EX-13 5 x59846exv13.htm EX-13 exv13

Management’s Discussion and Analysis

Management’s Discussion and Analysis
OVERVIEW
STATEMENT OF INCOME ANALYSIS
BALANCE SHEET ANALYSIS
CORPORATE RISK PROFILE
LINE OF BUSINESS FINANCIAL REVIEW
CRITICAL ACCOUNTING POLICIES
CONTROLS AND PROCEDURES


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For the fiscal year ended December 31, 2010






















 
OVERVIEW
 
The financial performance of U.S. Bancorp and its subsidiaries (the “Company”) in 2010 reflected the strength and quality of its business lines, prudent risk management and recent investments. In 2010, the Company achieved record total net revenue, increased its capital, experienced lower credit costs, and grew both its balance sheet and fee-based businesses. Though business and consumer customers continue to be affected by the tepid economic conditions and high unemployment levels in the United States, the Company’s comparative financial strength and enhanced product offerings attracted a significant number of new customer relationships in 2010, resulting in loan growth and significant increases in deposits as the Company continues to benefit from a “flight-to-quality” by customers. Additionally, in 2010 the Company invested opportunistically in businesses and products that strengthened its presence and ability to serve customers. Weakness in domestic real estate markets, both residential and commercial, continued to affect the Company’s loan portfolios, though the Company’s credit costs have declined since late 2009.
Despite significant legislative and regulatory challenges, and an economic environment which continues to adversely impact the banking industry, the Company earned $3.3 billion in 2010, an increase of 50.4 percent over 2009. Growth in total net revenue of $1.5 billion (8.9 percent) was attributable to an increase in net interest income, the result of higher earning assets and expanded net interest margin. Noninterest income grew year-over-year as increases in payments-related revenue and other fee-based businesses were partially offset by expected decreases from recent legislative actions and current economic conditions. The Company’s total net charge-offs and nonperforming assets both peaked in the first quarter of 2010, and declined throughout the remainder of the year. Additionally, the Company continued its focus on effectively managing its cost structure while making investments to increase revenue, improve efficiency and enhance customer service, with an efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue, excluding net securities gains and losses) in 2010 of 51.5 percent, one of the lowest in the industry.
The Company’s capital position remained strong and grew during 2010, with a Tier 1 (using Basel I definition) common equity to risk-weighted assets ratio of 7.8 percent and a Tier 1 capital ratio of 10.5 percent at December 31, 2010. In addition, at December 31, 2010, the Company’s total risk-based capital ratio was 13.3 percent, and its tangible common equity to risk-weighted assets ratio was 7.2 percent (refer to “Non-Regulatory Capital Ratios” for further information on the calculation of the Tier 1 common equity to risk-weighted assets and tangible common equity to risk-weighted assets ratios). On January 7, 2011, the Company submitted its plan to the Federal Reserve System requesting regulatory approval to increase its dividend, and expects to receive feedback from the Federal Reserve System late in the first quarter of 2011. Credit rating organizations rate the Company’s debt among the highest of its large domestic banking peers. This comparative financial strength provides the Company with favorable funding costs, and the ability to attract new customers, leading to growth in loans and deposits.
In 2010, the Company grew its loan portfolio and significantly increased deposits. Average loans and deposits increased $7.2 billion (3.9 percent) and $16.9 billion (10.1 percent), respectively, over 2009, including the impact of a Federal Deposit Insurance Corporation (“FDIC”) assisted transaction in the fourth quarter of 2009. Average loan growth reflected increases in residential mortgages, retail loans and commercial real estate loans, offset by a decline in commercial loans, the result of lower utilization of available commitments.
The Company’s provision for credit losses decreased $1.2 billion (21.6 percent) in 2010, compared with 2009. Real estate markets continue to experience stress, and the Company had 8 percent higher net charge-offs in 2010 than in 2009. However, net charge-offs began to decline in early 2010 and the Company’s net charge-offs in the fourth quarter of 2010 were 16 percent lower than the fourth quarter of 2009. The Company recorded a provision in excess of net charge-offs of $200 million in the first six months of 2010, but improving credit trends and risk profile of the Company’s loan portfolio resulted in the Company recording a provision that was less than net charge-offs by $25 million in the fourth quarter of 2010.
In January, 2011, U.S. federal banking regulators communicated to the Company the preliminary results of an interagency examination of the Company’s policies, procedures, and internal controls related to residential mortgage foreclosure practices. This examination was part of a review by the regulators of the foreclosure practices of 14 large mortgage servicers. As a result of the review, the Company expects the regulators will require the Company to address certain aspects of its foreclosure processes, including developing plans related to control procedures and monitoring of loss mitigation and foreclosure activities, and taking certain other remedial actions. Though the Company

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Table 1    SELECTED FINANCIAL DATA
 
                                         
Year ended December 31
                             
(Dollars and Shares in Millions, Except Per Share Data)   2010     2009     2008     2007     2006  
   
 
Condensed Income Statement
                                       
Net interest income (taxable-equivalent basis) (a)
  $ 9,788     $ 8,716     $ 7,866     $ 6,764     $ 6,790  
Noninterest income
    8,438       8,403       7,789       7,281       6,938  
Securities gains (losses), net
    (78 )     (451 )     (978 )     15       14  
     
     
Total net revenue
    18,148       16,668       14,677       14,060       13,742  
Noninterest expense
    9,383       8,281       7,348       6,907       6,229  
Provision for credit losses
    4,356       5,557       3,096       792       544  
     
     
Income before taxes
    4,409       2,830       4,233       6,361       6,969  
Taxable-equivalent adjustment
    209       198       134       75       49  
Applicable income taxes
    935       395       1,087       1,883       2,112  
     
     
Net income
    3,265       2,237       3,012       4,403       4,808  
Net (income) loss attributable to noncontrolling interests
    52       (32 )     (66 )     (79 )     (57 )
     
     
Net income attributable to U.S. Bancorp
  $ 3,317     $ 2,205     $ 2,946     $ 4,324     $ 4,751  
     
     
Net income applicable to U.S. Bancorp common shareholders
  $ 3,332     $ 1,803     $ 2,819     $ 4,258     $ 4,696  
     
     
Per Common Share
                                       
Earnings per share
  $ 1.74     $ .97     $ 1.62     $ 2.45     $ 2.64  
Diluted earnings per share
  $ 1.73     $ .97     $ 1.61     $ 2.42     $ 2.61  
Dividends declared per share
  $ .200     $ .200     $ 1.700     $ 1.625     $ 1.390  
Book value per share
  $ 14.36     $ 12.79     $ 10.47     $ 11.60     $ 11.44  
Market value per share
  $ 26.97     $ 22.51     $ 25.01     $ 31.74     $ 36.19  
Average common shares outstanding
    1,912       1,851       1,742       1,735       1,778  
Average diluted common shares outstanding
    1,921       1,859       1,756       1,756       1,803  
Financial Ratios
                                       
Return on average assets
    1.16 %     .82 %     1.21 %     1.93 %     2.23 %
Return on average common equity
    12.7       8.2       13.9       21.3       23.5  
Net interest margin (taxable-equivalent basis) (a)
    3.88       3.67       3.66       3.47       3.65  
Efficiency ratio (b)
    51.5       48.4       46.9       49.2       45.4  
Average Balances
                                       
Loans
  $ 193,022     $ 185,805     $ 165,552     $ 147,348     $ 140,601  
Loans held for sale
    5,616       5,820       3,914       4,298       3,663  
Investment securities
    47,763       42,809       42,850       41,313       39,961  
Earning assets
    252,042       237,287       215,046       194,683       186,231  
Assets
    285,861       268,360       244,400       223,621       213,512  
Noninterest-bearing deposits
    40,162       37,856       28,739       27,364       28,755  
Deposits
    184,721       167,801       136,184       121,075       120,589  
Short-term borrowings
    33,719       29,149       38,237       28,925       24,422  
Long-term debt
    30,835       36,520       39,250       44,560       40,357  
Total U.S. Bancorp shareholders’ equity
    28,049       26,307       22,570       20,997       20,710  
Period End Balances
                                       
Loans
  $ 197,061     $ 194,755     $ 184,955     $ 153,827     $ 143,597  
Allowance for credit losses
    5,531       5,264       3,639       2,260       2,256  
Investment securities
    52,978       44,768       39,521       43,116       40,117  
Assets
    307,786       281,176       265,912       237,615       219,232  
Deposits
    204,252       183,242       159,350       131,445       124,882  
Long-term debt
    31,537       32,580       38,359       43,440       37,602  
Total U.S. Bancorp shareholders’ equity
    29,519       25,963       26,300       21,046       21,197  
Capital ratios
                                       
Tier 1 capital
    10.5 %     9.6 %     10.6 %     8.3 %     8.8 %
Total risk-based capital
    13.3       12.9       14.3       12.2       12.6  
Leverage
    9.1       8.5       9.8       7.9       8.2  
Tier 1 common equity to risk-weighted assets (c)
    7.8       6.8       5.1       5.6       6.0  
Tangible common equity to tangible assets (c)
    6.0       5.3       3.3       4.8       5.2  
Tangible common equity to risk-weighted assets (c)
    7.2       6.1       3.7       5.1       5.6  
 
 
 
(a) Presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding net securities gains (losses).
(c) See Non-Regulatory Capital Ratios on page 60.

