OVERVIEW

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

U.S. Bancorp

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.

STATEMENT OF INCOME ANALYSIS

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

U.S. Bancorp

Table 2  Noninterest Income


                                                               Three Months Ended                         Nine Months Ended
                                                                 September 30,                              September 30,
                                                                                  Percent                                     Percent
(Dollars in Millions)                                     2009        2008         Change           2009          2008         Change
Credit and debit card revenue                          $   267     $   269            (.7 )%     $   782       $   783            (.1 )%
Corporate payment products revenue                         181         179            1.1            503           517           (2.7 )
Merchant processing services                               300         300              -            836           880           (5.0 )
ATM processing services                                    103          94            9.6            309           271           14.0
Trust and investment management fees                       293         329          (10.9 )          891         1,014          (12.1 )
Deposit service charges                                    256         286          (10.5 )          732           821          (10.8 )
Treasury management fees                                   141         128           10.2            420           389            8.0
Commercial products revenue                                157         132           18.9            430           361           19.1
Mortgage banking revenue                                   276          61                *          817           247                *
Investment products fees and commissions                    27          37          (27.0 )           82           110          (25.5 )
Securities gains (losses), net                             (76 )      (411 )         81.5           (293 )        (725 )         59.6
Other                                                      168           8                *          427           680          (37.2 )

Total noninterest income                               $ 2,093     $ 1,412           48.2 %      $ 5,936       $ 5,348           11.0 %

* 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

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Table 3  Noninterest Expense


                                                               Three Months Ended                          Nine Months Ended
                                                                  September 30,                              September 30,
                                                                                   Percent                                     Percent
(Dollars in Millions)                                     2009        2008          Change          2009          2008          Change
Compensation                                           $   769     $   763              .8 %     $ 2,319       $ 2,269             2.2 %
Employee benefits                                          134         125             7.2           429           391             9.7
Net occupancy and equipment                                203         199             2.0           622           579             7.4
Professional services                                       63          61             3.3           174           167             4.2
Marketing and business development                         137          75            82.7           273           220            24.1
Technology and communications                              175         153            14.4           487           442            10.2
Postage, printing and supplies                              72          73            (1.4 )         218           217              .5
Other intangibles                                           94          88             6.8           280           262             6.9
Other                                                      406         276            47.1         1,251           863            45.0

Total noninterest expense                              $ 2,053     $ 1,813            13.2 %     $ 6,053       $ 5,410            11.9 %

Efficiency ratio (a)                                      47.5 %      47.8 %                        48.1 %        45.9 %

(a) 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).

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.

BALANCE SHEET ANALYSIS

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

U.S. Bancorp

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.

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Table 4  Investment Securities


                                                                                       Available-for-Sale                                                   Held-to-Maturity
                                                                                                     Weighted-                                                        Weighted-
. . .