UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2009

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from (not applicable)

 

Commission file number 1-6880

 

U.S. BANCORP

(Exact name of registrant as specified in its charter)

 

 

800 Nicollet Mall

Minneapolis, Minnesota 55402

(Address of principal executive offices, including zip code)

 

651-466-3000

(Registrant’s telephone number, including area code)

 

(not applicable)

(Former name, former address and former fiscal year, if changed since last report)

 

 

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

 

YES þ  NO o

 

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES þ  NO o

 

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES o  NO þ

 

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

Table of Contents and Form 10-Q Cross Reference Index

 

 

 

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.

This Quarterly Report on Form 10-Q contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are based on the information available to, and assumptions and estimates made by, management as of the date made. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. Global and domestic economies could fail to recover from the recent economic downturn or could experience another severe contraction, which could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities. Global financial markets could experience a recurrence of significant turbulence, which could reduce the availability of funding to certain financial institutions and lead to a tightening of credit, a reduction of business activity, and increased market volatility. Stress in the commercial real estate markets, as well as a delay or failure of recovery in the residential real estate markets, could cause additional credit losses and deterioration in asset values. In addition, U.S. Bancorp’s business and financial performance could be impacted as the financial industry restructures in the current environment, by increased regulation of financial institutions or other effects of recently enacted legislation, and by changes in the competitive landscape. U.S. Bancorp’s results could also be adversely affected by continued deterioration in general business and economic conditions; changes in interest rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in its investment securities portfolio; legal and regulatory developments; increased competition from both banks and non-banks; changes in customer behavior and preferences; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, market risk, operational risk, legal risk, and regulatory and compliance risk.

 

For discussion of these and other risks that may cause actual results to differ from expectations, refer to U.S. Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2008, on file with the Securities and Exchange Commission, including the sections entitled “Risk Factors” and “Corporate Risk Profile” contained in Exhibit 13, and all subsequent filings with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. Forward-looking statements speak only as of the date they are made, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.

 

 

 

Table 1    Selected Financial Data

 

 

Management’s Discussion and Analysis

 

 

Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income attributable to U.S. Bancorp of $603 million for the third quarter of 2009 or $.30 per diluted common share, compared with $576 million, or $.32 per diluted common share for the third quarter of 2008. Return on average assets and return on average common equity were .90 percent and 10.0 percent, respectively, for the third quarter of 2009, compared with .94 percent and 10.8 percent, respectively, for the third quarter of 2008. During the third quarter of 2009, the Company strengthened its allowance for credit losses by recording $415 million of provision for credit losses in excess of net charge-offs in light of continued credit deterioration arising from the current economic environment. Other significant items in the third quarter of 2009 included $76 million of net securities losses and a $39 million gain related to the Company’s investment in Visa Inc. Significant items included in the third quarter of 2008 results were $250 million of provision for credit losses in excess of net charge-offs and net securities losses of $411 million.

Total net revenue, on a taxable-equivalent basis, for the third quarter of 2009 was $871 million (25.8 percent) higher than the third quarter of 2008, reflecting a 9.7 percent increase in net interest income and a 48.2 percent increase in noninterest income. The increase in net interest income from a year ago was principally the result of growth in average earning assets and an increase in core deposit funding. Noninterest income increased from a year ago, principally due to strong growth in mortgage banking revenue, a decrease in net securities losses, and lower retail lease residual losses.

Total noninterest expense in the third quarter of 2009 was $240 million (13.2 percent) higher than the third quarter of 2008, primarily due to the impact of acquisitions, higher Federal Deposit Insurance Corporation (“FDIC”) deposit insurance expense, and marketing expense principally associated with the introduction of a new credit card product.

