) and commercial real estate loans of $.9 billion (3.2 percent). The increase in commercial loans was primarily driven by growth in corporate and commercial banking balances as business customers utilized bank credit facilities, rather than the capital markets, to fund business growth and liquidity requirements. Retail loans experienced strong growth in credit card balances, installment products and home equity lines, offset somewhat by lower retail leasing balances. The increase in residential mortgages reflected higher balances in the consumer finance division. The growth in commercial real estate loans reflected higher demand for bank financing as changing market conditions have limited borrower access to the capital markets.
Average investment securities in the first quarter of 2008 were $3.0 billion (7.4 percent) higher than the first quarter of 2007. The increase was driven by the purchase in the fourth quarter of 2007 of structured investment securities from certain money market funds managed by an affiliate and an increase in tax-exempt municipal securities, partially offset by a reduction in mortgage-backed securities.
Average noninterest-bearing deposits for the first quarter of 2008 decreased $.6 billion (2.0 percent) compared with the first quarter of 2007, reflecting a decline in personal and business demand deposits, partially offset by higher trust deposits. The decline in personal demand deposit balances occurred in the Consumer business line. The decline in business demand deposits occurred within most business lines as business customers utilized deposit balances to fund business growth and meet other liquidity requirements.
Average total savings deposits increased year-over-year by $4.8 billion (8.6 percent) due to a $5.2 billion (20.8 percent) increase in interest checking balances driven by higher balances from broker-dealer, government and institutional trust customers. This increase was partially offset by a decline of $.3 billion (4.9 percent) in average savings accounts and $.1 billion (.5 percent) in average money market savings, primarily within Consumer Banking.
Average time certificates of deposit less than $100,000 were lower in the first quarter of 2008 than in the first quarter of 2007 by $1.2 billion (7.9 percent), while average time deposits greater than $100,000 increased by $7.0 billion (31.8 percent) over the same period. The decline in time certificates of deposit less than $100,000 was due to the Company’s funding and pricing decisions and competition for these deposits by other financial institutions that have more limited access to wholesale funding sources given the current market environment.
 
Provision for Credit Losses The provision for credit losses for the first quarter of 2008 increased $308 million over the first quarter of 2007. The increase in the provision for credit losses from a year ago reflected continuing stress in the residential real estate markets, including homebuilding and related supplier industries, driven by declining home prices in several geographic regions. It also reflected the continued growth of the consumer loan portfolios. Net charge-offs in the first quarter of 2008 were $293 million, compared with net charge-offs of $177 million in the first quarter of 2007. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
 
 
 
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Table 2     Noninterest Income
 
                         
    Three Months Ended
 
    March 31,  
                Percent
 
(Dollars in Millions)   2008     2007     Change  
   
Credit and debit card revenue
  $ 248     $ 206       20.4 %
Corporate payment products revenue
    164       147       11.6  
ATM processing services
    84       77       9.1  
Merchant processing services
    271       252       7.5  
Trust and investment management fees
    335       322       4.0  
Deposit service charges
    257       247       4.0  
Treasury management fees
    124       111       11.7  
Commercial products revenue
    112       100       12.0  
Mortgage banking revenue
    105       67       56.7  
Investment products fees and commissions
    36       34       5.9  
Securities gains (losses), net
    (251 )     1       *  
Other
    559       159       *  
     
     
Total noninterest income
  $ 2,044     $ 1,723       18.6 %
                         
*    Not meaningful.

 
Noninterest Income Noninterest income in the first quarter of 2008 was $2,044 million, compared with $1,723 million in the first quarter of 2007. The $321 million (18.6 percent) increase in the first quarter of 2008 over the first quarter of 2007, was driven by strong organic fee-based revenue growth of 7.3 percent and the Visa Gain in the first quarter of 2008. The Visa Gain represented $339 million of cash proceeds received for Class B shares redeemed in March 2008 and $153 million related to the Company’s proportionate share of stock redeemed to fund an escrow account for the settlement of Visa Inc. litigation matters. In addition, noninterest income was impacted by the adoption of SFAS 157 in the first quarter of 2008. Trading revenue decreased $62 million, as, under SFAS 157, primary market and nonperformance risk is now required to be considered when determining the fair value of customer derivatives. Mortgage banking revenue grew by $19 million, as mortgage production gains increased because the deferral of costs related to the origination of mortgage loans held for sale (“MLHFS”) is not permitted under SFAS 157.
The strong growth in credit and debit card revenue was primarily driven by an increase in customer accounts and higher customer transaction volumes over a year ago. Corporate payment products revenue growth reflected organic growth in sales volumes and card usage. ATM processing services increased primarily due to new sales of ATM and debit processing services. Merchant processing services revenue growth primarily reflected an increase in the number of merchants and business expansion. Trust and investment management fees increased year-over-year due to core account growth, partially offs et by unfavorable equity market conditions. Deposit service charges growth was driven by increased transaction-related fees and the impact of continued growth in net new checking accounts. This growth rate was muted somewhat as deposit account-related revenue, traditionally reflected in this fee category, continued to migrate to yield-related loan fees as customers utilized new consumer products. Treasury management fees increased due to higher sales activity and the favorable impact of declining rates on customer compensating balances. Commercial products revenue increased year-over-year due to higher foreign exchange, commercial leasing and other commercial lending fee revenue. Mortgage banking revenue increased due to an increase in mortgage servicing income and production gains, including $19 million from the adoption of SFAS 157. These favorable impacts to mortgage banking revenue were partially offset by the unfavorable net change in the valuation of mortgage servicing rights (“MSRs”) and related economic hedging activities. Other income was higher year-over-year due to the Visa Gain, partially offset by lower retail lease revenue due to higher end-of-term losses and the $62 million unfavorable impact to trading income upon adoption of a new accounting standard. Securities gains (losses) were lower year-over-year due to an impairment of certain structured investment securities recognized in the first quarter of 2008.
 
Noninterest Expense Noninterest expense was $1,796 million in the first quarter of 2008, an increase of $224 million (14.2 percent) over the first quarter of 2007. Compensation expense was higher due to growth in ongoing bank operations, acquired businesses and other bank initiatives and the impact from the adoption of a new accounting standard in the first quarter of 2008. Employee benefits expense increased year-over-year as higher medical costs were partially offset by
 
 
 
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Table 3     Noninterest Expense
 
                           
      Three Months Ended
 
      March 31,  
                  Percent
 
(Dollars in Millions)     2008     2007     Change  
   
Compensation
    $ 745     $ 635       17.3 %
Employee benefits
      137       133       3.0  
Net occupancy and equipment
      190       177       7.3  
Professional services
      47       47        
Marketing and business development
      79       52       51.9  
Technology and communications
      140       135       3.7  
Postage, printing and supplies
      71       69       2.9  
Other intangibles
      87       94       (7.4 )
Other
      300       230       30.4  
       
       
Total noninterest expense
    $ 1,796     $ 1,572       14.2 %
       
Efficiency ratio (a)
      43.5 %     46.4 %        
 
(a) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.

lower pension costs. Net occupancy and equipment expense increased over the first quarter of 2007 primarily due to rental cost escalation, acquisitions and branch-based business initiatives. Marketing and business development expense increased year-over-year primarily due to $25 million recognized in the first quarter of 2008 for a charitable contribution to the Company’s foundation intended to support community-based programs within the Company’s geographical markets. Other intangibles expense decreased primarily reflecting the timing and relative size of recent acquisitions. Other expense increased year-over-year due primarily to investments in tax-advantaged projects, higher litigation costs and credit-related costs for other real estate owned and loan collection activities.
 
Income Tax Expense The provision for income taxes was $476 million (an effective rate of 30.4 percent) for the first quarter of 2008, compared with $493 million (an effective rate of 30.4 percent) for the first quarter of 2007. For further information on income taxes, refer to Note 9 of the Notes to Consolidated Financial Statements.
 
BALANCE SHEET ANALYSIS
 
Loans The Company’s total loan portfolio was $158.3 billion at March 31, 2008, compared with $153.8 billion at December 31, 2007, an increase of $4.5 billion (2.9 percent). The increase was driven by growth in all major loan categories. The $1.7 billion (3.3 percent) increase in commercial loans was primarily driven by new and existing business customers utilizing bank credit facilities, rather than the capital markets, to fund business growth and liquidity requirements, as well as growth in corporate payment card balances.
Commercial real estate loans increased $.8 billion (2.6 percent) at March 31, 2008, compared with December 31, 2007, as developers sought bank financing as changing market conditions have limited borrower access to the capital markets.
Residential mortgages held in the loan portfolio increased $.4 billion (1.9 percent) at March 31, 2008, compared with December 31, 2007, reflecting an increase in consumer finance and traditional branch originations.
Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, increased $1.6 billion (3.2 percent) at March 31, 2008, compared with December 31, 2007. The increase was primarily driven by higher student loans due to the purchase of a portfolio late in the first quarter of 2008, and growth in installment, credit card and home equity loans. These increases were partially offset by a decrease in retail leasing balances.
 