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believes its policies, procedures and internal controls related to foreclosure practices materially follow established safeguards and legal requirements, the Company intends to comply with the expected requirements of the regulators in all respects. The Company does not believe those requirements will materially affect its financial position, results of operations, or ability to conduct normal business activities. In addition, the Company expects monetary penalties may be assessed but does not know the amount of any such penalties.
The Company’s financial strength, business model, credit culture and focus on efficiency have enabled it to deliver consistently profitable financial performance while operating in a very turbulent environment. Given the current economic environment, the Company will continue to focus on managing credit losses and operating costs, while also utilizing its financial strength to grow market share and profitability. Despite the expectation of significant impacts to the industry from recently enacted legislation, the Company believes it is well positioned for long-term growth in earnings per common share and an industry-leading return on common equity. The Company intends to achieve these financial objectives by providing high-quality customer service, ensuring regulatory compliance, continuing to carefully manage costs and, where appropriate, strategically investing in businesses that diversify and generate revenues, enhance the Company’s distribution network and expand its product offerings.
 
Earnings Summary The Company reported net income attributable to U.S. Bancorp of $3.3 billion in 2010, or $1.73 per diluted common share, compared with $2.2 billion, or $.97 per diluted common share, in 2009. Return on average assets and return on average common equity were 1.16 percent and 12.7 percent, respectively, in 2010, compared with .82 percent and 8.2 percent, respectively, in 2009. Diluted earnings per common share for 2010 included a non-recurring $.05 benefit related to an exchange of newly issued perpetual preferred stock for outstanding income trust securities (“ITS exchange”), net of related debt extinguishment costs. Also impacting 2010 were $175 million of provision for credit losses in excess of net charge-offs, net securities losses of $78 million, and a $103 million gain ($41 million after tax) resulting from the exchange of the Company’s long-term asset management business for an equity interest in Nuveen Investments and cash consideration (“Nuveen Gain”). The results for 2009 included $1.7 billion of provision for credit losses in excess of net charge-offs, net securities losses of $451 million, a $123 million FDIC special assessment, a $92 million gain from a corporate real estate transaction and a reduction to earnings per share from the recognition of $154 million of unaccreted preferred stock discount as a result of the redemption of preferred stock previously issued to the U.S. Department of the Treasury.
Total net revenue, on a taxable-equivalent basis, for 2010 was $1.5 billion (8.9 percent) higher than 2009, reflecting a 12.3 percent increase in net interest income and a 5.1 percent increase in total noninterest income. Net interest income increased in 2010 as a result of an increase in average earning assets and continued growth in low cost core deposit funding. Noninterest income increased principally due to higher payments-related and commercial products revenue and a decrease in net securities losses, partially offset by lower deposit service charges, trust and investment management fees and mortgage banking revenue.
Total noninterest expense in 2010 increased $1.1 billion (13.3 percent), compared with 2009, primarily due to the impact of acquisitions, higher total compensation and employee benefits expense and costs related to investments in affordable housing and other tax-advantaged projects, partially offset by lower FDIC deposit insurance expense due to the special assessment in 2009.
 
Acquisitions In 2009, the Company acquired the banking operations of First Bank of Oak Park Corporation (“FBOP”) in an FDIC assisted transaction, and in 2008 the Company acquired the banking operations of Downey Savings and Loan Association, F.A. and PFF Bank and Trust (“Downey” and “PFF”, respectively) in FDIC assisted transactions. Through these acquisitions, the Company increased its deposit base and branch franchise. In total, the Company acquired approximately $35 billion of assets in these acquisitions, most of which are covered under loss sharing agreements with the FDIC (“covered” assets). Under the terms of the loss sharing agreements, the FDIC will reimburse the Company for most of the losses on the covered assets.
In 2010, the Company acquired the securitization trust administration business of Bank of America, N.A. This transaction included the acquisition of $1.1 trillion of assets under administration and provided the Company with approximately $8 billion of deposits as of December 31, 2010.
In January 2011, the Company acquired the banking operations of First Community Bank of New Mexico (“FCB”) from the FDIC. The FCB transaction did not include a loss sharing agreement. The Company acquired 38 branch locations and approximately $2.1 billion in assets, assumed approximately $1.8 billion in liabilities, and received approximately $412 million in cash from the FDIC.

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Table 2    ANALYSIS OF NET INTEREST INCOME (a)
 
                                         
                      2010
    2009
 
(Dollars in Millions)   2010     2009     2008     v 2009     v 2008  
Components of Net Interest Income
                                       
Income on earning assets (taxable-equivalent basis)
  $ 12,375     $ 11,748     $ 12,630     $ 627     $ (882 )
Expense on interest-bearing liabilities (taxable-equivalent basis)
    2,587       3,032       4,764       (445 )     (1,732 )
                                         
Net interest income (taxable-equivalent basis)
  $ 9,788     $ 8,716     $ 7,866     $ 1,072     $ 850  
                                         
Net interest income, as reported
  $ 9,579     $ 8,518     $ 7,732     $ 1,061     $ 786  
                                         
                                         
Average Yields and Rates Paid
                                       
Earning assets yield (taxable-equivalent basis)
    4.91 %     4.95 %     5.87 %     (.04 )%     (.92 )%
Rate paid on interest-bearing liabilities (taxable-equivalent basis)
    1.24       1.55       2.58       (.31 )     (1.03 )%
                                         
Gross interest margin (taxable-equivalent basis)
    3.67 %     3.40 %     3.29 %     .27 %     .11 %
                                         
Net interest margin (taxable-equivalent basis)
    3.88 %     3.67 %     3.66 %     .21 %     .01 %
                                         
                                         
Average Balances
                                       
Investment securities
  $ 47,763     $ 42,809     $ 42,850     $ 4,954     $ (41 )
Loans
    193,022       185,805       165,552       7,217       20,253  
Earning assets
    252,042       237,287       215,046       14,755       22,241  
Interest-bearing liabilities
    209,113       195,614       184,932       13,499       10,682  
Net free funds (b)
    42,929       41,673       30,114       1,256       11,559  
                                         
                                         
 
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a federal tax rate of 35 percent.
(b) Represents noninterest-bearing deposits, other noninterest-bearing liabilities and equity, allowance for loan losses and unrealized gain (loss) on available-for-sale securities less non-earning assets.

 
STATEMENT OF INCOME ANALYSIS
 
Net Interest Income Net interest income, on a taxable-equivalent basis, was $9.8 billion in 2010, compared with $8.7 billion in 2009 and $7.9 billion in 2008. The $1.1 billion (12.3 percent) increase in net interest income in 2010, compared with 2009, was primarily the result of continued growth in lower cost core deposit funding and increases in average earning assets. Average earning assets were $14.8 billion (6.2 percent) higher in 2010, compared with 2009, driven by increases in average loans and investment securities. Average deposits increased $16.9 billion (10.1 percent) in 2010, compared with 2009. The net interest margin in 2010 was 3.88 percent, compared with 3.67 percent in 2009 and 3.66 percent in 2008. The increase in net interest margin was principally due to the impact of favorable funding rates, the result of the increase in deposits and improved credit spreads. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of the Company’s net interest income to changes in interest rates.
Average total loans were $193.0 billion in 2010, compared with $185.8 billion in 2009. The $7.2 billion (3.9 percent) increase was driven by growth in residential mortgages, retail loans, commercial real estate loans and acquisition-related covered loans, partially offset by a $5.8 billion (11.0 percent) decline in commercial loans, which was principally the result of lower utilization of available commitments by customers. Residential mortgage growth of $3.2 billion (13.2 percent) reflected increased origination and refinancing activity throughout most of 2009 and the second half of 2010 as a result of market interest rate declines. Average retail loans increased $2.1 billion (3.3 percent) year-over-year, driven by increases in credit card and installment (primarily automobile) loans. Average credit card balances for 2010 were $1.5 billion (9.8 percent) higher than 2009, reflecting growth in existing portfolios and portfolio purchases during 2009 and the second quarter of 2010. Growth in average commercial real estate balances of $518 million (1.5 percent) reflected the impact of new business activity, partially offset by customer debt deleveraging. Average covered loans were $19.9 billion in 2010, compared with $12.7 billion in 2009, reflecting the FBOP acquisition in the fourth quarter of 2009.
Average investment securities in 2010 were $5.0 billion (11.6 percent) higher than 2009, primarily due to purchases of U.S. government agency-backed securities and the consolidation of $.6 billion of held-to-maturity securities held in a variable interest entity (“VIE”) due to the adoption of new authoritative accounting guidance effective January 1, 2010.
Average total deposits for 2010 were $16.9 billion (10.1 percent) higher than 2009. Of this increase,

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Table 3    NET INTEREST INCOME — CHANGES DUE TO RATE AND VOLUME (a)
 
                                                 
    2010 v 2009     2009 v 2008  
(Dollars in Millions)   Volume     Yield/Rate     Total     Volume     Yield/Rate     Total  
Increase (Decrease) in
                                               
Interest Income
                                               
Investment securities
  $ 205     $ (212 )   $ (7 )   $ (2 )   $ (388 )   $ (390 )
Loans held for sale
    (10 )     (21 )     (31 )     111       (61 )     50  
Loans
                                               
Commercial loans
    (228 )     131       (97 )     (74 )     (554 )     (628 )
Commercial real estate
    22       55       77       150       (468 )     (318 )
Residential mortgage
    182       (126 )     56       75       (114 )     (39 )
Retail loans
    137       10       147       480       (489 )     (9 )
                                                 
Total loans, excluding covered loans
    113       70       183       631       (1,625 )     (994 )
Covered loans
    327       80       407       534       (17 )     517  
                                                 
Total loans
    440       150       590       1,165       (1,642 )     (477 )
Other earning assets
    89       (14 )     75       7       (72 )     (65 )
                                                 
Total earning assets
    724       (97 )     627       1,281       (2,163 )     (882 )
Interest Expense
                                               
Interest-bearing deposits
                                               
Interest checking
    7       (8 )     (1 )     46       (219 )     (173 )
Money market accounts
    36       (49 )     (13 )     69       (254 )     (185 )
Savings accounts
    42       8       50       24       27       51  
Time certificates of deposit less than $100,000
    (32 )     (126 )     (158 )     149       (160 )     (11 )
Time deposits greater than $100,000
    (46 )     (106 )     (152 )     (5 )     (356 )     (361 )
                                                 
Total interest-bearing deposits
    7       (281 )     (274 )     283       (962 )     (679 )
Short-term borrowings
    86       (81 )     5       (272 )     (321 )     (593 )
Long-term debt
    (199 )     23       (176 )     (121 )     (339 )     (460 )
                                                 
Total interest-bearing liabilities
    (106 )     (339 )     (445 )     (110 )     (1,622 )     (1,732 )
                                                 
Increase (decrease) in net interest income
  $ 830     $ 242     $ 1,072     $ 1,391     $ (541 )   $ 850  
                                                 
                                                 
 
(a) This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis utilizing a tax rate of 35 percent. This table does not take into account the level of noninterest-bearing funding, nor does it fully reflect changes in the mix of assets and liabilities. The change in interest not solely due to changes in volume or rates has been allocated on a pro-rata basis to volume and yield/rate.