The provision for credit losses for the third quarter of 2009 increased $708 million over the third quarter of 2008, reflecting weak economic conditions and the corresponding impact on the commercial, commercial real estate and consumer loan portfolios. It also reflected stress in the residential real estate markets. Net charge-offs in the third quarter of 2009 were $1.0 billion, compared with net charge-offs of $498 million in the third quarter of 2008. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

The Company reported net income attributable to U.S. Bancorp of $1.6 billion for the first nine months of 2009 or $.66 per diluted common share, compared with $2.6 billion, or $1.46 per diluted common share for the first nine months of 2008. Return on average assets and return on average common equity were .81 percent and 7.7 percent, respectively, for the first nine months of 2009, compared with 1.45 percent and 16.6 percent, respectively, for the first nine months of 2008. The Company’s results for the first nine months of 2009 reflected several significant items, including provision for credit losses in excess of net charge-offs of $1.4 billion, $293 million of net securities losses, a $123 million FDIC special assessment, a $92 million gain from a corporate real estate transaction and the $39 million gain related to the Company’s investment in Visa Inc. Significant items included in the first nine months of 2008 results were a $492 million gain related to the Company’s ownership position in Visa Inc. (“2008 Visa Gain”), $642 million provision for credit losses in excess of net charge-offs and net securities losses of $725 million.

Total net revenue, on a taxable-equivalent basis, for the first nine months of 2009 was $1.2 billion (11.2 percent) higher than the first nine months of 2008, reflecting an 11.4 percent increase in net interest income and an 11.0 percent increase in noninterest income. The increase in net interest income from a year ago was principally the result of growth in average earning assets and an increase in core deposit funding. Noninterest income increased due to strong growth in mortgage banking revenue, a significant decrease in net securities losses, higher commercial products revenue and treasury management fees, and gains from a corporate real estate transaction and the Company’s investment in Visa Inc. These revenue increases were partially offset by lower trust and investment management fees, lower deposit service charges and the 2008 Visa Gain.

Total noninterest expense in the first nine months of 2009 was $643 million (11.9 percent) higher than in the first nine months of 2008, primarily due to the impact of acquisitions, higher FDIC deposit insurance expense, and

 

 

marketing expense, principally related to credit card initiatives.

The provision for credit losses for the first nine months of 2009 increased $2.3 billion over the first nine months of 2008. The increase in the provision for credit losses reflected weak economic conditions and the corresponding impact on the commercial, commercial real estate and consumer loan portfolios. It also reflected stress in the residential real estate markets. Net charge-offs in the first nine months of 2009 were $2.8 billion, compared with net charge-offs of $1.2 billion in the first nine months of 2008. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

 

Net Interest Income Net interest income, on a taxable-equivalent basis, was $2.2 billion in the third quarter of 2009, compared with $2.0 billion in the third quarter of 2008. Net interest income, on a taxable-equivalent basis, was $6.4 billion in the first nine months of 2009, compared with $5.7 billion in the first nine months of 2008. The increases were due to growth in average earning assets and an increase in core deposit funding. Average earning assets were $19.1 billion (8.9 percent) higher in the third quarter of 2009 and $23.2 billion (11.0 percent) higher in the first nine months of 2009, compared with the same periods of 2008, primarily driven by increases in average loans, including originated and acquired loans. The net interest margin in the third quarter and first nine months of 2009 was 3.67 percent and 3.62 percent, respectively, compared with 3.65 percent and 3.60 percent, respectively, for the same periods of 2008. Given the current interest rate environment, the Company expects the net interest margin to remain relatively stable, with a bias toward modest improvement in the fourth quarter of 2009. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tables for further information on net interest income.