Loans Held for Sale At March 31, 2008, loans held for sale, consisting primarily of residential mortgages and student loans to be sold in the secondary market, were $5.2 billion, compared with $4.8 billion at December 31, 2007. The increase in loans held for sale was principally due to seasonal loan originations and the timing of sales during the first quarter of 2008.
 
Investment Securities Investment securities, both available-for-sale and held-to-maturity, totaled $41.7 billion at March 31, 2008, compared with $43.1 billion at December 31, 2007, reflecting purchases of $1.1 billion of securities, more than offset by sales, maturities and prepayments. As of March 31, 2008, approximately 37 percent of the investment securities portfolio represented adjustable-rate financial instruments, compared with 39 percent at December 31, 2007. Adjustable-rate financial instruments include variable-rate collateralized mortgage obligations, mortgage-backed securities, agency securities, adjustable-rate money market accounts, asset-backed securities,
 
 
 
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corporate debt securities and floating-rate preferred stock.
The Company conducts a regular assessment of its investment portfolios to determine whether any securities are other-than-temporarily impaired. At March 31, 2008, the available-for-sale securities portfolio included a $1.6 billion net unrealized loss, compared with a net unrealized loss of $1.1 billion at December 31, 2007. The substantial portion of securities with unrealized losses were either government securities, issued by government-backed agencies or privately issued securities with high investment grade credit ratings and limited credit exposure. Some securities classified within obligations of state and political subdivisions are supported by mono-line insurers. While mono-line insurers have experienced credit rating downgrades, management believes the underlying credit quality of the issuers and the support of the mono-line insurers alleviate any impairment concerns. The majority of investment securities classified as asset-backed securities at March 31, 2008, represented interests in structured investments. The valuation of these securities is determined through estimates of expected cash flows, discount rates and management’s assessment of various market factors, which are judgmental in nature. During the first quarter of 2008, the Company completed its valuation of these structured investments and, as a result, recorded $253 million of impairment charges primarily as a result of widening credit spreads during the quarter. The Company expects that approximately $65 million of principal and interest payments will not be received for certain structured investment securities, which was incorporated in determining the impairment charges recorded during the quarter ended March 31, 2008. On March 31, 2008, the Company exchanged its interest in certain structured investment securities and received its share of the underlying investment securities collateral as an in-kind distribution as permitted under the applicable restructuring agreements. Refer to Note 3 in the Notes to Consolidated Financial Statements for further information on investment securities.
 
Deposits Total deposits were $138.3 billion at March 31, 2008, compared with $131.4 billion at December 31, 2007, an increase of $6.9 billion (5.2 percent). The increase in total deposits was primarily the result of increases in interest checking accounts, money market savings accounts and time deposits greater than $100,000, partially offset by decreases in noninterest-bearing deposits and time certificates of deposit less than $100,000. The $3.1 billion (10.8 percent) increase in interest checking account balances was due primarily to higher broker-dealer balances. The $2.2 billion (8.9 percent) increase in money market savings account b alances was due to higher broker-dealer and branch-based balances. Time deposits greater than $100,000 increased $2.9 billion (11.1 percent) at March 31, 2008, compared with December 31, 2007. Time deposits greater than $100,000 are largely viewed as purchased funds and are managed to levels deemed appropriate given alternative funding sources. The $.5 billion (1.4 percent) decrease in noninterest-bearing deposits was primarily due to the seasonal decline of business demand balances. Time certificates of deposit less than $100,000 decreased $1.2 billion (8.3 percent) at March 31, 2008, compared with December 31, 2007, primarily within consumer banking, reflecting the Company’s funding and pricing decisions and competition for these deposits by other financial institutions that have more limited access to wholesale funding sources given the current market environment.
 
Borrowings The Company utilizes both short-term and long-term borrowings to fund growth of assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $36.4 billion at March 31, 2008, compared with $32.4 billion at December 31, 2007. Short-term funding is managed within approved liquidity policies. The increase of $4.0 billion (12.4 percent) in short-term borrowings reflected wholesale funding associated with the Company’s asset growth and asset/liability management activities. Long-term debt was $36.2 billion at March 31, 2008, compared with $43.4 billion at December 31, 2007, primarily reflecting the repayment of $2.9 billion of convertible senior debentures and $5.2 billion of medium-term note maturities in the first quarter of 2008. The $7.2 billion (16.6 percent) decrease in long-term debt reflected asset/liability management decisions to fund balance sheet growth with other funding sources. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.
 
CORPORATE RISK PROFILE
 
Overview Managing risks is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit, residual value, operational, interest rate, market and liquidity risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Residual value risk is the potential reduction in the end-of-term value of leased assets or the residual cash flows related to asset securitization and other off-balance sheet structures. Operational risk includes risks related to fraud, legal and compliance risk, processing
 
 
 
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errors, technology, breaches of internal controls and business continuation and disaster recovery risk. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates, which can affect the repricing of assets and liabilities differently, as well as their market value. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities that are accounted for on a mark-to-market basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. In addition, corporate strategic decisions, as well as the risks described above, could give rise to reputation risk. Reputation risk is the risk that negative publicity or press, whether true or not, could result in costly litigation or cause a decline in the Company’s stock value, customer base, funding sources or revenue.
 
Credit Risk Management The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors. Refer to “Management’s Discussion and Analysis — Credit Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for a more detailed discussion on credit risk management processes.
The Company manages its credit risk, in part through diversification of its loan portfolio. As part of its normal business activities, the Company offers a broad array of commercial and retail lending products. The Company’s retail lending business utilizes several distinct business processes and channels to originate retail credit, including traditional branch lending, indirect lending, portfolio acquisitions and a consumer finance division. Generally, loans managed by the Company’s consumer finance division exhibit higher credit risk characteristics, but are priced commensurate with the differing risk profile. With respect to residential mortgages originated through these channels, the Company may either retain the loans on its balance sheet or sell its interest in the balances into the secondary market while retaining the servicing rights and customer relationships. For residential mortgages that are retained in the Company’s portfolio, credit risk is also diversified by geography and monitoring loan-to-values during the underwriting process.
 
The following table provides summary information of the loan-to-values of residential mortgages by distribution channel and type at March 31, 2008:
 
                           
    Interest
          Percent of
 
(Dollars in Millions)   Only   Amortizing   Total   Total  
   
 
Consumer Finance
                         
Less than or equal to 80%
  $ 769   $ 2,553   $ 3,322     33.3 %
Over 80% through 90%
    794     1,615     2,409     24.1  
Over 90% through 100%
    840     3,289     4,129     41.4  
Over 100%
        116     116     1.2  
     
     
Total
  $ 2,403   $ 7,573   $ 9,976     100.0 %
Other Retail
                         
Less than or equal to 80%
  $ 2,396   $ 9,635   $ 12,031     90.8 %
Over 80% through 90%
    80     540     620     4.7  
Over 90% through 100%
    127     464     591     4.5  
Over 100%
                 
     
     
Total
  $ 2,603   $ 10,639   $ 13,242     100.0 %
Total Company
                         
Less than or equal to 80%
  $ 3,165   $ 12,188   $ 15,353     66.1 %
Over 80% through 90%
    874     2,155     3,029     13.1  
Over 90% through 100%
    967     3,753     4,720     20.3  
Over 100%
        116     116     .5  
     
     
Total
  $ 5,006   $ 18,212   $ 23,218     100.0 %
Note:  loan-to-values determined as of the date of origination and consider mortgage insurance, as applicable.
 
Within the consumer finance division approximately $3.2 billion, or 32.1 percent of that division, represents residential mortgages to customers that may be defined as sub-prime borrowers, compared with $3.3 billion, or 33.5 percent, at December 31, 2007. The following table provides further information on residential mortgages for the consumer finance division:
                           
    Interest
          Pecent of
 
(Dollars in Millions)   Only   Amortizing   Total   Division  
   
 
Sub-Prime Borrowers
                         
Less than or equal to 80%
  $ 4   $ 1,162   $ 1,166     11.7 %
Over 80% through 90%
    6     781     787     7.9  
Over 90% through 100%
    23     1,157     1,180     11.8  
Over 100%
        71     71     .7  
     
     
Total
  $ 33   $ 3,171   $ 3,204     32.1 %
Other Borrowers
                         
Less than or equal to 80%
  $ 765   $ 1,391   $ 2,156     21.6 %
Over 80% through 90%
    788     834     1,622     16.3  
Over 90% through 100%
    817     2,132     2,949     29.6  
Over 100%
        45     45     .4  
     
     
Total
  $ 2,370   $ 4,402   $ 6,772     67.9 %
     
     
Total Consumer Finance
  $ 2,403   $ 7,573   $ 9,976     100.0 %
 
 
 
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In addition to residential mortgages, the consumer finance division had $.8 billion of home equity and second mortgage loans to customers that may be defined as sub-prime borrowers at March 31, 2008, compared with $.9 billion at December 31, 2007. Including residential mortgages, and home equity and second mortgage loans, the total amount of loans to customers that may be defined as sub-prime borrowers represented only 1.7 percent of total assets at March 31, 2008, and at December 31, 2007. The Company does not have any residential mortgages whose payment schedule would cause balances to increase over time.
 