$12.0 billion related to deposits assumed in the FBOP acquisition. Excluding deposits from acquisitions, 2010 average total deposits increased $6.8 billion (4.1 percent) over 2009. Average noninterest-bearing deposits in 2010 were $2.3 billion (6.1 percent) higher than 2009, primarily due to growth in Consumer and Small Business Banking and Wholesale Banking and Commercial Real Estate balances. Average total savings deposits were $19.0 billion (23.2 percent) higher in 2010, compared with 2009, due to an increase in savings account balances of $7.8 billion (59.5 percent) resulting from continued strong participation in a product offered by Consumer and Small Business Banking, higher money market savings balances of $7.9 billion (24.8 percent) from higher corporate trust and Consumer and Small Business Banking balances, and higher interest checking account balances of $3.3 billion (9.0 percent) resulting from increases in Consumer and Small Business Banking and institutional trust accounts. Average time certificates of deposit less than $100,000 were lower in 2010 by $1.3 billion (7.0 percent), compared with 2009, reflecting the net impact of balances assumed in the FBOP acquisition, more than offset by expected run-off of balances assumed in the PFF and Downey acquisitions and lower renewals given the current interest rate environment. Average time deposits greater than $100,000 were $3.1 billion (10.3 percent) lower in 2010, compared with 2009, reflecting the net impact of acquisitions, more than offset by a decrease in required overall wholesale funding. Time deposits greater than $100,000 are managed as an alternative to other funding sources, such as wholesale borrowing, based largely on relative pricing.
The $.8 billion (10.8 percent) increase in net interest income in 2009, compared with 2008, was attributable to growth in average earning assets and lower cost core deposit

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funding. The $22.2 billion (10.3 percent) increase in average earning assets in 2009 over 2008 was principally a result of growth in total average loans, including originated and acquired loans, and loans held for sale.
Average total loans increased $20.3 billion (12.2 percent) in 2009, compared with 2008, driven by new loan originations, acquisitions and portfolio purchases. Average covered loans increased $11.4 billion, due to the timing of the Downey, PFF and FBOP acquisitions. Average retail loans increased $6.5 billion (11.6 percent), driven by increases in credit card, home equity and student loans, reflecting both growth in existing portfolios and portfolio purchases during 2009.
Average investment securities in 2009 were essentially unchanged from 2008, as security purchases offset maturities and sales. In 2009, the composition of the Company’s investment portfolio shifted to a larger proportion in U.S. Treasury, agency and agency mortgage-backed securities, compared with 2008.
Average noninterest-bearing deposits in 2009 were $9.1 billion (31.7 percent) higher than 2008. The increase reflected higher business demand deposit balances, partially offset by lower trust demand deposits. Average total savings products increased $18.4 billion (29.0 percent) in 2009, compared with 2008, principally as a result of a $7.2 billion increase in savings accounts from higher Consumer and Small Business Banking balances, a $5.7 billion (18.4 percent) increase in interest checking balances from higher government and consumer banking customer balances and acquisitions, and a $5.5 billion (20.9 percent) increase in money market savings balances from higher broker-dealer, corporate trust and institutional trust customer balances and acquisitions. Average time certificates of deposit less than $100,000 increased $4.3 billion (31.6 percent) primarily due to acquisitions. Average time deposits greater than $100,000 decreased $.2 billion (.7 percent) in 2009, compared with 2008.
 
Provision for Credit Losses The provision for credit losses reflects changes in the credit quality of the entire portfolio of loans, and is maintained at a level considered appropriate by management for probable and estimable incurred losses, based on factors discussed in the “Analysis and Determination of Allowance for Credit Losses” section.
In 2010, the provision for credit losses was $4.4 billion, compared with $5.6 billion and $3.1 billion in 2009 and 2008, respectively. The provision for credit losses exceeded net charge-offs by $175 million in 2010, $1.7 billion in 2009 and $1.3 billion in 2008. The $1.2 billion decrease in provision for credit losses in 2010, compared with 2009, reflected improving credit trends and the underlying risk profile of the loan portfolio as economic conditions continued to stabilize. Accruing loans ninety days or more past due decreased by $431 million (excluding covered loans) from December 31, 2009 to December 31, 2010, reflecting a moderation in the level of stress in economic conditions during 2010. Delinquencies in most major loan categories began to decrease in the third quarter of 2010. Nonperforming assets decreased $553 million (excluding covered assets) from December 31, 2009 to December 31, 2010, principally in the construction and land development portfolios, as the Company continued to resolve and reduce exposure to these assets. However, net charge-offs increased $313 million (8.1 percent) over 2009, as borrowers still impacted by weak economic conditions and real estate markets defaulted on loans.
The $2.5 billion increase in the provision for credit losses in 2009, compared with 2008 and the increase in the allowance for credit losses from December 31, 2008 to December 31, 2009 reflected deterioration in economic conditions during most of 2009 and the corresponding impact on the commercial, commercial real estate and consumer loan portfolios. It also reflected stress in the residential real estate markets. Nonperforming assets increased $1.9 billion (excluding covered assets) from December 31, 2008 to December 31, 2009. The increase was driven primarily by stress in residential home construction and related industries, deterioration in the residential mortgage portfolio, as well as an increase in foreclosed properties and the impact of the economic slowdown on commercial and consumer customers. Net charge-offs increased $2.1 billion in 2009, compared with 2008, primarily due to economic factors affecting the residential housing markets, including homebuilding and related industries, commercial real estate properties, and credit card and other consumer and commercial loans, as the economy weakened and unemployment increased during the period.
Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
 
Noninterest Income Noninterest income in 2010 was $8.4 billion, compared with $8.0 billion in 2009 and $6.8 billion in 2008. The $408 million (5.1 percent) increase in 2010 over 2009, was due to higher payments-related revenues of 6.3 percent, principally due to increased

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Table 4    NONINTEREST INCOME
 
                                         
                      2010
    2009
 
(Dollars in Millions)   2010     2009     2008     v 2009     v 2008  
Credit and debit card revenue
  $ 1,091     $ 1,055     $ 1,039       3.4 %     1.5 %
Corporate payment products revenue
    710       669       671       6.1       (.3 )
Merchant processing services
    1,253       1,148       1,151       9.1       (.3 )
ATM processing services
    423       410       366       3.2       12.0  
Trust and investment management fees
    1,080       1,168       1,314       (7.5 )     (11.1 )
Deposit service charges
    710       970       1,081       (26.8 )     (10.3 )
Treasury management fees
    555       552       517       .5       6.8  
Commercial products revenue
    771       615       492       25.4       25.0  
Mortgage banking revenue
    1,003       1,035       270       (3.1 )     *
Investment products fees and commissions
    111       109       147       1.8       (25.9 )
Securities gains (losses), net
    (78 )     (451 )     (978 )     82.7       53.9  
Other
    731       672       741       8.8       (9.3 )
                                         
Total noninterest income
  $ 8,360     $ 7,952     $ 6,811       5.1 %     16.8 %
                                         
                                         
 
* Not meaningful

transaction volumes and business expansion; an increase in commercial products revenue of 25.4 percent, attributable to higher standby letters of credit fees, commercial loan and syndication fees and other capital markets revenue; a decrease in net securities losses of 82.7 percent, primarily due to lower impairments in the current year; and an increase in other income. The increase in other income of 8.8 percent, reflected the Nuveen Gain, higher 2010 gains related to the Company’s investment in Visa Inc. and higher retail lease residual valuation income, partially offset by the $92 million gain on a corporate real estate transaction in 2009, a payments-related contract termination gain that occurred in 2009 and lower customer derivative revenue. Mortgage banking revenue decreased 3.1 percent, principally due to lower origination and sales revenue and an unfavorable net change in the valuation of mortgage servicing rights (“MSRs”) and related economic hedging activities, partially offset by higher servicing income. Deposit service charges decreased 26.8 percent as a result of Company-initiated and regulatory revisions to overdraft fee policies, partially offset by core account growth. Trust and investment management fees declined 7.5 percent because low interest rates negatively impacted money market investment fees and money market fund balances declined as a result of customers migrating balances from money market funds to deposits.
The $1.2 billion (16.8 percent) increase in noninterest income in 2009 over 2008 was principally due to a $765 million increase in mortgage banking revenue, the result of strong mortgage loan production, as the Company gained market share and low interest rates drove refinancing, and an increase in the valuation of MSRs net of related economic hedging instruments. Other increases in noninterest income included higher ATM processing services of 12.0 percent, related to growth in transaction volumes and business expansion, higher treasury management fees of 6.8 percent, resulting from increased new business activity and pricing, and a 25.0 percent increase in commercial products revenue due to higher letters of credit, capital markets and other commercial loan fees. Net securities losses in 2009 were 53.9 percent lower than 2008. Other income decreased 9.3 percent due to higher gains in 2008 related to the Company’s ownership position in Visa Inc., partially offset by the gain from a corporate real estate transaction and the payments-related contract termination gain. Deposit service charges decreased 10.3 percent primarily due to a decrease in the number of transaction-related fees, which more than offset account growth. Trust and investment management fees declined 11.1 percent, reflecting lower assets under management account volume and the impact of low interest rates on money market investment fees. Investment product fees and commissions declined 25.9 percent due to lower sales levels in 2009, compared with 2008.
The Company expects recently enacted legislation will have a negative impact on noninterest income, principally related to debit interchange fee revenue, in future years.
 