Total average loans for the third quarter and first nine months of 2009 were $15.4 billion (9.3 percent) and $22.2 billion (13.7 percent) higher, respectively, than the same periods of 2008, driven by new loan originations, acquisitions and portfolio purchases. Retail loan growth, year-over-year, was driven by increases in credit card, home equity and federally-guaranteed student loans. Average credit card balances for the third quarter and first nine months of 2009 were $3.2 billion (25.9 percent) and $2.8 billion (24.4 percent) higher, respectively, than the same periods of 2008, reflecting both growth in existing portfolios and portfolio purchases of approximately $.3 billion and $1.3 billion during the second and third quarters of 2009, respectively. Commercial real estate loan growth reflected new business and higher utilization of existing credits driven by market conditions. Residential mortgage growth reflected increased origination activity as a result of market interest rate declines. Commercial loans decreased for the third quarter of 2009, compared with the same period of 2008, principally due to lower utilization of existing commitments and a reduction in demand for new loans. Assets covered by loss sharing agreements with the FDIC (“covered assets”) relate to the 2008 acquisitions of the banking operations of Downey Savings and Loan Association, F.A. and PFF Bank and Trust (“Downey and PFF”) and the average balances were $10.3 billion and $10.8 billion in the third quarter and first nine months of 2009, respectively.

Average investment securities in the third quarter of 2009 were essentially unchanged from the third quarter of 2008, as securities purchases offset repayments. Average investment securities for the first nine months of 2009 decreased $787 million (1.8 percent) from the same period of 2008 as a result of prepayments and sales. The composition of the Company’s investment portfolio remained essentially unchanged from a year ago.

Total average deposits for the third quarter and first nine months of 2009 increased $32.8 billion (24.6 percent) and $30.0 billion (22.5 percent), respectively, over the same periods of 2008. Excluding deposits from 2008 and 2009 acquisitions, third quarter 2009 average total deposits increased $21.5 billion (16.1 percent) over the third quarter of 2008. Average noninterest-bearing deposits for the third quarter and first nine months of 2009 increased $8.7 billion (30.6 percent) and $9.1 billion (32.5 percent), respectively, compared with same periods of 2008, primarily due to growth in the Consumer and Wholesale Banking business lines. Average total savings deposits increased $21.4 billion (33.5 percent) in the third quarter and $14.5 billion (23.0 percent) in the first nine months of 2009, compared with the same periods in 2008, the result of higher consumer, government, broker-dealer and institutional trust customer balances and the impact of acquisitions. Contributing to the increase in savings accounts was strong participation in a new savings product introduced across the franchise by Consumer Banking late in the third quarter of 2008. Average time certificates of deposit less than $100,000 were higher in the third quarter and first nine months of 2009 by $4.3 billion (34.1 percent) and $4.7 billion

 

 

 

Table 2    Noninterest Income

 

*    Not meaningful

(36.4 percent), respectively, over the same periods in 2008, primarily due to acquisitions. Average time deposits greater than $100,000 decreased $1.6 billion (5.5 percent) in the third quarter of 2009, compared with the third quarter of 2008, reflecting a decrease in overall wholesale funding requirements. Average time deposits greater than $100,000 increased $1.7 billion (5.9 percent) in the first nine months of 2009, compared with the same period in the prior year, due primarily to acquisitions.

 

Provision for Credit Losses The provision for credit losses for the third quarter and first nine months of 2009 increased $708 million and $2.3 billion, respectively, over the same periods of 2008, reflecting the adverse impact of current economic conditions compared with a year ago. The provision for credit losses exceeded net charge-offs by $415 million and $1.4 billion in the third quarter and first nine months of 2009, respectively, compared with $250 million and $642 million in the same periods of 2008. The increases in the provision and allowance for credit losses reflected weak economic conditions and the corresponding impact on the commercial, commercial real estate and consumer loan portfolios. It also reflected stress in residential real estate markets. Net charge-offs were $1.0 billion in the third quarter and $2.8 billion in the first nine months of 2009, compared with net charge-offs of $498 million in the third quarter and $1.2 billion in the first nine months of 2008. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

 