Loan Delinquencies Trends in delinquency ratios represent an indicator, among other considerations, of credit risk within the Company’s loan portfolios. The Company measures delinquencies, both including and excluding nonperforming loans, to enable comparability with other companies. Accruing loans 90 days or more past due totaled $676 million at March 31, 2008, compared with $584 million at December 31, 2007. Consistent with banking industry practices, these loans are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. The ratio of accruing loans 90 days or more past due to total loans was .43 percent at March 31, 2008, compared with .38 percent at December 31, 2007.

 

Table 4     Delinquent Loan Ratios as a Percent of Ending Loan Balances
 
                 
    March 31,
    December 31,
 
90 days or more past due excluding nonperforming loans   2008     2007  
Commercial
               
Commercial
    .10 %     .08 %
Lease financing
    .02        
                 
Total commercial
    .09       .07  
Commercial real estate
               
Commercial mortgages
    .02       .02  
Construction and development
    .38       .02  
                 
Total commercial real estate
    .13       .02  
Residential mortgages
    .98       .86  
Retail
               
Credit card
    1.96       1.94  
Retail leasing
    .11       .10  
Other retail
    .37       .37  
                 
Total retail
    .69       .68  
                 
Total loans
    .43 %     .38 %
                 
 
                 
    March 31,
    December 31,
 
90 days or more past due including nonperforming loans   2008     2007  
Commercial
    .60 %     .43 %
Commercial real estate
    1.18       1.02  
Residential mortgages (a)
    1.24       1.10  
Retail (b)
    .77       .73  
                 
Total loans
    .86 %     .74 %
                 
(a) Delinquent loan ratios exclude advances made pursuant to servicing agreements to Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Including the guaranteed amounts, the ratio of residential mortgages 90 days or more past due was 4.19 percent at March 31, 2008, and 3.78 percent at December 31, 2007.
(b) Beginning in 2008, delinquent loan ratios exclude student loans that are guaranteed by the federal government. Including the guaranteed amounts, the ratio of retail loans 90 days or more past due including nonperforming loans was .79 percent at March 31, 2008.

 
 
 
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To monitor credit risk associated with retail loans, the Company monitors delinquency ratios in the various stages of collection, including nonperforming status. The following table provides summary delinquency information for residential mortgages and retail loans:
 
                               
          As a Percent of Ending
 
    Amount     Loan Balances  
    March 31,
  December 31,
    March 31,
    December 31,
 
(Dollars in Millions)   2008   2007     2008     2007  
Residential Mortgages
                             
30-89 days
    $256     $233       1.10 %     1.02 %
90 days or more
    228     196       .98       .86  
Nonperforming
    59     54       .26       .24  
                               
Total
    $543     $483       2.34 %     2.12 %
                               
                               
Retail
                             
Credit card
                             
30-89 days
    $276     $268       2.43 %     2.44 %
90 days or more
    222     212       1.96       1.94  
Nonperforming
    25     14       .22       .13  
                               
Total
    $523     $494       4.61 %     4.51 %
Retail leasing
                             
30-89 days
    $36     $39       .63 %     .65 %
90 days or more
    6     6       .11       .10  
Nonperforming
                     
                               
Total
    $42     $45       .74 %     .75 %
Home equity and second mortgages
                             
30-89 days
    $102     $107       .61 %     .65 %
90 days or more
    73     64       .44       .39  
Nonperforming
    11     11       .07       .07  
                               
Total
    $186     $182       1.12 %     1.11 %
Other retail
                             
30-89 days
    $158     $177       .84 %     1.02 %
90 days or more
    59     62       .32       .36  
Nonperforming
    6     4       .03       .02  
                               
Total
    $223     $243       1.19 %     1.40 %
                               
 
Within these product categories, the following table provides information on delinquent and nonperforming loans as a percent of ending loan balances, by channel:
                                   
    Consumer Finance       Other Retail  
    March 31,
    December 31,
      March 31,
    December 31,
 
    2008     2007       2008     2007  
Residential mortgages
                                 
30-89 days
    1.76 %     1.58 %       .61 %     .61 %
90 days or more
    1.55       1.33         .55       .51  
Nonperforming
    .35       .31         .18       .18  
                                   
Total
    3.66 %     3.22 %       1.34 %     1.30 %
                                   
                                   
Retail
                                 
Credit card
                                 
30-89 days
    %     %       2.43 %     2.44 %
90 days or more
                  1.96       1.94  
Nonperforming
                  .22       .13  
                                   
Total
    %     %       4.61 %     4.51 %
Retail leasing
                                 
30-89 days
    %     %       .63 %     .65 %
90 days or more
                  .11       .10  
Nonperforming
                         
                                   
Total
    %     %       .74 %     .75 %
Home equity and second mortgages
                                 
30-89 days
    2.32 %     2.53 %       .39 %     .41 %
90 days or more
    2.26       1.78         .20       .21  
Nonperforming
    .16       .11         .06       .06  
                                   
Total
    4.74 %     4.42 %       .65 %     .68 %
Other retail
                                 
30-89 days
    4.40 %     6.38 %       .76 %     .88 %
90 days or more
    1.39       1.66         .29       .33  
Nonperforming
                  .03       .02  
                                   
Total
    5.79 %     8.04 %       1.08 %     1.23 %
                                   
 
 
 
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Within the consumer finance division at March 31, 2008, approximately $240 million and $86 million of these delinquent and nonperforming residential mortgages and other retail loans, respectively, were with customers that may be defined as sub-prime borrowers, compared with $227 million and $89 million, respectively, at December 31, 2007.
The Company expects the accelerating trends in delinquencies to continue during the remainder of 2008 as residential home valuations are expected to continue to decline and economic factors adversely affect the consumer sector.
 
Nonperforming Assets The level of nonperforming assets represents another indicator of the potential for future credit losses. At March 31, 2008, total nonperforming assets were $845 million, compared with $690 million at December 31, 2007. The ratio of total nonperforming assets to total loans and other real estate was .53 percent at March 31, 2008, compared with .45 percent at December 31, 2007. The increase in nonperforming assets was driven primarily by an increase in foreclosed residential properties and the impact of the economic downturn on commercial customers, including real estate developers.
 

 

Table 5    Nonperforming Assets (a)
 
                 
    March 31,
    December 31,
 
(Dollars in Millions)   2008     2007  
Commercial
               
Commercial
  $ 201     $ 128  
Lease financing
    64       53  
                 
Total commercial
    265       181  
Commercial real estate
               
Commercial mortgages
    102       84  
Construction and development
    212       209  
                 
Total commercial real estate
    314       293  
Residential mortgages
    59       54  
Retail
               
Credit card
    25       14  
Retail leasing
           
Other retail
    17       15  
                 
Total retail
    42       29  
                 
Total nonperforming loans
    680       557  
Other real estate (b)
    141       111  
Other assets
    24       22  
                 
Total nonperforming assets
  $ 845     $ 690  
                 
Accruing loans 90 days or more past due
  $ 676     $ 584  
Nonperforming loans to total loans
    .43 %     .36 %
Nonperforming assets to total loans plus other real estate (b)
    .53 %     .45 %
                 
Changes in Nonperforming Assets
                         
    Commercial and
    Retail and
       
    Commercial
    Residential
       
(Dollars in Millions)   Real Estate     Mortgages (d)     Total  
Balance December 31, 2007
  $ 485     $ 205       $690  
Additions to nonperforming assets
                       
New nonaccrual loans and foreclosed properties
    241       51       292  
Advances on loans
    5             5  
                         
Total additions
    246       51       297  
Reductions in nonperforming assets
                       
Paydowns, payoffs
    (56 )     (8 )     (64 )
Net sales
                 
Return to performing status
    (8 )     (2 )     (10 )
Charge-offs (c)
    (62 )     (6 )     (68 )
                         
Total reductions
    (126 )     (16 )     (142 )
                         
Net additions to nonperforming assets
    120       35       155  
                         
Balance March 31, 2008
  $ 605     $ 240       $845  
                         
(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Excludes $130 million and $102 million at March 31, 2008, and December 31, 2007, respectively, of foreclosed GNMA loans which continue to accrue interest .
(c) Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.
(d) Residential mortgage information excludes changes related to residential mortgages serviced by others.

 
 
 
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Included in nonperforming loans were restructured loans of $30 million at March 31, 2008, compared with $17 million at December 31, 2007. At March 31, 2008, and December 31, 2007, the Company had no commitments to lend additional funds under restructured loans.
Other real estate included in nonperforming assets was $141 million at March 31, 2008, compared with $111 million at December 31, 2007, and was primarily related to properties that the Company has taken ownership of that once secured residential mortgages and home equity and second mortgage loan balances. The increase in other real estate assets was due to higher residential mortgage loan foreclosures as customers experienced financial difficulties given inflationary factors, changing interest rates and other current economic conditions.
 