Noninterest Expense Noninterest expense in 2010 was $9.4 billion, compared with $8.3 billion in 2009 and $7.3 billion in 2008. The Company’s efficiency ratio was 51.5 percent in 2010, compared with 48.4 percent in 2009. The $1.1 billion (13.3 percent) increase in noninterest expense in 2010 over 2009 was principally due to acquisitions, increased total compensation and employee benefits expense and higher costs related to investments in affordable housing and other tax-advantaged projects. Total

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Table 5    NONINTEREST EXPENSE
 
                                         
                      2010
    2009
 
(Dollars in Millions)   2010     2009     2008     v 2009     v 2008  
Compensation
  $ 3,779     $ 3,135     $ 3,039       20.5 %     3.2 %
Employee benefits
    694       574       515       20.9       11.5  
Net occupancy and equipment
    919       836       781       9.9       7.0  
Professional services
    306       255       240       20.0       6.3  
Marketing and business development
    360       378       310       (4.8 )     21.9  
Technology and communications
    744       673       598       10.5       12.5  
Postage, printing and supplies
    301       288       294       4.5       (2.0 )
Other intangibles
    367       387       355       (5.2 )     9.0  
Other
    1,913       1,755       1,216       9.0       44.3  
                                         
Total noninterest expense
  $ 9,383     $ 8,281     $ 7,348       13.3 %     12.7 %
                                         
Efficiency ratio (a)
    51.5 %     48.4 %     46.9 %                
                                         
                                         
 
(a) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.

compensation and employee benefits expense increased 20.6 percent, reflecting acquisitions, branch expansion and other initiatives, the elimination of a five percent cost reduction program that was in effect during 2009, higher incentive compensation costs related to the Company’s improved financial results, merit increases, and increased pension costs associated with previous declines in the value of pension assets. Net occupancy and equipment expense and professional services expense increased 9.9 percent and 20.0 percent, respectively, principally due to acquisitions and other business initiatives. Technology and communications expense increased 10.5 percent as a result of business initiatives and volume increases across various business lines. Postage, printing and supplies expense increased 4.5 percent, principally due to payments-related business initiatives. Other expense increased 9.0 percent, reflecting higher costs related to investments in affordable housing and other tax-advantaged projects, which reduce the Company’s income tax expense, and higher other real estate owned (“OREO”) costs, partially offset by the $123 million FDIC special assessment in 2009. Marketing and business development expense decreased 4.8 percent, largely due to payments-related initiatives during 2009. Other intangibles expense decreased 5.2 percent due to the declining level or completion of scheduled amortization of certain intangibles.
The $933 million (12.7 percent) increase in noninterest expense in 2009, compared with 2008, was principally due to the impact of acquisitions, higher ongoing FDIC deposit insurance expense and the $123 million special assessment in 2009, costs related to affordable housing and other tax-advantaged investments, and marketing and business development expense. Compensation expense increased 3.2 percent primarily due to acquisitions, partially offset by reductions from cost containment efforts. Employee benefits expense increased 11.5 percent primarily due to increased pension costs associated with previous declines in the value of pension assets. Net occupancy and equipment expense, and professional services expense increased 7.0 percent and 6.3 percent, respectively, primarily due to acquisitions, as well as branch-based and other business expansion initiatives. Marketing and business development expense increased 21.9 percent, principally due to costs related to the introduction of new credit card products and advertising related to the Company’s national branding strategy, while technology and business communications expense increased 12.5 percent, primarily due to business expansion initiatives. Other intangibles expense increased 9.0 percent due to acquisitions. Other expense increased 44.3 percent due to higher FDIC deposit insurance expense, including the $123 million special assessment in 2009. Other expense also reflected increased costs related to investments in affordable housing and other tax-advantaged projects, higher merchant processing expenses, growth in mortgage servicing expenses and costs associated with OREO.
The Company expects recently enacted legislation will increase deposit insurance expense in future years.
 
Pension Plans Because of the long-term nature of pension plans, the related accounting is complex and can be impacted by several factors, including investment funding policies, accounting methods, and actuarial assumptions.
The Company’s pension accounting reflects the long-term nature of the benefit obligations and the investment horizon of plan assets. Amounts recorded in the financial statements reflect actuarial assumptions about participant benefits and plan asset returns. Changes in actuarial assumptions, and differences in actual plan experience compared with actuarial assumptions, are deferred and recognized in expense in future periods. Differences related to participant benefits are

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Table 6    LOAN PORTFOLIO DISTRIBUTION
 
                                                                                 
    2010     2009     2008     2007     2006  
          Percent
          Percent
          Percent
          Percent
          Percent
 
At December 31 (Dollars in Millions)   Amount     of Total     Amount     of Total     Amount     of Total     Amount     of Total     Amount     of Total  
Commercial
                                                                               
Commercial
  $ 42,272       21.5 %   $ 42,255       21.7 %   $ 49,759       26.9 %   $ 44,832       29.1 %   $ 40,640       28.3 %
Lease financing
    6,126       3.1       6,537       3.4       6,859       3.7       6,242       4.1       5,550       3.9  
                                                                                 
Total commercial
    48,398       24.6       48,792       25.1       56,618       30.6       51,074       33.2       46,190       32.2  
Commercial Real Estate
                                                                               
Commercial mortgages
    27,254       13.8       25,306       13.0       23,434       12.7       20,146       13.1       19,711       13.7  
Construction and development
    7,441       3.8       8,787       4.5       9,779       5.3       9,061       5.9       8,934       6.2  
                                                                                 
Total commercial real estate
    34,695       17.6       34,093       17.5       33,213       18.0       29,207       19.0       28,645       19.9  
Residential Mortgages
                                                                               
Residential mortgages
    24,315       12.3       20,581       10.6       18,232       9.9       17,099       11.1       15,316       10.7  
Home equity loans, first liens
    6,417       3.3       5,475       2.8       5,348       2.9       5,683       3.7       5,969       4.1  
                                                                                 
Total residential mortgages
    30,732       15.6       26,056       13.4       23,580       12.8       22,782       14.8       21,285       14.8  
Retail
                                                                               
Credit card
    16,803       8.5       16,814       8.6       13,520       7.3       10,956       7.1       8,670       6.0  
Retail leasing
    4,569       2.3       4,568       2.3       5,126       2.8       5,969       3.9       6,960       4.9  
Home equity and second mortgages
    18,940       9.6       19,439       10.0       19,177       10.4       16,441       10.7       15,523       10.8  
Other retail
                                                                               
Revolving credit
    3,472       1.8       3,506       1.8       3,205       1.7       2,731       1.8       2,563       1.8  
Installment
    5,459       2.8       5,455       2.8       5,525       3.0       5,246       3.4       4,478       3.1  
Automobile
    10,897       5.5       9,544       4.9       9,212       5.0       8,970       5.8       8,693       6.1  
Student
    5,054       2.5       4,629       2.4       4,603       2.5       451       .3       590       .4  
                                                                                 
Total other retail
    24,882       12.6       23,134       11.9       22,545       12.2       17,398       11.3       16,324       11.4  
                                                                                 
Total retail
    65,194       33.0       63,955       32.8       60,368       32.6       50,764       33.0       47,477       33.1  
                                                                                 
Total loans, excluding covered loans
    179,019       90.8       172,896       88.8       173,779       94.0       153,827       100.0       143,597       100.0  
Covered loans
    18,042       9.2       21,859       11.2       11,176       6.0                          
                                                                                 
Total loans
  $ 197,061       100.0 %   $ 194,755       100.0 %   $ 184,955       100.0 %   $ 153,827       100.0 %   $ 143,597       100.0 %
                                                                                 
                                                                                 

recognized over the future service period of the employees. Differences related to the expected return on plan assets are included in expense over an approximately twelve-year period.
The Company expects pension expense to increase $111 million in 2011, primarily driven by a $34 million increase related to utilizing a lower discount rate, a $29 million increase related to the amortization of unrecognized actuarial losses from prior years, a $6 million increase related to lower expected returns on plan assets and a $42 million increase related to amortization of other actuarial losses, including changes in assumptions based on actuarial review of past experience and compensation levels. If performance of plan assets equals the actuarially-assumed long-term rate of return (“LTROR”), the cumulative asset return difference of $255 million at December 31, 2010 will incrementally increase pension expense $34 million in 2012 and $47 million in 2013, and incrementally decrease pension expense $18 million in 2014 and $5 million in 2015. Because of the complexity of forecasting pension plan activities, the accounting methods utilized for pension plans, the Company’s ability to respond to factors affecting the plans and the hypothetical nature of actuarial assumptions, actual pension expense will differ from these amounts.
Refer to Note 17 of the Notes to the Consolidated Financial Statements for further information on the Company’s pension plan funding practices, investment policies and asset allocation strategies, and accounting policies for pension plans.