Noninterest Income Noninterest income was $2.1 billion in the third quarter and $5.9 billion in the first nine months of 2009, increasing $681 million (48.2 percent) and $588 million (11.0 percent), respectively, from the same periods of 2008. The increases in noninterest income from a year ago were principally due to a significant increase in mortgage banking revenue, as the lower rate environment drove strong mortgage loan production and related gains. Other increases in noninterest income included higher ATM processing services related to growth in transaction volumes and business expansion, higher treasury management fees resulting from increased new business activity and pricing, and higher commercial products revenue due to higher letters of credit, capital markets and other commercial loan fees. Net securities losses for the third quarter and first nine months of 2009 were also lower than the same periods a year ago. Other income increased in the third quarter of 2009, compared with the third quarter of 2008, due principally to a significant reduction in retail lease residual losses, a gain related to the Company’s investment in Visa Inc., and the impact of lower market-related valuation losses relative to the prior year, partially offset by higher valuation losses on equity investments. Other income decreased in the first nine months of 2009, compared with the same period of the prior year, due to the 2008 Visa Gain, partially offset by a reduction in residual lease valuation losses in the current year and the gain related to the Company’s investment in Visa Inc. recorded in the third quarter of 2009. Deposit service charges decreased primarily due to a decrease in the number of overdraft incidences, which more than offset account growth. Trust and investment management fees declined, as did investment product

 

 

 

Table 3    Noninterest Expense

 

fees and commissions, reflecting adverse equity market conditions.

 

Noninterest Expense Noninterest expense was $2.1 billion in the third quarter and $6.1 billion in the first nine months of 2009, increasing $240 million (13.2 percent) and $643 million (11.9 percent), respectively, from the same periods of 2008. The increases in noninterest expense from a year ago were principally due to the impact of acquisitions, higher FDIC deposit insurance expense and marketing expense. Compensation expense increased primarily due to acquisitions, partially offset by reductions from cost containment efforts. Employee benefits expense increased primarily due to increased pension costs associated with previous declines in the value of pension assets. Net occupancy and equipment expense, and technology and communications expense increased primarily due to acquisitions, as well as branch-based and other business expansion initiatives. Marketing and business development expense increased principally due to costs related to the introduction of new credit card products. Other intangibles expense increased due to acquisitions. Other expense increased due to an increase in FDIC deposit insurance expense. In addition, FDIC expense for the first nine months of 2009 further increased over the same period of the prior year due to a second quarter 2009 special assessment. Other expense included increased costs related to investments in affordable housing and other tax-advantaged projects, growth in mortgage servicing and costs associated with foreclosed real estate.

 

Income Tax Expense The provision for income taxes was $86 million (an effective rate of 12.4 percent) for the third quarter and $287 million (an effective rate of 14.9 percent) for the first nine months of 2009, compared with $198 million (an effective rate of 25.3 percent) and $1.1 billion (an effective rate of 28.5 percent) for the same periods of 2008. The declines in the effective tax rates in the third quarter and first nine months of 2009, compared with the same periods of the prior year, reflected the impact of the relative level of tax-exempt income, and investments in affordable housing and other tax-advantaged projects, combined with lower pre-tax earnings year-over-year. For further information on income taxes, refer to Note 10 of the Notes to Consolidated Financial Statements.

 

Loans The Company’s total loan portfolio was $183.1 billion at September 30, 2009, compared with $185.2 billion at December 31, 2008, a decrease of $2.1 billion (1.2 percent). The decrease was driven primarily by lower commercial loans and covered assets, partially offset by growth in retail loans, residential mortgages and commercial real estate loans. The $5.9 billion (10.4 percent) decrease in commercial loans was primarily driven by lower capital spending and economic conditions impacting loan demand by business customers, along with improved access to the bond markets by those customers to refinance their bank debt.

Commercial real estate loans increased $683 million (2.1 percent) at September 30, 2009, compared with December 31, 2008, reflecting new business growth and higher utilization of existing credits, as current market conditions have limited borrower access to real estate capital markets.

Residential mortgages held in the loan portfolio increased $1.4 billion (5.8 percent) at September 30, 2009, compared with December 31, 2008, reflecting an increase in activity as a result of market interest rate declines. Most loans retained in the portfolio are to

 

 

customers with prime or near-prime credit characteristics at the date of origination.

Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, increased $3.3 billion (5.4 percent) at September 30, 2009, compared with December 31, 2008. The increase was primarily driven by growth in credit card balances and home equity and second mortgages, partially offset by decreases in installment loans and retail leasing balances.

 

Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages and student loans to be sold in the secondary market, were $6.0 billion at September 30, 2009, compared with $3.2 billion at December 31, 2008. The increase in loans held for sale was principally due to an increase in mortgage loan origination activity as a result of a decline in market interest rates.

 

Investment Securities Investment securities, totaled $42.3 billion at September 30, 2009, compared with $39.5 billion at December 31, 2008. The $2.8 billion increase principally reflected a decrease in unrealized losses. At September 30, 2009, adjustable-rate financial instruments comprised 47 percent of the investment securities portfolio, compared with 40 percent at December 31, 2008.

The Company conducts a regular assessment of its investment securities to determine whether any securities are other-than-temporarily impaired. During the first nine months of 2009, the Financial Accounting Standards Board issued new accounting guidance, which the Company adopted effective January 1, 2009, for the measurement and recognition of other-than-temporary impairment for debt securities. This guidance requires the portion of other-than-temporary impairment related to factors other than anticipated credit losses be recognized in other comprehensive income (loss), rather than earnings.

Net unrealized losses included in accumulated other comprehensive income (loss) were $.6 billion at September 30, 2009, compared with $2.8 billion at December 31, 2008. The decrease in unrealized losses was primarily due to increases in the fair value of agency mortgage-backed securities and obligations of state and political subdivisions, and to amounts recognized as other-than-temporary impairment in earnings.

During the third quarter and first nine months of 2009, the Company recognized impairment charges in earnings related to perpetual preferred securities, primarily issued by financial institutions, of $21 million and $228 million, respectively. The net unrealized loss for the Company’s remaining investments in perpetual preferred securities was $53 million at September 30, 2009.

There is limited market activity for the remaining structured investment security and the non-agency mortgage-backed securities held by the Company. As a result, the Company estimates the fair value of these securities using estimates of expected cash flows, discount rates and management’s assessment of various market factors, which are judgmental in nature. The Company recorded $51 million and $183 million of impairment charges in earnings on non-agency mortgage-backed and structured investment related securities during the third quarter and first nine months of 2009, respectively. These impairment charges were due to changes in expected cash flows resulting from the continuing decline in housing prices and an increase in foreclosure activity. Further adverse changes in market conditions may result in additional impairment charges in future periods. Refer to Notes 3 and 12 in the Notes to Consolidated Financial Statements for further information on investment securities.

 

Deposits Total deposits were $169.8 billion at September 30, 2009, compared with $159.3 billion at December 31, 2008, an increase of $10.5 billion (6.5 percent) that reflected customer flight to quality. The increase in total deposits was primarily the result of increases in money market savings, savings accounts and interest checking balances, partially offset by decreases in noninterest-bearing deposit accounts and time deposits. Money market savings balances increased $10.5 billion (40.0 percent) due to higher corporate trust, institutional trust and custody, and broker-dealer balances. Savings account balances increased $5.6 billion (62.2 percent) due primarily to strong participation in a new savings product introduced late in the third quarter of 2008 by Consumer Banking and higher broker-dealer balances. Interest checking balances increased $5.3 billion (16.4 percent) due to higher government, branch-based, and broker-dealer balances. Noninterest-bearing deposits decreased $3.2 billion (8.7 percent) due primarily to declines in broker-dealer and corporate trust balances. Time certificates of deposit less than $100,000 decreased $2.3 billion (12.6 percent), and time deposits greater than $100,000 decreased $5.4 billion (15.1 percent), reflecting the Company’s funding and pricing decisions. Time deposits greater than $100,000 are managed as an alternative to other funding sources, such as wholesale borrowing, based largely on relative pricing.