The following table provides an analysis of other real estate owned (“OREO”) as a percent of their related loan balances, including further detail for residential mortgages and home equity and second mortgage loan balances by geographical location:
 
                               
          As a Percent of Ending
 
    Amount     Loan Balances  
    March 31,
  December 31,
    March 31,
    December 31,
 
(Dollars in Millions)   2008   2007     2008     2007  
Residential
                             
Michigan
  $ 21   $ 22       3.70 %     3.47 %
Minnesota
    13     12       .25       .23  
Ohio
    10     10       .40       .40  
Florida
    8     6       1.03       .70  
Missouri
    6     6       .23       .22  
All other states
    64     54       .23       .20  
                               
Total residential
    122     110       .31       .28  
Commercial
    19     1       .06        
                               
Total OREO
  $ 141   $ 111       .09 %     .07 %
                               
 
Within other real estate in the table above, approximately $66 million at March 31, 2008, and $61 million at December 31, 2007, were from portfolios that may be defined as sub-prime.
The Company expects nonperforming assets to increase moderately over the next several quarters due to general economic conditions and continued stress in the residential mortgage portfolio and residential construction industry.
 
Restructured Loans Accruing Interest On a case-by-case basis, management determines whether an account that experiences financial difficulties should be modified as to its interest rate or repayment terms to maximize the Company’s collection of its balance. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are excluded from restructured loans once repayment performance, in accordance with the modified agreement, has been demonstrated over several payment cycles. Loans that have interest rates reduced below comparable market rates remain classified as restructured loans; however, interest income is accrued at the reduced rate as long as the customer complies with the revised terms and conditions.
In late 2007, the Company began implementing a mortgage loan restructuring program for certain qualifying borrowers. In general, borrowers with sub-prime credit quality, that are current in their repayment status, will be allowed to retain the lower of their existing interest rate or the market interest rate as of their interest reset date.
 
The following table provides a summary of restructured loans that continue to accrue interest:
 
                               
          As a Percent of Ending
 
    Amount     Loan Balances  
    March 31,
  December 31,
    March 31,
    December 31,
 
(Dollars in Millions)   2008   2007     2008     2007  
Commercial
  $ 19   $ 21       .04 %     .04 %
Commercial real estate
                     
Residential mortgages
    260     157       1.12       .69  
Credit card
    362     324       3.19       2.96  
Other retail
    54     49       .13       .12  
                               
Total
  $ 695   $ 551       .44 %     .36 %
                               
Restructured loans that continue to accrue interest were higher at March 31, 2008, compared with December 31, 2007, reflecting the impact of restructurings for certain residential mortgage customers in light of current economic conditions. The Company expects this trend to continue during 2008 as residential home valuations are expected to continue to decline and certain borrowers take advantage of the Company’s mortgage loan restructuring programs.
 
Analysis of Loan Net Charge-Offs Total loan net charge-offs were $293 million for the first quarter of 2008, compared with net charge-offs of $177 million for the first quarter of 2007. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the first quarter of 2008 was .76 percent, compared with .50 percent, for the first quarter of 2007. The year-over-year increase in total net charge-offs was due primarily to continued stress in the residential housing market, homebuilding and related industry sectors, in addition to the growth of the credit card and other consumer loan portfolios.
 
 
 
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Table 6    Net Charge-offs as a Percent of Average Loans Outstanding
 
                 
    Three Months Ended
 
    March 31,  
    2008     2007  
Commercial
               
Commercial
    .34 %     .31 %
Lease financing
    1.03       .22  
                 
Total commercial
    .43       .30  
Commercial real estate
               
Commercial mortgages
    .08       .02  
Construction and development
    .35        
                 
Total commercial real estate
    .16       .01  
Residential mortgages
    .46       .23  
Retail
               
Credit card
    3.93       3.48  
Retail leasing
    .49       .18  
Home equity and second mortgages
    .73       .42  
Other retail
    1.25       .89  
                 
Total retail
    1.58       1.10  
                 
Total loans
    .76 %     .50 %
                 

 
Commercial and commercial real estate loan net charge-offs for the first quarter of 2008 increased to $67 million (.33 percent of average loans outstanding on an annualized basis), compared with $36 million (.19 percent of average loans outstanding on an annualized basis) for the first quarter of 2007. The year-over-year increase in net charge-offs reflected anticipated increases in nonperforming loans and delinquencies within the portfolios, especially residential homebuilding and related industry sectors. Given the continuing stress in the homebuilding and related industries, as well as the potential impact of the economic downturn on other commercial customers, the Company expects commercial and commercial real estate net charge-offs to continue to increase moderately over the next several quarters.
Retail loan net charge-offs for the first quarter of 2008 were $200 million (1.58 percent of average loans outstanding on an annualized basis), compared with $129 million (1.10 percent of average loans outstanding on an annualized basis) for the first quarter of 2007. The increase in retail loan net charge-offs in the first quarter of 2008, compared with the same period of 2007, reflected continued stress in the residential housing market and growth in the credit card and other consumer loan portfolios. It also reflected higher retail loan delinquency ratios, compared with the prior year. The Company anticipates higher delinquency levels in the retail portfolios and that retail net charge-offs will continue to increase, but remain manageable during 2008.
 
The following table provides an analysis of net charge-offs as a percent of average loans outstanding managed by the consumer finance division, compared with other retail related loans:
 
                               
    Three Months Ended March 31  
          Percent of
 
    Average Loans     Average Loans  
(Dollars in Millions)   2008   2007     2008     2007  
Consumer Finance (a)
                             
Residential mortgages
  $ 9,898     $8,491       .85 %     .53 %
Home equity and second mortgages
    1,873     1,871       4.29       2.17  
Other retail
    429     399       5.63       3.05  
Other Retail
                             
Residential mortgages
  $ 13,080     $13,078       .15 %     .03 %
Home equity and second mortgages
    14,654     13,684       .27       .18  
Other retail
    17,202     16,039       1.15       .83  
Total Company
                             
Residential mortgages
  $ 22,978     $21,569       .46 %     .23 %
Home equity and second mortgages
    16,527     15,555       .73       .42  
Other retail
    17,631     16,438       1.25       .89  
                               
(a) Consumer finance category included credit originated and managed by US Bank Consumer Finance, as well as home equity and second mortgages with a loan-to-value greater than 100 percent that were originated in the branches.
 
 
 
 
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Within the consumer finance division, the Company originates loans to customers that may be defined as sub-prime borrowers. The following table provides further information on net charge-offs as a percent of average loans outstanding for this division:
 
                               
    Three Months Ended March 31  
          Percent of
 
    Average Loans     Average Loans  
(Dollars in Millions)   2008   2007     2008     2007  
Residential mortgages
                             
Sub-prime borrowers
  $ 3,220     $3,005       1.62 %     1.08 %
Other borrowers
    6,678     5,486       .48       .22  
                               
Total
  $ 9,898     $8,491       .85 %     .53  
Home equity and second mortgages
                             
Sub-prime borrowers
  $ 854     $911       6.59 %     2.67 %
Other borrowers
    1,019     960       2.37       1.69  
                               
Total
  $ 1,873     $1,871       4.29 %     2.17 %
                               
 
Analysis and Determination of the Allowance for Credit Losses The allowance for loan losses provides coverage for probable and estimable losses inherent in the Company’s loan and lease portfolio. Management evaluates the allowance each quarter to determine that it is adequate to cover these inherent losses. Several factors were taken into consideration in evaluating the allowance for credit losses at March 31, 2008, including the risk profile of the portfolios, loan net charge-offs during the period, the level of nonperforming assets, accruing loans 90 days or more past due, delinquency ratios and changes in restructured loan balances compared with December 31, 2007. Management also considered the uncertainty related to certain industry sectors, and the extent of credit exposure to specific borrowers within the portfolio. In addition, concentration risks associated with commercial real estate and the mix of loans, including credit cards, loans originated through the consumer finance division and residential mortgage balances, and their relative credit risks, were evaluated. Finally, the Company considered current economic conditions that might impact the portfolio.
At March 31, 2008, the allowance for credit losses was $2,435 million (1.54 percent of loans), compared with an allowance of $2,260 million (1.47 percent of loans) at December 31, 2007. The ratio of the allowance for credit losses to nonperforming loans was 358 percent at March 31, 2008, compared with 406 percent at December 31, 2007. The ratio of the allowance for credit losses to annualized loan net charge-offs was 207 percent at March 31, 2008, compared with 285 percent at December 31, 2007.
 
Residual Value Risk Management The Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of March 31, 2008, no significant change in the amount of residuals or concentration of the portfolios has occurred since December 31, 2007. Refer to “Management’s Discussion and Analysis — Residual Value Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for further discussion on residual value risk management.
 