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Table 7    COMMERCIAL LOANS BY INDUSTRY GROUP AND GEOGRAPHY, EXCLUDING COVERED LOANS
 
                                 
    December 31, 2010     December 31, 2009  
(Dollars in Millions)   Loans     Percent     Loans     Percent  
Industry Group
                               
Consumer products and services
  $ 7,599       15.7 %   $ 8,197       16.8 %
Financial services
    5,785       12.0       5,123       10.5  
Healthcare
    3,744       7.7       2,000       4.1  
Capital goods
    3,696       7.7       3,806       7.8  
Commercial services and supplies
    3,543       7.3       3,757       7.7  
Agriculture
    2,539       5.3       3,415       7.0  
Property management and development
    2,489       5.1       2,586       5.3  
Consumer staples
    2,438       5.0       1,659       3.4  
Transportation
    1,926       4.0       1,708       3.5  
Energy
    1,788       3.7       1,122       2.3  
Paper and forestry products, mining and basic materials
    1,738       3.6       1,952       4.0  
Private investors
    1,712       3.5       1,757       3.6  
Information technology
    1,543       3.2       878       1.8  
Other
    7,858       16.2       10,832       22.2  
                                 
Total
  $ 48,398       100.0 %   $ 48,792       100.0 %
                                 
                                 
Geography
                               
California
  $ 5,588       11.5 %   $ 6,685       13.7 %
Colorado
    1,974       4.1       1,903       3.9  
Illinois
    2,457       5.1       3,611       7.4  
Minnesota
    3,993       8.2       3,757       7.7  
Missouri
    2,020       4.2       1,708       3.5  
Ohio
    2,464       5.1       2,196       4.5  
Oregon
    1,508       3.1       1,610       3.3  
Washington
    2,259       4.7       2,196       4.5  
Wisconsin
    2,144       4.4       2,098       4.3  
Iowa, Kansas, Nebraska, North Dakota, South Dakota
    3,465       7.2       3,123       6.4  
Arkansas, Indiana, Kentucky, Tennessee
    2,798       5.8       1,805       3.7  
Idaho, Montana, Wyoming
    1,069       2.2       1,073       2.2  
Arizona, Nevada, Utah
    1,741       3.6       2,000       4.1  
                                 
Total banking region
    33,480       69.2       33,765       69.2  
Outside the Company’s banking region
    14,918       30.8       15,027       30.8  
                                 
Total
  $ 48,398       100.0 %   $ 48,792       100.0 %
                                 
 

 
The following table shows an analysis of hypothetical changes in the LTROR and discount rate:
                 
    Down 100
    Up 100
 
LTROR (Dollars in Millions)   Basis Points     Basis Points  
   
Incremental benefit (expense)
  $ (25 )   $ 25  
Percent of 2010 net income
    (.47 )%     .47 %
 
 
    Down 100
    Up 100
 
Discount Rate (Dollars in Millions)   Basis Points     Basis Points  
   
Incremental benefit (expense)
  $ (77 )   $ 66  
Percent of 2010 net income
    (1.44 )%     1.23 %
 
 
 
Income Tax Expense The provision for income taxes was $935 million (an effective rate of 22.3 percent) in 2010, compared with $395 million (an effective rate of 15.0 percent) in 2009 and $1.1 billion (an effective rate of 26.5 percent) in 2008. The increase in the effective tax rate over 2009 primarily reflected the marginal impact of higher pre-tax earnings year-over-year and the 2010 Nuveen Gain.
For further information on income taxes, refer to Note 19 of the Notes to Consolidated Financial Statements.
 
 
BALANCE SHEET ANALYSIS
 
Average earning assets were $252.0 billion in 2010, compared with $237.3 billion in 2009. The increase in average earning assets of $14.7 billion (6.2 percent) was due to growth in total average loans of $7.2 billion (3.9 percent) and investment securities of $5.0 billion (11.6 percent).
For average balance information, refer to Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 128 and 129.

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Table 8    COMMERCIAL REAL ESTATE BY PROPERTY TYPE AND GEOGRAPHY, EXCLUDING COVERED LOANS
 
                                 
    December 31, 2010     December 31, 2009  
(Dollars in Millions)   Loans     Percent     Loans     Percent  
Property Type
                               
Business owner occupied
  $ 11,416       32.9 %   $ 10,944       32.1 %
Commercial property
                               
Industrial
    1,530       4.4       1,500       4.4  
Office
    3,783       10.9       3,580       10.5  
Retail
    4,288       12.4       4,500       13.2  
Other commercial
    3,551       10.2       3,614       10.6  
Homebuilders
                               
Condominiums
    463       1.3       614       1.8  
Other residential
    1,144       3.3       1,704       5.0  
Multi-family
    6,130       17.7       5,625       16.5  
Hotel/motel
    2,134       6.2       1,807       5.3  
Health care facilities
    256       .7       205       .6  
                                 
Total
  $ 34,695       100.0 %   $ 34,093       100.0 %
                                 
                                 
Geography
                               
California
  $ 7,515       21.6 %   $ 7,432       21.8 %
Colorado
    1,524       4.4       1,568       4.6  
Illinois
    1,248       3.6       1,227       3.6  
Minnesota
    1,805       5.2       1,739       5.1  
Missouri
    1,558       4.5       1,568       4.6  
Ohio
    1,402       4.0       1,364       4.0  
Oregon
    1,809       5.2       1,773       5.2  
Washington
    3,488       10.1       3,307       9.7  
Wisconsin
    1,724       5.0       1,568       4.6  
Iowa, Kansas, Nebraska, North Dakota, South Dakota
    2,205       6.4       2,216       6.5  
Arkansas, Indiana, Kentucky, Tennessee
    1,634       4.7       1,602       4.7  
Idaho, Montana, Wyoming
    1,185       3.4       1,227       3.6  
Arizona, Nevada, Utah
    2,868       8.3       3,034       8.9  
                                 
Total banking region
    29,965       86.4       29,625       86.9  
Outside the Company’s banking region
    4,730       13.6       4,468       13.1  
                                 
Total
  $ 34,695       100.0 %   $ 34,093       100.0 %
                                 
                                 

 
Loans The Company’s loan portfolio was $197.1 billion at December 31, 2010, an increase of $2.3 billion (1.2 percent) from December 31, 2009. The increase was driven by growth in residential mortgages of $4.7 billion (17.9 percent), retail loans of $1.2 billion (1.9 percent) and commercial real estate loans of $.6 billion (1.8 percent), partially offset by decreases in commercial loans of $.4 billion (.8 percent) and acquisition-related covered loans of $3.8 billion (17.5 percent). Table 6 provides a summary of the loan distribution by product type, while Table 10 provides a summary of the selected loan maturity distribution by loan category. Average total loans increased $7.2 billion (3.9 percent) in 2010, compared with 2009. The increase was due to growth in most major loan categories in 2010.
 
Commercial Commercial loans, including lease financing, decreased $394 million (.8 percent) as of December 31, 2010, compared with December 31, 2009. Average commercial loans decreased $5.8 billion (11.0 percent) in 2010, compared with 2009. These decreases were primarily due to lower utilization by customers of available commitments, partially offset by new loan commitments. Table 7 provides a summary of commercial loans by industry and geographical locations.
 
Commercial Real Estate The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction loans, increased $602 million (1.8 percent) at December 31, 2010, compared with December 31, 2009. Average commercial real estate loans increased $518 million (1.5 percent) in 2010, compared with 2009. The growth principally reflected the impact of new business activity, partially offset by customer debt deleveraging. Table 8 provides a summary of commercial real estate by property type and geographical location. The collateral for $4.5 billion of commercial real estate loans

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Table 9    RESIDENTIAL MORTGAGES AND RETAIL LOANS BY GEOGRAPHY, EXCLUDING COVERED LOANS
 
                                 
    December 31, 2010     December 31, 2009  
(Dollars in Millions)   Loans     Percent     Loans     Percent  
Residential Mortgages
                               
California
  $ 3,339       10.9 %   $ 2,487       9.5 %
Colorado
    1,947       6.3       1,755       6.7  
Illinois
    2,123       6.9       1,676       6.4  
Minnesota
    2,457       8.0       2,216       8.5  
Missouri
    1,643       5.4       1,467       5.6  
Ohio
    1,824       5.9       1,682       6.5  
Oregon
    1,246       4.1       1,065       4.1  
Washington
    1,726       5.6       1,414       5.4  
Wisconsin
    1,171       3.8       1,067       4.1  
Iowa, Kansas, Nebraska, North Dakota, South Dakota
    1,522       5.0       1,393       5.4  
Arkansas, Indiana, Kentucky, Tennessee
    2,431       7.9       1,947       7.5  
Idaho, Montana, Wyoming
    688       2.2       601       2.3  
Arizona, Nevada, Utah
    1,857       6.0       1,657       6.4  
                                 
Total banking region
    23,974       78.0       20,427       78.4  
Outside the Company’s banking region
    6,758       22.0       5,629       21.6  
                                 