 

 

 

Table 4    Investment Securities

 

 

 

 

 

 

Borrowings The Company utilizes both short-term and long-term borrowings to fund growth of assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $28.2 billion at September 30, 2009, compared with $34.0 billion at December 31, 2008. The decrease principally reflected reduced borrowing needs as a result of increases in deposits due to customer flight to quality.

Long-term debt was $33.3 billion at September 30, 2009, compared with $38.4 billion at December 31, 2008, primarily reflecting $4.4 billion of medium-term note maturities and a $4.7 billion net decrease in Federal Home Loan Bank advances, partially offset by $4.0 billion of issuances of medium-term notes in the first nine months of 2009. The $5.1 billion (13.3 percent) decrease in long-term debt reflected asset/liability management decisions to fund the balance sheet with other sources. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

Overview Managing risks is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit, residual value, operational, interest rate, market and liquidity risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Residual value risk is the potential reduction in the end-of-term value of leased assets. Operational risk includes risks related to fraud, legal and compliance risk, processing errors, technology, breaches of internal controls and business continuation and disaster recovery risk. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates, which can affect the re-pricing of assets and liabilities differently. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities that are accounted for on a mark-to-market basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. In addition, corporate strategic decisions, as well as the risks described above, could give rise to reputation risk. Reputation risk is the risk that negative publicity or press, whether true or not, could result in costly litigation or cause a decline in the Company’s stock value, customer base, funding sources or revenue.

Credit Risk Management The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors, such as changes in unemployment rates, gross domestic product and consumer bankruptcy filings. Refer to “Management’s Discussion and Analysis — Credit Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, for a more detailed discussion on credit risk management processes.

The Company manages its credit risk, in part through diversification of its loan portfolio. As part of its normal business activities, the Company offers a broad array of commercial and retail lending products. The Company’s retail lending business utilizes several distinct business processes and channels to originate retail credit, including traditional branch lending, indirect lending, portfolio acquisitions and a consumer finance division. Generally, loans managed by the Company’s consumer finance division exhibit higher credit risk characteristics, but are priced commensurate with the differing risk profile. With respect to residential mortgages originated through these channels, the Company may either retain the loans on its balance sheet or sell its interest in the balances into the secondary market while retaining the servicing rights and customer relationships. For residential mortgages that are retained in the Company’s portfolio and for home equity and second mortgages, credit risk is also diversified by geography and managed by adherence to loan-to-value and borrower credit criteria during the underwriting process.

 

 

 

The following tables provide summary information of the loan-to-values of residential mortgages and home equity and second mortgages by distribution channel and type at September 30, 2009 (excluding covered assets):

 

 

 

Within the consumer finance division, at September 30, 2009, approximately $2.6 billion of residential mortgages were to customers that may be defined as sub-prime borrowers based on credit scores from independent credit rating agencies at loan origination, compared with $2.9 billion at December 31, 2008.

 

The following table provides further information on residential mortgages for the consumer finance division:

 

 

In addition to residential mortgages, at September 30, 2009, the consumer finance division had $.6 billion of home equity and second mortgage loans to customers that may be defined as sub-prime borrowers, compared with $.7 billion at December 31, 2008.

 

The following table provides further information on home equity and second mortgages for the consumer finance division:

 

The total amount of residential mortgage, home equity and second mortgage loans, other than covered assets, to customers that may be defined as sub-prime borrowers represented only 1.2 percent of total assets at September 30, 2009, compared with 1.4 percent at December 31, 2008. Covered assets include $2.4 billion in loans with negative-amortization payment options at September 30, 2009, compared with $3.3 billion at December 31, 2008. The Company’s risk on covered assets is limited by loss sharing agreements with the FDIC. Other than covered assets, the Company does not have any residential mortgages with payment schedules that would cause balances to increase over time.

 

 

Table 5      Delinquent Loan Ratios as a Percent of Ending Loan Balances