Operational Risk Management The Company manages operational risk through a risk management framework and its internal control processes. Within this framework, the Corporate Risk Committee (“Risk Committee”) provides oversight and assesses the most significant operational risks facing the Company within its business lines. Under the guidance of the Risk Committee, enterprise risk management personnel establish policies and interact with business lines to monitor significant operating risks on a regular basis. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. Refer to “Management’s Discussion and Analysis — Operational Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for further discussion on operational risk management.
 
Interest Rate Risk Management In the banking industry, changes in interest rates are a significant risk that can impact earnings, market valuations and safety and soundness of an entity. To minimize the volatility of net interest income and the market value of assets and liabilities, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Policy Committee (“ALPC”) and approved by the Board of Directors. ALPC has the responsibility for approving and ensuring compliance with ALPC management policies, including interest rate risk exposure. The Company uses Net Interest Income Simulation Analysis and Market Value of Equity Modeling for measuring and analyzing consolidated interest rate risk.
 
 
 
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Table 7    Summary of Allowance for Credit Losses
 
                 
    Three Months Ended
    March 31,
(Dollars in Millions)   2008   2007
Balance at beginning of period
  $ 2,260     $ 2,256  
Charge-offs
               
Commercial
               
Commercial
    46       45  
Lease financing
    22       14  
                 
Total commercial
    68       59  
Commercial real estate
               
Commercial mortgages
    4       2  
Construction and development
    8        
                 
Total commercial real estate
    12       2  
Residential mortgages
    26       12  
Retail
               
Credit card
    131       89  
Retail leasing
    8       5  
Home equity and second mortgages
    32       18  
Other retail
    71       52  
                 
Total retail
    242       164  
                 
Total charge-offs
    348       237  
Recoveries
               
Commercial
               
Commercial
    7       13  
Lease financing
    6       11  
                 
Total commercial
    13       24  
Commercial real estate
               
Commercial mortgages
          1  
Construction and development
           
                 
Total commercial real estate
          1  
Residential mortgages
           
Retail
               
Credit card
    23       15  
Retail leasing
    1       2  
Home equity and second mortgages
    2       2  
Other retail
    16       16  
                 
Total retail
    42       35  
                 
Total recoveries
    55       60  
Net Charge-offs
               
Commercial
               
Commercial
    39       32  
Lease financing
    16       3  
                 
Total commercial
    55       35  
Commercial real estate
               
Commercial mortgages
    4       1  
Construction and development
    8        
                 
Total commercial real estate
    12       1  
Residential mortgages
    26       12  
Retail
               
Credit card
    108       74  
Retail leasing
    7       3  
Home equity and second mortgages
    30       16  
Other retail
    55       36  
                 
Total retail
    200       129  
                 
Total net charge-offs
    293       177  
                 
Provision for credit losses
    485       177  
Acquisitions and other changes
    (17 )     4  
                 
Balance at end of period
  $ 2,435     $ 2,260  
                 
Components
               
Allowance for loan losses
  $ 2,251     $ 2,027  
Liability for unfunded credit commitments
    184       233  
                 
Total allowance for credit losses
  $ 2,435     $ 2,260  
                 
Allowance for credit losses as a percentage of
               
Period-end loans
    1.54 %     1.56 %
Nonperforming loans
    358       498  
Nonperforming assets
    288       388  
Annualized net charge-offs
    207       315  
                 
 
 
 
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Net Interest Income Simulation Analysis Through this simulation, management estimates the impact on net interest income of gradual upward or downward changes of market interest rates over a one-year period, the effect of immediate and sustained parallel shifts in the yield curve and the effect of immediate and sustained flattening or steepening of the yield curve. The table below summarizes the interest rate risk of net interest income based on forecasts over the succeeding 12 months. At March 31, 2008, the Company’s overall interest rate risk position was liability sensitive to changes in interest rates. ALPC policy limits the estimated change in net interest income to 4.0 percent of forecasted net interest income over the succeeding 12 months. At March 31, 2008, and December 31, 2007, the Company was within policy. Refer to “Management’s Discussion and Analysis — Net Interest Income Simulation Analysis” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for further discussion on net interest income simulation analysis.
 
Market Value of Equity Modeling The Company also manages interest rate sensitivity by utilizing market value of equity modeling, which measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. ALPC policy limits the change in market value of equity in a 200 basis point parallel rate shock to 15 percent of the market value of equity assuming interest rates at March 31, 2008. The up 200 basis point scenario resulted in an 11.4 percent decrease in the market value of equity at March 31, 2008, compared with a 7.6 percent decrease at December 31, 2007. The down 200 basis point scenario resulted in a .3 percent decrease in the market value of equity at March 31, 2008, compared with a 3.5 percent decrease at December 31, 2007. At March 31, 2008, and December 31, 2007, the Company was within its ALPC policy.
The Company also uses duration of equity as a measure of interest rate risk. The duration of equity is a measure of the net market value sensitivity of the assets, liabilities and derivative positions of the Company. At March 31, 2008, the duration of assets, liabilities and equity was 1.9 years, 1.7 years and 3.4 years, respectively, compared with 1.8 years, 1.9 years and 1.2 years, respectively, at December 31, 2007. The change in duration of equity reflects a change in market rates and credit spreads. The duration of equity measures show that sensitivity of the market value of equity of the Company was liability sensitive to changes in interest rates. Refer to “Management’s Discussion and Analysis — Market Value of Equity Modeling” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for further discussion on market value of equity modeling.
 
Use of Derivatives to Manage Interest Rate and Other Risks In the ordinary course of business, the Company enters into derivative transactions to manage its interest rate, prepayment, credit, price and foreign currency risks (“asset and liability management positions”) and to accommodate the business requirements of its customers (“customer-related positions”). Refer to “Management’s Discussion and Analysis — Use of Derivatives to Manage Interest Rate and Other Risks” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for further discussion on the use of derivatives to manage interest rate and other risks.
By their nature, derivative instruments are subject to market risk. The Company does not utilize derivative instruments for speculative purposes. Of the Company’s $56.2 billion of total notional amount of asset and liability management positions at March 31, 2008, $17.8 billion was designated as either fair value or cash flow hedges or net investment hedges of foreign operations. The cash flow hedge derivative positions are interest rate swaps that hedge the forecasted cash flows from the underlying variable-rate debt. The fair value hedges are primarily interest rate swaps that hedge the change in fair value related to interest rate changes of underlying fixed-rate debt and subordinated obligations.
At March 31, 2008, the Company had $402 million in accumulated other comprehensive income related to realized and unrealized losses on derivatives classified as cash flow hedges. Unrealized gains and losses are reflected in earnings when the related cash flows or hedged transactions occur and offset the related performance of the hedged items. The estimated amount to be reclassified from accumulated other comprehensive income into earnings during the remainder of 2008 and the next 12 months is a loss of $32 million and $167 million, respectively.
 
Sensitivity of Net Interest Income:
                                                                   
    March 31, 2008       December 31, 2007  
    Down 50
    Up 50
    Down 200
    Up 200
      Down 50
    Up 50
    Down 200
    Up 200
 
    Immediate     Immediate     Gradual*     Gradual       Immediate     Immediate     Gradual     Gradual  
Net interest income
    .92%       (.94)%       1.78%       (1.68)%         .54%       (1.01)%       1.28%       (2.55)%  
                                                                   
* Market rates in the Down 200 Gradual Ramp have been floored in the later months of the ramp.
 
 
 
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Table 8    Derivative Positions
 
                                                   
    March 31, 2008       December 31, 2007  
                Weighted-
                  Weighted-
 
                Average
                  Average
 
                Remaining
                  Remaining
 
    Notional
    Fair
    Maturity
      Notional
    Fair
    Maturity
 
(Dollars in Millions)   Amount     Value     In Years       Amount     Value     In Years  
Asset and Liability Management Positions
                                                 
Interest rate contracts
                                                 
Receive fixed/pay floating swaps
  $ 5,000     $ 195       32.95       $ 3,750     $ 17       40.87  
Pay fixed/receive floating swaps
    11,979       (638 )     3.67         15,979       (307 )     3.00  
Futures and forwards
                                                 
Buy
    10,902       138       .06         12,459       (51 )     .12  
Sell
    8,158       (35 )     .13         11,427       (33 )     .16  
Options
                                                 
Written
    16,948       29       .10         10,689       10       .12  
Foreign exchange contracts
                                                 
Cross-currency swaps
    2,015       338       8.58         1,913       196       8.80  
Forwards
    1,076             .04         1,111       (15 )     .03  
Equity contracts
    66       2       2.06         73       (3 )     2.33  
Credit default swaps
    56       2       3.35         56       1       3.60  
                                                   
Customer-related Positions                                                  
Interest rate contracts
                                                 
Receive fixed/pay floating swaps
  $ 16,900     $ 752       5.22       $ 14,260     $ 386       5.10  
Pay fixed/receive floating swaps
    16,893       (744 )     5.25         14,253       (309 )     5.08  
Options
                                                 
Purchased
    1,884       (31 )     2.24         1,939       1       2.25  
Written
    1,877       31       2.24         1,932       1       2.25  
Risk participation agreements (a)
                                                 
Purchased
    425       1       6.20         370       1       6.23  
Written
    1,175       (2 )     3.95         628       (1 )     4.98  
Foreign exchange rate contracts
                                                 
Forwards and swaps
                                                 
Buy
    3,992       192       .41         3,486       109       .44  
Sell
    3,890       (182 )     .42         3,426       (95 )     .44  
Options
                                                 
Purchased
    563       (22 )     1.06         308       (6 )     .68  
Written
    563       22       1.06         293       6       .71  
                                                   
(a) At March 31, 2008, the credit equivalent amount was $4 million and $103 million, compared with $4 million and $69 million at December 31, 2007, for purchased and written risk participation agreements, respectively.