Total
  $ 30,732       100.0 %   $ 26,056       100.0 %
                                 
                                 
Retail Loans
                               
California
  $ 7,656       11.7 %   $ 8,442       13.2 %
Colorado
    2,984       4.6       3,390       5.3  
Illinois
    3,037       4.6       3,262       5.1  
Minnesota
    5,940       9.1       6,396       10.0  
Missouri
    2,725       4.2       2,942       4.6  
Ohio
    3,974       6.1       3,837       6.0  
Oregon
    2,592       4.0       2,878       4.5  
Washington
    3,029       4.6       3,262       5.1  
Wisconsin
    2,926       4.5       2,878       4.5  
Iowa, Kansas, Nebraska, North Dakota, South Dakota
    3,277       5.0       3,581       5.6  
Arkansas, Indiana, Kentucky, Tennessee
    4,110       6.3       4,285       6.7  
Idaho, Montana, Wyoming
    1,606       2.5       1,791       2.8  
Arizona, Nevada, Utah
    2,774       4.3       3,006       4.7  
                                 
Total banking region
    46,630       71.5       49,950       78.1  
Outside the Company’s banking region
    18,564       28.5       14,005       21.9  
                                 
Total
  $ 65,194       100.0 %   $ 63,955       100.0 %
                                 
                                 

included in covered loans at December 31, 2010 was in California, compared with $4.7 billion at December 31, 2009.
The Company classifies loans as construction until the completion of the construction phase. Following construction, if a loan is retained, the loan is reclassified to the commercial mortgage category. In 2010, approximately $995 million of construction loans were reclassified to the commercial mortgage loan category for bridge financing after completion of the construction phase. At December 31, 2010, $270 million of tax-exempt industrial development loans were secured by real estate. The Company’s commercial real estate mortgages and construction loans had unfunded commitments of $6.5 billion and $6.1 billion at December 31, 2010 and 2009, respectively.
The Company also finances the operations of real estate developers and other entities with operations related to real estate. These loans are not secured directly by real estate and are subject to terms and conditions similar to commercial loans. These loans were included in the commercial loan category and totaled $1.7 billion at December 31, 2010.
 
Residential Mortgages Residential mortgages held in the loan portfolio at December 31, 2010, increased $4.7 billion (17.9 percent) over December 31, 2009. Average residential mortgages increased $3.2 billion (13.2 percent) in 2010, compared with 2009. The growth reflected increased origination and refinancing activity in the second half of 2010 as a result of the low interest rate environment. Most

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Table 10    SELECTED LOAN MATURITY DISTRIBUTION
 
                                 
          Over One
             
    One Year
    Through
    Over Five
       
December 31, 2010 (Dollars in Millions)   or Less     Five Years     Years     Total  
   
 
Commercial
  $ 20,697     $ 25,625     $ 2,076     $ 48,398  
Commercial real estate
    10,684       17,252       6,759       34,695  
Residential mortgages
    1,728       3,608       25,396       30,732  
Retail
    25,679       24,303       15,212       65,194  
Covered loans
    4,814       4,445       8,783       18,042  
     
     
Total loans
  $ 63,602     $ 75,233     $ 58,226     $ 197,061  
Total of loans due after one year with
                               
Predetermined interest rates
                          $ 61,855  
Floating interest rates
                            71,604  
 
 

loans retained in the portfolio are to customers with prime or near-prime credit characteristics at the date of origination.
 
Retail Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, increased $1.2 billion (1.9 percent) at December 31, 2010, compared with December 31, 2009. The increase was primarily driven by higher installment (primarily automobile) and federally-guaranteed student loans, partially offset by lower credit card and home equity balances. Average retail loans increased $2.1 billion (3.3 percent) in 2010, compared with 2009, as a result of current year growth and credit card portfolio purchases in 2009 and 2010.
Of the total retail loans and residential mortgages outstanding, excluding covered assets, at December 31, 2010, approximately 73.6 percent were to customers located in the Company’s primary banking region. Table 9 provides a geographic summary of residential mortgages and retail loans outstanding as of December 31, 2010 and 2009. The collateral for $5.2 billion of residential mortgages and retail loans included in covered loans at December 31, 2010 was in California, compared with $6.6 billion at December 31, 2009.
 
Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were $8.4 billion at December 31, 2010, compared with $4.8 billion at December 31, 2009. The increase in loans held for sale was principally due to a higher level of mortgage loan origination and refinancing activity in the second half of 2010.
 
Investment Securities The Company uses its investment securities portfolio for several purposes. The portfolio serves as a vehicle to manage enterprise interest rate risk, provides liquidity, including the ability to meet proposed regulatory requirements, generates interest and dividend income from the investment of excess funds depending on loan demand and is used as collateral for public deposits and wholesale funding sources. While the Company intends to hold its investment securities indefinitely, it may sell available-for-sale securities in response to structural changes in the balance sheet and related interest rate risk and to meet liquidity requirements, among other factors.
At December 31, 2010, investment securities totaled $53.0 billion, compared with $44.8 billion at December 31, 2009. The $8.2 billion (18.3 percent) increase reflected $7.3 billion of net investment purchases, the consolidation of $.6 billion of held-to-maturity securities held in a VIE due to the adoption of new authoritative accounting guidance effective January 1, 2010, and a $.3 billion favorable change in net unrealized gains (losses) on available-for-sale securities.
Average investment securities were $47.8 billion in 2010, compared with $42.8 billion in 2009. The weighted-average yield of the available-for-sale portfolio was 3.41 percent at December 31, 2010, compared with 4.00 percent at December 31, 2009. The average maturity of the available-for-sale portfolio was 7.4 years at December 31, 2010, compared with 7.1 years at December 31, 2009. Investment securities by type are shown in Table 11.
The Company conducts a regular assessment of its investment portfolio to determine whether any securities are other-than-temporarily impaired. At December 31, 2010, the Company’s net unrealized loss on available-for-sale securities was $346 million, compared with $635 million at December 31, 2009. The favorable change in net unrealized gains (losses) was primarily due to increases in the fair value of agency and certain non-agency mortgage-backed securities, partially offset by decreases in the fair value of obligations of state and political subdivisions securities as a result of market interest rate increases near the end of 2010. Unrealized losses on available-for-sale securities in an unrealized loss position totaled $1.2 billion at December 31, 2010, compared with $1.3 billion at December 31, 2009. When assessing unrealized losses for other-than-temporary impairment, the Company considers the nature of the investment, the financial condition of the issuer, the extent and duration of unrealized loss,

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Table 11    INVESTMENT SECURITIES
 
                                                                 
    Available-for-Sale     Held-to-Maturity  
                Weighted-
                      Weighted-
       
                Average
    Weighted-
                Average
    Weighted-
 
    Amortized
    Fair
    Maturity in
    Average
    Amortized
    Fair
    Maturity in
    Average
 
December 31, 2010 (Dollars in Millions)   Cost     Value     Years     Yield (e)     Cost     Value     Years     Yield (e)  
U.S. Treasury and Agencies
                                                               
Maturing in one year or less
  $ 836     $ 838       .5       2.05 %   $     $             %
Maturing after one year through five years
    1,671       1,646       2.7       1.21       103       102       3.3       .88  
Maturing after five years through ten years
    33       35       6.9       4.86                          
Maturing after ten years
    19       18       12.3       3.66       62       62       11.1       1.75  
                                                                 
Total
  $ 2,559     $ 2,537       2.1       1.55 %   $ 165     $ 164       6.2       1.21 %
                                                                 
Mortgage-Backed Securities (a)
                                                               
Maturing in one year or less
  $ 695     $ 696       .6       2.11 %   $     $             %
Maturing after one year through five years
    19,023       19,310       3.6       3.18       206       199       3.7       2.15  
Maturing after five years through ten years
    17,451       17,421       6.0       2.80       554       552       6.1       3.10  
Maturing after ten years
    2,625       2,573       12.6       1.44       100       100       13.6       1.27  
                                                                 
Total
  $ 39,794     $ 40,000       5.2       2.88 %   $ 860     $ 851       6.4       2.66 %
                                                                 
Asset-Backed Securities (a)
                                                               
Maturing in one year or less
  $ 3     $ 11       .4       17.33 %   $ 100     $ 100       .3       .59 %
Maturing after one year through five years
    348       357       4.0       8.30       69       69       2.4       1.05  
Maturing after five years through ten years
    326       337       7.0       4.04       79       71       6.1       .91  
Maturing after ten years
    236       239       10.5       2.38       36       31       23.6       .79  
                                                                 
Total
  $ 913     $ 944       6.7       5.28 %   $ 284     $ 271       5.4       .81 %
                                                                 
Obligations of State and Political Subdivisions (b) (c)
                                                               
Maturing in one year or less
  $ 4     $ 4       .1       6.48 %   $     $       .7       6.99 %
Maturing after one year through five years
    835       831       3.8       5.94       6       7       3.9       8.09  
Maturing after five years through ten years
    836       819       6.4       6.70       6       6       6.3       6.46  
Maturing after ten years
    5,160       4,763       20.9       6.83       15       14       16.1       5.52  
                                                                 
Total
  $ 6,835     $ 6,417       17.1       6.71 %   $ 27     $ 27       11.0       6.32 %
                                                                 
Other Debt Securities
                                                               
Maturing in one year or less
  $ 6     $ 6       .9       1.39 %   $     $             %
Maturing after one year through five years
    92       82       1.4       6.61       15       12       2.5       1.24  
Maturing after five years through ten years
    31       29       6.8       6.33       118       94       7.8       1.14  
Maturing after ten years
    1,306       1,136       31.4       4.11                          
                                                                 
Total
  $ 1,435     $ 1,253       28.8       4.30 %   $ 133     $ 106       7.2       1.15 %
                                                                 
Other Investments
  $ 319     $ 358       18.0       4.14 %   $     $             %
                                                                 
Total investment securities (d)
  $ 51,855     $ 51,509       7.4       3.41 %   $ 1,469     $ 1,419       6.3       2.07 %
                                                                 
                                                                 
 
(a) Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
(b) Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if purchased at par or a discount.
(c) Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and contractual maturity for securities with a fair value equal to or below par.
(d) The weighted-average maturity of the available-for-sale investment securities was 7.1 years at December 31, 2009, with a corresponding weighted-average yield of 4.00 percent. The weighted-average maturity of the held-to-maturity investment securities was 8.4 years at December 31, 2009, with a corresponding weighted-average yield of 5.10 percent.
(e) Average yields are presented on a fully-taxable equivalent basis under a tax rate of 35 percent. Yields on available-for-sale and held-to-maturity securities are computed based on historical cost balances. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity.
 