 
The change in the fair value of all other asset and liability management positions attributed to hedge ineffectiveness recorded in noninterest income was not material for the first quarter of 2008. Gains or losses on customer-related positions were not material for the first quarter of 2008. The impact of the adoption of the SFAS 157 reduced noninterest income $62 million as it required the Company to consider the primary market and nonperformance risk in determining the fair value of customer derivatives.
The Company enters into derivatives to protect its net investment in certain foreign operations. The Company uses forward commitments to sell specified amounts of certain foreign currencies to hedge fluctuations in foreign currency exchange rates. The net amount of gains or losses included in the cumulative translation adjustment for the first quarter of 2008 was not material.
The Company uses forward commitments to sell residential mortgage loans to economically hedge its interest rate risk related to residential MLHFS. In connection with its mortgage banking operations, the Company held $6.3 billion of forward commitments to sell mortgage loans and $5.0 billion of unfunded mortgage loan commitments at March 31, 2008, that were derivatives in accordance with the provisions of the Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedge Activities”. The unfunded mortgage loan commitments are reported at fair value as options in Table 8.
 
 
 
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Effective January 1, 2008, the Company adopted SFAS 159 and elected to measure certain MLHFS originated on or after January 1, 2008 at fair value. The fair value election for MLHFS will reduce certain timing differences and better match changes in the value of these mortgage loans with changes in the value of the derivatives used as economic hedges for these mortgage loans. The Company also utilizes U.S. Treasury futures, options on U.S. Treasury futures contracts, interest rate swaps and forward commitments to buy residential mortgage loans to economically hedge the change in fair value of its residential MSRs.
 
Market Risk Management In addition to interest rate risk, the Company is exposed to other forms of market risk as a consequence of conducting normal trading activities. These trading activities principally support the risk management processes of the Company’s customers including their management of foreign currency and interest rate risks. The Company also manages market risk of non-trading business activities, including its MSRs and loans held-for-sale. Value at Risk (“VaR”) is a key measure of market risk for the Company. Theoretically, VaR represents the maximum amount that the Company has placed at risk of loss, with a ninety-ninth percentile degree of confidence, to adverse market movements in the course of its risk taking activities.
The Company’s market valuation risk for trading and non-trading positions, as estimated by the VaR analysis, was $2 million and $12 million, respectively, at March 31, 2008, compared with $1 million and $15 million at December 31, 2007, respectively. The Company’s VaR limit was $45 million at March 31, 2008. Refer to “Management’s Discussion and Analysis — Market Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for further discussion on market risk management.
 
Liquidity Risk Management ALPC establishes policies, as well as analyzes and manages liquidity, to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds in a timely and cost-effective manner. Liquidity management is viewed from long-term and short-term perspectives, as well as from an asset and liability perspective. Management monitors liquidity through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk. Refer to “Management’s Discussion and Analysis — Liquidity Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for further discussion on liquidity risk management.
At March 31, 2008, parent company long-term debt outstanding was $8.4 billion, compared with $10.7 billion at December 31, 2007. The $2.3 billion decrease was primarily due to the repayment of $2.9 billion of convertible senior debentures during the first three months of 2008. As of March 31, 2008, there was no parent company debt scheduled to mature in the remainder of 2008.
Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. The amount of dividends available to the parent company from its banking subsidiaries after meeting the regulatory capital requirements for well-capitalized banks was approximately $1.3 billion at March 31, 2008.
 
Off-Balance Sheet Arrangements The Company sponsors an off-balance sheet conduit, a qualified special purpose entity (“QSPE”), to which it transferred high-grade investment securities, funded by the issuance of commercial paper. Because QSPEs are exempt from consolidation under the provisions of Financial Accounting Standards Board Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities”, the Company does not consolidate the conduit structure in its financial statements. The conduit held assets of $1.1 billion at March 31, 2008, and $1.2 billion at December 31, 2007. These investment securities include primarily (i) private label asset-backed securities, which are insurance “wrapped” by mono-line insurance companies and (ii) government agency mortgage-backed securities and collateralized mortgage obligations. The conduit had commercial paper liabilities of $.6 billion at March 31, 2008, and $1.2 billion at December 31, 2007. The Company provides a liquidity facility to the conduit. Utilization of the liquidity facility is triggered when the conduit is unable to, or does not issue commercial paper to fund its assets. In March 2008, the conduit ceased issuing commercial paper and, based on the terms of the conduit, the Company began providing funding to replace outstanding commercial paper as it matures. At March 31, 2008, the balance drawn on the liquidity facility by the conduit was $.6 billion, which is recorded on the Company’s balance sheet in commercial loans and will be paid by the proceeds of the underlying investment securities. Most of the remaining outstanding commercial paper will mature during the second quarter, resulting in additional draws against the liquidity facility. A liability for the estimate of the potential risk of loss for the Company as the liquidity facility provider is recorded on the balance sheet in other liabilities. The liability is adjusted downward over time as the liquidity facility is drawn upon and as underlying assets in the conduit pay down with the offset
 
 
 
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Table 9    Capital Ratios
 
                 
    March 31,
    December 31,
 
(Dollars in Millions)   2008     2007  
Tier 1 capital
  $ 18,543     $ 17,539  
As a percent of risk-weighted assets
    8.6 %     8.3 %
As a percent of adjusted quarterly average assets (leverage ratio)
    8.1 %     7.9 %
Total risk-based capital
  $ 27,207     $ 25,925  
As a percent of risk-weighted assets
    12.6 %     12.2 %
Tangible common equity
  $ 12,327     $ 11,820  
As a percent of tangible assets
    5.3 %     5.1 %
                 

recognized as other noninterest income. The liability for the liquidity facility was $1 million and $2 million at March 31, 2008, and December 31, 2007, respectively. Given the credit quality of the underlying investment securities, including the guarantees provided by insurers and government agencies, the Company believes it has limited credit risk related to its fundings as liquidity provider. In addition, the Company recorded its retained residual interest in the conduit of $6 million and $2 million at March 31, 2008 and December 31, 2007, respectively.
 
Capital Management The Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. In the first quarter of 2008, the Company returned 75 percent of earnings to its common shareholders primarily through dividends and limited net share repurchases. The Company also manages its capital to exceed regulatory capital requirements for well-capitalized bank holding companies. Table 9 provides a summary of capital ratios as of March 31, 2008, and December 31, 2007. All regulatory ratios continue to be in excess of regulatory “well-capitalized” requirements. Total shareholders’ equity was $21.6 billion at March 31, 2008, compared with $21.0 billion at December 31, 2007. The increase was the result of corporate earnings and the issuance of $.5 billion of non-cumulative, perpetual preferred stock, partially offset by dividends and share repurchases.
On August 3, 2006, the Company announced that the Board of Directors approved an authorization to repurchase 150 million shares of common stock through December 31, 2008.
 
The following table provides a detailed analysis of all shares repurchased under this authorization during the first quarter of 2008:
                   
            Maximum Number
    Total Number of
  Average
  of Shares that May
    Shares Purchased
  Price Paid
  Yet Be Purchased
Time Period   as Part of the Program   per Share   Under the Program
January
    110,000   $ 30.78     64,151,002
February
    185,094     32.88     63,965,908
March
    2,106,930     33.66     61,858,978
                   
Total
    2,402,024   $ 33.47     61,858,978
                   
 
LINE OF BUSINESS FINANCIAL REVIEW
 
Within the Company, financial performance is measured by major lines of business, which include Wholesale Banking, Consumer Banking, Wealth Management & Securities Services, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance.
 
Basis for Financial Presentation Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. Refer to “Management’s Discussion and Analysis — Line of Business Financial Review” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for further discussion on the business lines’ basis for financial presentation.
Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2008, certain organization and methodology changes were made and, accordingly, 2007 results were restated and presented on a comparable basis.
 
Wholesale Banking Wholesale Banking offers lending, equipment finance and small-ticket leasing, depository, treasury management, capital markets, foreign exchange, international trade services and other financial services to middle market, large corporate, commercial real estate and public sector clients. Wholesale Banking contributed $255 million of the Company’s net income in the first quarter of 2008, a decrease of $17 million (6.3 percent), compared with the first quarter of 2007. The decrease was primarily driven by an increase in the provision for credit losses and higher noninterest expense, partially offset by higher total net revenue.
Total net revenue increased $5 million (.7 percent) in the first quarter of 2008, compared with the first
 
 
 
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Table 10    Line of Business Financial Performance
 
                                           
    Wholesale
      Consumer
 
    Banking       Banking  
            Percent
              Percent
 
Three Months Ended March 31 (Dollars in Millions)   2008   2007   Change       2008   2007   Change  
Condensed Income Statement
                                         
Net interest income (taxable-equivalent basis)
  $ 485   $ 451     7.5 %     $ 942   $ 961     (2.0 )%
Noninterest income
    193     222     (13.1 )       471     437     7.8  
Securities gains (losses), net
                             
                                           
Total net revenue
    678     673     .7         1,413     1,398     1.1  
Noninterest expense
    239     228     4.8         705     630     11.9  
Other intangibles
    3     4     (25.0 )       11     14     (21.4 )
                                           
Total noninterest expense
    242     232     4.3         716     644     11.2  
                                           
Income before provision and income taxes
    436     441     (1.1 )       697     754     (7.6 )
Provision for credit losses
    35     13     *       120     72     66.7  
                                           
Income before income taxes
    401     428     (6.3 )       577     682     (15.4 )
Income taxes and taxable-equivalent adjustment
    146     156     (6.4 )       210     248     (15.3 )
                                           
Net income
  $ 255   $ 272     (6.3 )     $ 367   $ 434     (15.4 )
                                           
                                           
Average Balance Sheet
                                         
Commercial
  $ 38,685   $ 34,708     11.5 %     $ 6,418   $ 6,370     .8 %
Commercial real estate
    17,709     16,799     5.4         11,118     11,091     .2  
Residential mortgages
    94     60     56.7         22,421     21,042     6.6  
Retail
    73     65     12.3         36,472     35,310     3.3  
                                           
Total loans
    56,561     51,632     9.5         76,429     73,813     3.5  
Goodwill
    1,329     1,329             2,217     2,206     .5  
Other intangible assets
    31     43     (27.9 )       1,463     1,597     (8.4 )
Assets
    61,659     56,725     8.7         87,940     83,967     4.7  
Noninterest-bearing deposits
    10,272     10,817     (5.0 )       11,447     12,101     (5.4 )
Interest checking
    8,009     4,500     78.0         17,731     17,789     (.3 )
Savings products
    5,803     5,740     1.1         19,270     19,769     (2.5 )
Time deposits
    14,332     11,808     21.4         18,793     19,843     (5.3 )
                                           
Total deposits
    38,416     32,865     16.9         67,241     69,502     (3.3 )
Shareholders’ equity
    6,180     5,800     6.6         6,507     6,440     1.0  
                                           
*  Not meaningful

quarter of 2007. Net interest income, on a taxable-equivalent basis, increased $34 million (7.5 percent) in the first quarter of 2008, compared with the first quarter of 2007, driven by strong growth in earning asset and deposit balances and improved credit spreads, partially offset by a decrease in the margin benefit of deposits. Noninterest income decreased $29 million (13.1 percent) in the first quarter of 2008, compared with the first quarter of 2007. The decrease was primarily due to market-related valuation losses and lower earnings from equity investments, partially offset by higher treasury management fees, commercial leasing and foreign exchange revenue.
Total noninterest expense increased $10 million (4.3 percent) in the first quarter of 2008 compared with the first quarter of 2007, primarily due to higher compensation and employee benefits expense related to merit increases, expanding the business line’s national corporate banking presence, investments to enhance customer relationship management, and other business initiatives. The provision for credit losses increased $22 million in the first quarter of 2008, compared with the first quarter of 2007. The unfavorable change was due to continued credit deterioration in the homebuilding and commercial home supplier industries. Nonperforming assets were $424 million at March 31, 2008, $335 million at December 31, 2007, and $226 million at March 31, 2007. Nonperforming assets as a percentage of period-end loans were .74 percent at March 31, 2008, .60 percent at December 31, 2007, and .44 percent at March 31, 2007. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.
 
Consumer Banking Consumer Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail and ATMs. It encompasses community banking, metropolitan banking, in-store banking, small business banking, consumer lending, mortgage banking, consumer finance, workplace banking, student banking and 24-hour banking. Consumer Banking contributed $367 million of the Company’s net income in the first quarter of 2008, a decrease of $67 million (15.4 percent), compared with the first quarter of 2007. Within Consumer Banking, the retail banking division contributed $320 million of the total net income in the first quarter of 2008, a decrease of 21.8 percent from the same period in the prior year. Mortgage banking contributed $47 million of the business line’s net income in the first quarter of 2008, an increase of 88.0 percent over the same period in the prior year.
 
 
 
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Wealth Management &
    Payment
    Treasury and
    Consolidated
     
Securities Services     Services     Corporate Support     Company      
        Percent
            Percent
                Percent
              Percent
     
2008   2007   Change     2008   2007   Change     2008     2007     Change     2008     2007   Change      
                                                                                       
$ 122   $ 121     .8 %   $ 252   $ 169     49.1 %   $ 29     $ (36 )     * %   $ 1,830     $ 1,666     9.8 %    
  389     374     4.0       769     680     13.1       473       9       *       2,295       1,722     33.3      
                              (251 )     1       *       (251 )     1     *      
                                                                                       
  511     495     3.2       1,021     849     20.3       251       (26 )     *       3,874       3,389     14.3      
  243     230     5.7       379     342     10.8       143       48       *       1,709       1,478     15.6      
  20     23     (13.0 )     53     53                             87       94     (7.4 )    
                                                                                       
  263     253     4.0       432     395     9.4       143       48       *       1,796       1,572     14.2      
                                                                                       
  248     242     2.5       589     454     29.7       108       (74 )     *       2,078       1,817     14.4      
  1         *       134     91     47.3       195       1       *       485       177     *      
                                                                                       
  247     242     2.1       455     363     25.3       (87 )     (75 )     (16.0 )     1,593       1,640     (2.9 )    
  90     88     2.3       166     132     25.8       (109 )     (114 )     4.4       503       510     (1.4 )    
                                                                                       
$ 157   $ 154     1.9     $ 289   $ 231     25.1     $ 22     $ 39       (43.6 )   $ 1,090     $ 1,130     (3.5 )    
                                                                                       
                                                                                       
                                                                                       
                                                                                       
                                                                                       
$ 1,997   $ 1,969     1.4 %   $ 4,257   $ 3,834     11.0 %   $ 352     $ 138       * %   $ 51,709     $ 47,019     10.0 %    
  667     690     (3.3 )                   42       52       (19.2 )     29,536       28,632     3.2      
  460     463     (.6 )                   3       4       (25.0 )     22,978       21,569     6.5      
  2,371     2,345     1.1       12,056     9,712     24.1       37       41       (9.8 )     51,009       47,473     7.4      
                                                                                       
  5,495     5,467     .5       16,313     13,546     20.4       434       235       84.7       155,232       144,693     7.3      
  1,564     1,550     .9       2,554     2,456     4.0             28       *       7,664       7,569     1.3      
  356     450     (20.9 )     1,071     1,088     (1.6 )     2       42       (95.2 )     2,923       3,220     (9.2 )    
  7,933     8,036     (1.3 )     21,300     18,796     13.3       57,843       51,988       11.3       236,675       219,512     7.8      
  4,604     4,260     8.1       471     455     3.5       325       44       *       27,119       27,677     (2.0 )    
  4,531     2,775     63.3       29     9     *       3       3             30,303       25,076     20.8      
  5,568     5,517     .9       20     20           63       67       (6.0 )     30,724       31,113     (1.3 )    
  3,859     3,868     (.2 )     2     3     (33.3 )     5,726       1,340       *       42,712       36,862     15.9      
                                                                                       
  18,562     16,420     13.0       522     487     7.2       6,117       1,454       *       130,858       120,728     8.4      
  2,414     2,498     (3.4 )     5,006     4,749     5.4       1,372       1,723       (20.4 )     21,479       21,210     1.3      
                                                                                       