                                 
    2010     2009  
    Amortized
    Percent
    Amortized
    Percent
 
December 31 (Dollars in Millions)   Cost     of Total     Cost     of Total  
U.S. Treasury and agencies
  $ 2,724       5.1 %   $ 3,415       7.5 %
Mortgage-backed securities
    40,654       76.2       32,289       71.1  
Asset-backed securities
    1,197       2.3       559       1.2  
Obligations of state and political subdivisions
    6,862       12.9       6,854       15.1  
Other debt securities and investments
    1,887       3.5       2,286       5.1  
                                 
Total investment securities
  $ 53,324       100.0 %   $ 45,403       100.0 %
                                 
                                 

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Table 12    DEPOSITS
 
The composition of deposits was as follows:
 
                                                                                         
    2010       2009       2008       2007       2006  
          Percent
            Percent
            Percent
            Percent
            Percent
 
December 31 (Dollars in Millions)   Amount     of Total       Amount     of Total       Amount     of Total       Amount     of Total       Amount     of Total  
Noninterest-bearing deposits
  $ 45,314       22.2 %     $ 38,186       20.8 %     $ 37,494       23.5 %     $ 33,334       25.4 %     $ 32,128       25.7 %
Interest-bearing deposits
                                                                                       
Interest checking
    43,183       21.2         38,436       21.0         32,254       20.2         28,996       22.1         24,937       20.0  
Money market savings
    46,855       22.9         40,848       22.3         26,137       16.4         24,301       18.5         26,220       21.0  
Savings accounts
    24,260       11.9         16,885       9.2         9,070       5.7         5,001       3.8         5,314       4.2  
                                                                                         
Total of savings deposits
    114,298       56.0         96,169       52.5         67,461       42.3         58,298       44.4         56,471       45.2  
Time certificates of deposit less than $100,000
    15,083       7.4         18,966       10.4         18,425       11.7         14,160       10.8         13,859       11.1  
Time deposits greater than $100,000
                                                                                       
Domestic
    12,330       6.0         16,858       9.2         20,791       13.0         15,351       11.7         14,868       11.9  
Foreign
    17,227       8.4         13,063       7.1         15,179       9.5         10,302       7.8         7,556       6.1  
                                                                                         
Total interest-bearing deposits
    158,938       77.8         145,056       79.2         121,856       76.5         98,111       74.6         92,754       74.3  
                                                                                         
Total deposits
  $ 204,252       100.0 %     $ 183,242       100.0 %     $ 159,350       100.0 %     $ 131,445       100.0 %     $ 124,882       100.0 %
                                                                                         
                                                                                         
 
The maturity of time deposits was as follows:
                         
          Time Deposits
       
    Certificates
    Greater Than
       
December 31, 2010 (Dollars in Millions)   Less Than $100,000     $100,000     Total  
   
 
Three months or less
    $  1,790       $  19,625       $  21,415  
Three months through six months
    1,597       1,309       2,906  
Six months through one year
    3,095       1,609       4,704  
2012
    4,239       2,745       6,984  
2013
    1,704       1,239       2,943  
2014
    1,546       1,359       2,905  
2015
    1,107       1,367       2,474  
Thereafter
    5       304       309  
     
     
Total
    $  15,083       $  29,557       $  44,640  
 
 

expected cash flows of underlying collateral or assets and market conditions. At December 31, 2010, the Company had no plans to sell securities with unrealized losses and believes it is more likely than not it would not be required to sell such securities before recovery of their amortized cost.
There is limited market activity for structured investment-related and non-agency mortgage-backed securities held by the Company. As a result, the Company estimates the fair value of these securities using estimates of expected cash flows, discount rates and management’s assessment of various other market factors, which are judgmental in nature. The Company recorded $91 million of impairment charges in earnings during 2010, predominately on non-agency mortgage-backed and structured investment-related securities. These impairment charges were due to changes in expected cash flows resulting from increases in defaults in the underlying mortgage pools and regulatory actions in the first quarter of 2010 related to an insurer of some of the securities. Further adverse changes in market conditions may result in additional impairment charges in future periods.
During 2009, the Company recognized impairment charges in earnings of $223 million related to perpetual preferred securities, primarily issued by financial institutions, and $363 million on non-agency mortgage-backed and structured investment-related securities.
Refer to Notes 5 and 21 in the Notes to Consolidated Financial Statements for further information on investment securities.
 
Deposits Total deposits were $204.3 billion at December 31, 2010, compared with $183.2 billion at December 31, 2009. The $21.0 billion (11.5 percent) increase in total deposits reflected organic growth in core deposits and balances from the securitization trust administration acquisition in the fourth quarter of 2010. Average total deposits increased $16.9 billion (10.1 percent) over 2009, reflecting increases in noninterest-bearing and

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savings account balances, partially offset by a decrease in interest-bearing time deposits.
Noninterest-bearing deposits at December 31, 2010, increased $7.1 billion (18.7 percent) over December 31, 2009. Average noninterest-bearing deposits increased $2.3 billion (6.1 percent) in 2010, compared with 2009. The increase was due primarily to growth in Wholesale Banking and Commercial Real Estate, Consumer and Small Business Banking and corporate trust balances.
Interest-bearing savings deposits increased $18.1 billion (18.9 percent) at December 31, 2010, compared with December 31, 2009. Excluding acquisitions, interest-bearing savings deposits increased $11.8 billion (12.3 percent) at December 31, 2010, compared with December 31, 2009. The increase in these deposit balances was related to increases in all major savings deposit categories. The $7.4 billion (43.7 percent) increase in savings account balances reflected growth in Consumer and Small Business Banking balances. The $6.0 billion (14.7 percent) increase in money market savings account balances principally reflected acquisition-related growth in corporate trust balances. The $4.7 billion (12.4 percent) increase in interest checking account balances was due primarily to higher broker-dealer balances. Average interest-bearing savings deposits in 2010 increased $19.0 billion (23.2 percent), compared with 2009, driven by higher money market savings account balances of $7.9 billion (24.8 percent), savings account balances of $7.8 billion (59.5 percent) and interest checking account balances of $3.3 billion (9.0 percent).
Interest-bearing time deposits at December 31, 2010, decreased $4.2 billion (8.7 percent), compared with December 31, 2009, driven by decreases in both time certificates of deposit less than $100,000 and time deposits greater than $100,000. Excluding the trust administration acquisition, interest-bearing time deposits decreased $6.1 billion (12.4 percent) at December 31, 2010, compared with December 31, 2009. Time certificates of deposit less than $100,000 decreased $3.9 billion (20.5 percent) at December 31, 2010, compared with December 31, 2009, as a result of expected decreases in acquired certificates of deposit and decreases in Consumer and Small Business Banking balances. Average time certificates of deposit less than $100,000 in 2010 decreased $1.3 billion (7.0 percent), compared with 2009, reflecting maturities and lower renewals given the current interest rate environment. Time deposits greater than $100,000 decreased $364 million (1.2 percent) at December 31, 2010, compared with December 31, 2009. Average time deposits greater than $100,000 in 2010 decreased $3.1 billion (10.3 percent), compared with 2009. Time deposits greater than $100,000 are managed as an alternative to other funding sources, such as wholesale borrowing, based largely on relative pricing.
During 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law, resulting in a permanent increase in the statutory standard maximum deposit insurance amount for domestic deposits to $250,000 per depositor. Domestic time deposits greater than $250,000 were $5.4 billion at December 31, 2010, compared with $7.1 billion at December 31, 2009.
 
Borrowings The Company utilizes both short-term and long-term borrowings as part of its asset/liability management and funding strategies. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $32.6 billion at December 31, 2010, compared with $31.3 billion at December 31, 2009. The $1.3 billion (4.0 percent) increase in short-term borrowings reflected wholesale funding associated with the Company’s asset growth and asset/liability management activities.
Long-term debt was $31.5 billion at December 31, 2010, compared with $32.6 billion at December 31, 2009, reflecting a $2.6 billion net decrease in Federal Home Loan Bank advances, $5.7 billion of medium-term note maturities and repayments and the extinguishment of $.6 billion of junior subordinated debentures in connection with the ITS exchange, partially offset by $5.7 billion of medium-term note and subordinated debt issuances and the consolidation of $2.3 billion of long-term debt related to certain VIEs at December 31, 2010. Refer to Note 13 of the Notes to Consolidated Financial Statements for additional information regarding long-term debt and the “Liquidity Risk Management” section for discussion of liquidity management of the Company.
 