Total net revenue increased $15 million (1.1 percent) in the first quarter of 2008, compared with the first quarter of 2007. Net interest income, on a taxable-equivalent basis, decreased $19 million (2.0 percent) in the first quarter of 2008, compared with the first quarter of 2007. The year-over-year decrease in net interest income was due to the declining funding benefit of deposits and declining deposit balances, partially offset by growth in average loans of 3.5 percent and higher loan fees. The increase in average loan balances reflected growth in all loan categories, with the largest increases in residential mortgages and retail loans. The favorable change in retail loans was principally driven by an increase in installment products and home equity lines, partially offset by a reduction in retail leasing balances due to customer demand for installment loan products and pricing competition. The year-over-year decrease in average deposits primarily reflected a reduction in time, savings and noninterest-bearing deposit products. Average time deposit balances in the first quarter of 2008 declined $1.1 billion (5.3 percent), compared with the first quarter of 2007. Average savings balances in the first quarter of 2008 declined $.5 billion (2.5 percent), compared with the first quarter of 2007. These declines reflected the Company’s funding and pricing decisions and competition for these deposits by other financial institutions that have more limited access to the wholesale funding sources given the current market environment. Fee-based noninterest income increased $34 million (7.8 percent) in the first quarter of 2008, compared with the first quarter of 2007. The year-over-year increase in fee-based revenue was driven by an increase in deposit service charges and mortgage banking revenue, partially offset by lower lease revenue related to higher end-of-term losses and declining student loan sales gains. The increase in mortgage banking revenue was principally related to an increase in mortgage servicing income and production gains, including $19 million from the adoption of SFAS 157. These favorable impacts to mortgage banking revenue were partially offset by an unfavorable net change in the valuation of MSRs and related economic hedging activities.
Total noninterest expense increased $72 million (11.2 percent) in the first quarter of 2008, compared with the first quarter of 2007. The increase included the net addition of 21 in-store and 3 traditional branches at March 31, 2008, compared with March 31, 2007. The increase was primarily attributable to higher compensation and employee benefit expense which reflected business investments in customer service and various promotional activities including further deployment of the PowerBank initiative, the adoption of
 
 
 
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SFAS 157 and higher credit related costs associated with other real estate owned and foreclosures.
The provision for credit losses increased $48 million (66.7 percent) in the first quarter of 2008, compared with the first quarter of 2007. The increase was attributable to higher net charge-offs, reflecting portfolio growth and credit deterioration in residential mortgages, home equity and other installment and consumer loan portfolios from a year ago. As a percentage of average loans outstanding, net charge-offs increased to .63 percent in the first quarter of 2008, compared with .40 percent in the first quarter of 2007. Commercial and commercial real estate loan net charge-offs increased $3 million (25.0 percent) and retail loan and residential mortgage net charge-offs increased $45 million (75.0 percent) in the first quarter of 2008, compared with the first quarter of 2007. Nonperforming assets were $370 million at March 31, 2008, $326 million at December 31, 2007, and $312 million at March 31, 2007. Nonperforming assets as a percentage of period-end loans were .50 percent at March 31, 2008, .45 percent at December 31, 2007, and .44 percent at March 31, 2007. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.
 
Wealth Management & Securities Services Wealth Management & Securities Services provides trust, private banking, financial advisory, investment management, retail brokerage services, insurance, custody and mutual fund servicing through five businesses: Wealth Management, Corporate Trust, FAF Advisors, Institutional Trust and Custody and Fund Services. Wealth Management & Securities Services contributed $157 million of the Company’s net income in the first quarter of 2008, an increase of $3 million (1.9 percent), compared with the first quarter of 2007. The increase was attributable to core account fee growth, partially offset by unfavorable equity market conditions relative to a year ago.
Total net revenue increased $16 million (3.2 percent) in the first quarter of 2008, compared with the first quarter of 2007. Net interest income, on a taxable-equivalent basis, increased $1 million (.8 percent) in the first quarter of 2008, compared with the first quarter of 2007. Noninterest income increased $15 million (4.0 percent) in the first quarter of 2008, compared with the first quarter of 2007, primarily driven by core account fee growth, partially offset by unfavorable equity market conditions.
Total noninterest expense increased $10 million (4.0 percent) in the first quarter of 2008, compared with the first quarter of 2007. The increase in noninterest expense was primarily due to higher compensation, employee benefits and processing-related expenses.
 
Payment Services Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. Payment Services are highly inter-related with banking products and services of the other lines of business and rely on access to the bank subsidiary’s settlement network, lower cost funding available to the Company, cross-selling opportunities and operating efficiencies. Payment Services contributed $289 million of the Company’s net income in the first quarter of 2008, an increase of $58 million (25.1 percent), compared with the first quarter of 2007. The increase was due to growth in total net revenue, driven by loan growth and higher transaction volumes, partially offset by an increase in total noninterest expense and a higher provision for credit losses.
Total net revenue increased $172 million (20.3 percent) in the first quarter of 2008, compared with the first quarter of 2007. Net interest income, on a taxable-equivalent basis, increased $83 million (49.1 percent) in the first quarter of 2008, compared with the first quarter of 2007. The increase was primarily due to growth in higher yielding retail credit card loan balances and the timing of asset repricing in a declining rate environment. Noninterest income increased $89 million (13.1 percent) in the first quarter of 2008, compared with the first quarter of 2007. The increase in fee-based revenue was driven by organic account growth, higher transaction volumes and business expansion initiatives.
Total noninterest expense increased $37 million (9.4 percent) in the first quarter of 2008, compared with the first quarter of 2007, due primarily to new business initiatives, including costs associated with transaction processing and a recent acquisition, as well as higher collection costs.
The provision for credit losses increased $43 million (47.3 percent) in the first quarter of 2008, compared with the first quarter of 2007, due to higher net charge-offs, which reflected average retail credit card portfolio growth and higher delinquency rates from a year ago. As a percentage of average loans outstanding, net charge-offs were 3.30 percent in the first quarter of 2008, compared with 2.72 percent in the first quarter of 2007.
 
Treasury and Corporate Support Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management, asset securitization, interest rate risk management, the net effect of transfer pricing related to average balances and the residual
 
 
 
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aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $22 million in the first quarter of 2008, a decrease of $17 million (43.6 percent), compared with the first quarter of 2007.
Total net revenue increased $277 million in the first quarter of 2008, compared with the first quarter of 2007. Net interest income, on a taxable-equivalent basis, increased $65 million in the first quarter of 2008, compared with the first quarter of 2007, due to a steepening yield curve relative to the first quarter of 2007, wholesale funding decisions and the Company’s asset and liability management positions. Noninterest income increased $212 million in the first quarter of 2008, compared with the first quarter of 2007. The increase was primarily due to the net impact of the Visa Gain, partially offset by the structured investment securities impairment and the transition impact of adopting SFAS 157 during the first quarter of 2008.
Total noninterest expense increased $95 million in the first quarter of 2008, compared with the first quarter of 2007. The increase in noninterest expense was driven by higher compensation and employee benefits expense, a charitable contribution made to the foundation and higher litigation costs, partially offset by a reduction in net shared services expense.
The provision for credit losses for this business unit represents the residual aggregate of the net credit losses allocated to the reportable business units and the Company’s recorded provision determined in accordance with accounting principles generally accepted in the United States. The provision for credit losses increased $194 million in the first quarter of 2008, compared with the same quarter of the prior year, driven by incremental provision expense recorded in the first quarter of 2008, reflecting deterioration in the credit quality within the loan portfolios related to stress in the residential real estate markets, including homebuilding and related supplier industries, and the continued growth of the consumer loan portfolios. Refer to the “Corporate Risk Profile” section for further information on the provision for credit losses, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
Income taxes are assessed to each line of business at a managerial tax rate of 36.4 percent with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support. The consolidated effective tax rate of the Company was 30.4 percent in the first quarter of 2008 and first quarter of 2007.
 
CRITICAL ACCOUNTING POLICIES
 
The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company’s financial statements. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Those policies considered to be critical accounting policies relate to the allowance for credit losses, estimations of fair value, MSRs, goodwill and other intangibles and income taxes. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee. These accounting policies are discussed in detail in “Management’s Discussion and Analysis — Critical Accounting Policies” and the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
 
CONTROLS AND PROCEDURES
 
Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
During the most recently completed fiscal quarter, there was no change made in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
 
U.S. Bancorp
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Table of Contents

U.S. Bancorp
Consolidated Balance Sheet
 
</
                 
    March 31,
    December 31,
 
(Dollars in Millions, Except Per Share Data)   2008     2007  
    (Unaudited)        
Assets
               
Cash and due from banks
  $ 7,323     $ 8,884  
Investment securities
               
Held-to-maturity (fair value $75 and $78, respectively)
    72       74  
Available-for-sale
    41,624       43,042  
Loans held for sale (included $3,097 of mortgage loans carried at fair value at 3/31/08)
    5,241       4,819  
Loans
               
Commercial
    52,744       51,074  
Commercial real estate
    29,969       29,207  
Residential mortgages
    23,218       22,782  
Retail
    52,369       50,764  
                 
Total loans
    158,300       153,827  
Less allowance for loan losses
    (2,251 )     (2,058 )
                 
Net loans
    156,049       151,769  
Premises and equipment
    1,805       1,779  
Goodwill
    7,685       7,647  
Other intangible assets
    2,962       3,043  
Other assets
    19,020       16,558  
                 
Total assets
  $ 241,781     $ 237,615  
                 
Liabilities and Shareholders’ Equity
               
Deposits
               
Noninterest-bearing
  $ 32,870     $ 33,334  
Interest-bearing
    76,895       72,458  
Time deposits greater than $100,000
    28,505       25,653  
                 
Total deposits
    138,270       131,445