 
CORPORATE RISK PROFILE
 
Overview Managing risks is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit, residual value, operational, interest rate, market and liquidity risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Residual value risk is the potential reduction in the end-of-term value of leased assets. Operational risk includes risks related to fraud, legal and compliance, processing errors, technology, breaches of internal controls and business continuation and disaster recovery. Interest rate risk is the potential reduction

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of net interest income as a result of changes in interest rates, which can affect the re-pricing of assets and liabilities differently. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. In addition, corporate strategic decisions, as well as the risks 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. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans exhibiting deterioration of credit quality. The credit risk management strategy also includes a credit risk assessment process, independent of business line managers, that performs assessments of compliance with commercial and consumer credit policies, risk ratings, and other critical credit information. The Company strives to identify potential problem loans early, record any necessary charge-offs promptly and maintain appropriate reserve levels for probable incurred loan losses. Commercial banking operations rely on prudent credit policies and procedures and individual lender and business line manager accountability. Lenders are assigned lending authority based on their level of experience and customer service requirements. Credit officers reporting to an independent credit administration function have higher levels of lending authority and support the business units in their credit decision process. Loan decisions are documented with respect to the borrower’s business, purpose of the loan, evaluation of the repayment source and the associated risks, evaluation of collateral, covenants and monitoring requirements, and risk rating rationale. The Company classifies commercial loans by credit quality ratings that it defines, including: pass, special mention and classified, and utilizes a credit risk rating system to measure the credit quality of individual commercial loans. This risk rating system includes estimates about the likelihood of default by borrowers and the severity of loss in the event of default. The Company uses the risk rating system for on-going management of the portfolio, regulatory reporting, determining the frequency of review of the credit exposures, and evaluation and determination of the specific allowance for commercial credit losses. The Company regularly forecasts potential changes in risk ratings, nonperforming status and potential for loss and the estimated impact on the allowance for credit losses. The Company classifies loans by the same credit quality ratings in its retail banking operations, primarily driven by delinquency status. In addition, standard credit scoring systems are used to assess credit risks of consumer, small business and small-ticket leasing customers and to price products accordingly. The Company conducts the underwriting and collections of its retail products in loan underwriting and servicing centers specializing in certain retail products. Forecasts of delinquency levels, bankruptcies and losses in conjunction with projection of estimated losses by delinquency categories and vintage information are regularly prepared and are used to evaluate underwriting and collection and determine the specific allowance for credit losses for these products. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments. The Company also engages in non-lending activities that may give rise to credit risk, including interest rate swap and option contracts for balance sheet hedging purposes, foreign exchange transactions, deposit overdrafts and interest rate swap contracts for customers, and settlement risk, including Automated Clearing House transactions, and the processing of credit card transactions for merchants. These activities are also subject to credit review, analysis and approval processes.
 
Economic and Other Factors In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors, such as changes in unemployment rates, gross domestic product and consumer bankruptcy filings.
Beginning in late 2007, financial markets suffered significant disruptions, leading to and exacerbated by declining real estate values and subsequent economic challenges, both domestically and globally. Median home prices, which peaked in 2006, declined across most domestic markets with severe price reductions in California and some parts of the Southwest, Northeast and Southeast regions.

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The decline in residential home values has had a significant adverse impact on residential mortgage loans. Residential mortgage delinquencies, which increased dramatically in 2007 for sub-prime borrowers, also increased throughout 2008 and 2009 for other classes of borrowers. High unemployment levels throughout 2009 and 2010 further increased losses in prime-based residential portfolios and credit cards.
Economic conditions began to stabilize in late 2009 and throughout 2010, though unemployment and under-employment continue to be elevated, consumer confidence and spending remain lower, and many borrowers continue to have difficulty meeting their commitments. Credit costs peaked for the Company in late 2009 and trended downward thereafter, but remain at elevated levels. The Company recorded provision for credit losses in excess of net charge-offs during 2010, 2009 and 2008 of $175 million, $1.7 billion and $1.3 billion, respectively, as the result of these economic and environmental factors. The decrease in the provision for credit losses in excess of net charge-offs for 2010, compared with 2009, reflected the stabilization of economic conditions throughout 2010 and the improving underlying risk profile of the loan portfolio.
 
Credit Diversification The Company manages its credit risk, in part, through diversification of its loan portfolio and limit setting by product type criteria and concentrations. As part of its normal business activities, the Company offers a broad array of traditional commercial lending products and specialized products such as asset-based lending, commercial lease financing, agricultural credit, warehouse mortgage lending, commercial real estate, health care and correspondent banking. The Company also offers an array of retail lending products, including residential mortgages, credit cards, retail leases, home equity, revolving credit, lending to students and other consumer loans. These retail credit products are primarily offered through the branch office network, home mortgage and loan production offices, indirect distribution channels, such as automobile dealers, and a consumer finance division. The Company monitors and manages the portfolio diversification by industry, customer and geography. Table 6 provides information with respect to the overall product diversification and changes in the mix during 2010.
The commercial portfolio reflects the Company’s focus on serving small business customers, middle market and larger corporate businesses throughout its Consumer and Small Business Banking markets, as well as large national customers. The commercial loan portfolio is diversified among various industries with somewhat higher concentrations in consumer products and services, financial services, healthcare, commercial services and supplies, capital goods (including manufacturing and commercial construction-related businesses), property management and development and agricultural industries. Additionally, the commercial portfolio is diversified across the Company’s geographical markets with 69.2 percent of total commercial loans, excluding covered loans, within the Company’s Consumer and Small Business Banking markets. Credit relationships outside of the Company’s Consumer and Small Business Banking markets are reflected within the corporate banking, mortgage banking, auto dealer and leasing businesses focusing on large national customers and specifically targeted industries. Loans to mortgage banking customers are primarily warehouse lines which are collateralized with the underlying mortgages. The Company regularly monitors its mortgage collateral position to manage its risk exposure. Table 7 provides a summary of significant industry groups and geographical locations of commercial loans outstanding at December 31, 2010 and 2009.
The commercial real estate portfolio reflects the Company’s focus on serving business owners within its geographic footprint as well as regional and national investment-based real estate owners and builders. At December 31, 2010, the Company had commercial real estate loans of $34.7 billion, or 17.6 percent of total loans, compared with $34.1 billion at December 31, 2009. Within commercial real estate loans, different property types have varying degrees of credit risk. Table 8 provides a summary of the significant property types and geographical locations of commercial real estate loans outstanding at December 31, 2010 and 2009. At December 31, 2010, approximately 32.9 percent of the commercial real estate loan portfolio represented business owner-occupied properties that tend to exhibit credit risk characteristics similar to the middle market commercial loan portfolio. Generally, the investment-based real estate mortgages are diversified among various property types with somewhat higher concentrations in office and retail properties. During 2010, the Company continued to reduce its level of exposure to homebuilders, given the stress in the homebuilding industry sector. From a geographical perspective, the Company’s commercial real estate portfolio is generally well diversified. However, at December 31, 2010, 21.6 percent of the Company’s commercial real estate portfolio, excluding covered assets, was secured by collateral in California, which has experienced higher delinquency levels and credit quality deterioration due to excess home inventory levels and declining valuations. During 2010, the Company recorded $845 million of net charge-offs in the total commercial real estate portfolio. Included in commercial real

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estate at year-end 2010 was approximately $1.2 billion in loans related to land held for development and $1.8 billion of loans related to residential and commercial acquisition and development properties. These loans are subject to quarterly monitoring for changes in local market conditions due to a higher credit risk profile. The commercial real estate portfolio is diversified across the Company’s geographical markets with 86.4 percent of total commercial real estate loans outstanding at December 31, 2010, within the Company’s Consumer and Small Business Banking markets.
The assets acquired from the FDIC assisted acquisitions of Downey, PFF and FBOP included nonperforming loans and other loans with characteristics indicative of a high credit risk profile, including a substantial concentration in California, loans with negative-amortization payment options, and homebuilder and other construction finance loans. Because most of these loans are covered under loss sharing agreements with the FDIC, the Company’s financial exposure to losses from these assets is substantially reduced. To the extent actual losses exceed the Company’s estimates at acquisition, the Company’s financial risk would only be its share of those losses under the loss sharing agreements.
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. Each distinct underwriting and origination activity manages unique credit risk characteristics and prices its loan production commensurate with the differing risk profiles. Within Consumer and Small Business Banking, the consumer finance division specializes in serving channel-specific and alternative lending markets in residential mortgages, home equity and installment loan financing. The consumer finance division manages loans originated through a broker network, correspondent relationships and U.S. Bank branch offices. Generally, loans managed by the Company’s consumer finance division exhibit higher credit risk characteristics, but are priced commensurate with the differing risk profile.
Residential mortgages represent an important financial product for consumer customers of the Company and are originated through the Company’s branches, loan production offices, a wholesale network of originators and the consumer finance division. 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. Utilizing the secondary markets enables the Company to effectively reduce its credit and other asset/liability risks. For residential mortgages that are retained in the Company’s portfolio and for home equity and second mortgages, credit risk is also diversified by geography and managed by adherence to loan-to-value and borrower credit criteria during the underwriting process.
 
The following tables provide summary information of the loan-to-values of residential mortgages and home equity and second mortgages by distribution channel and type at December 31, 2010 (excluding covered loans):
                                 
Residential mortgages
  Interest
                Percent
 
(Dollars in Millions)   Only     Amortizing     Total     of Total  
   
 
Consumer Finance
                               
Less than or equal to 80%
  $ 1,393     $ 4,772     $ 6,165       53.5 %
Over 80% through 90%
    494       2,356       2,850       24.7  
Over 90% through 100%
    457       1,912       2,369       20.5  
Over 100%
          147       147       1.3  
     
     
Total
  $ 2,344     $ 9,187     $ 11,531       100.0 %
Other Retail
                               
Less than or equal to 80%
  $ 1,911     $ 15,870     $ 17,781       92.6 %
Over 80% through 90%
    56       656       712       3.7  
Over 90% through 100%
    71       637       708       3.7  
Over 100%