Lockheed Martin Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2005 five years.
The amounts ultimately applied against our offset agreements are based on negotiations with the customer and generally require cash outlays that represent only a fraction of the original amount in the offset agreement.
At December 31, 2005, we had outstanding offset agreements totaling $8.4 billion, primarily related to our Aeronautics segment, that extend through 2015.
To the extent we have entered into purchase obligations at December 31, 2005 that also satisfy offset agreements, those amounts are included in the preceding table.
We have entered into standby letter of credit agreements and other arrangements with financial institutions and customers mainly relating to advances received from customers and/or the guarantee of future performance on some of our contracts.
At December 31, 2005, we had outstanding letters of credit, surety bonds and guarantees, as follows:
## Table 0 ##
(a) Approximately $2,262 million and $49 million of standby letters of credit in the “Less Than 1 Year” and “1-3 Year” periods, respectively, and approximately $38 million of surety bonds in the “Less Than 1 Year” period are expected to renew for additional periods until completion of the contractual obligation.
Included in the table above is approximately $200 million representing letter of credit and surety bond amounts for which related obligations or liabilities are also recorded in the balance sheet, either as reductions of inventories, as customer advances and amounts in excess of costs incurred, or as other liabilities.
Approximately $2 billion of the standby letters of credit in the table above were to secure advance payments received under an F-16 contract from an international customer.
These letters of credit are available for draw down in the event of our nonperformance, and the amount available will be reduced as certain events occur throughout the period of performance in accordance with the contract terms.
Similar to the letters of credit for the F-16 contract, other letters of credit and surety bonds are available for draw down in the event of our nonperformance.
At December 31, 2005, we had no material off-balance sheet arrangements as those arrangements are defined by the Securities and Exchange Commission (SEC).
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK Our main exposure to market risk relates to interest rates and foreign currency exchange rates.
Our financial instruments that are subject to interest rate risk principally include fixedrate and floating rate long-term debt.
If interest rates were to change by plus or minus 1%, interest expense would increase or decrease by approximately $10 million related to our floating rate debt.
The estimated fair values of the Corporation’s long-term debt instruments at December 31, 2005 aggregated approximately $6.2 billion, compared with a carrying amount of approximately $5.0 billion.
The majority of our long-term debt obligations are not callable until maturity.
We have used interest rate swaps in the past to manage our exposure to fixed and variable interest rates; however, at year-end 2005, we had no such agreements in place.
We use forward foreign exchange contracts to manage our exposure to fluctuations in foreign currency exchange rates, and do so in ways that qualify for hedge accounting treatment.
These exchange contracts hedge the fluctuations in cash flows associated with firm commitments or specific anticipated transactions contracted in foreign currencies, or hedge the exposure to rate changes affecting foreign currency denominated assets or liabilities.
Related gains and losses on these contracts, to the extent they are effective hedges, are recognized in income at the same time the hedged transaction is recognized or when the hedged asset or liability is adjusted.
To the extent the hedges are ineffective, gains and losses on the contracts are recognized in the current period.
At December 31, 2005, the fair value of forward exchange contracts outstanding, as well as the amounts of gains and losses recorded during the year then ended, were not material.
We do not hold or issue derivative financial instruments for trading or speculative purposes.
RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued FAS 123(R), ShareBased Payments, which will impact our net earnings and earnings per share and change the classification of certain elements of the statement of cash flows.
FAS 123(R) requires stock options and other share-based payments made to employees to be accounted for as compensation expense and recorded at fair
During 2009, additional information was obtained about the credit quality of acquired loans as of the acquisition date.
As a result, an additional $2.6 billion of acquired loans were deemed impaired as of December 31, 2008 and the net carryover allowance for loan losses attributable to these loans of $112 million was released.
Adjustments to the fair value of impaired loans of $1.8 billion were also recognized.
At December 31, 2009 and December 31, 2008, purchased impaired loans had a carrying value of $10.4 billion and $12.7 billion, respectively.
During 2009, the amount of purchased impaired loans decreased by a net $2.3 billion as a result of payments and other exit activities primarily offset by accretion.
The unpaid principal balance of these loans was $15.4 billion at December 31, 2009 and $21.9 billion at December 31, 2008, as detailed below: Purchased Impaired Loans
## Table 1 ##
(a) Includes purchased impaired loans held for sale.
The recorded investment and outstanding balance of these loans was $85 million and $200 million, respectively, at December 31, 2009.
The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan using the constant effective yield method.
The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference.
Changes in the expected cash flows of individual commercial or pooled consumer purchased impaired loans from the date of acquisition will either impact the accretable yield or result in a charge to the provision for credit losses in the period in which the changes become probable.
Prepayments are treated as a reduction of cash flows expected to be collected and a reduction of projections of contractual cash flows such that the nonaccretable difference is not affected.
Thus, for decreases in cash flows expected to be collected resulting from prepayments, the effect will be to reduce the yield prospectively.
Subsequent decreases to the expected cash flows will generally result in a charge to the provision for credit losses, resulting in an increase to the allowance for loan and lease losses, and a reclassification from accretable yield to nonaccretable difference.
During 2009, $646 million of provision and $90 million of charge-offs were recorded on purchased impaired loans.
As of December 31, 2009 decreases in the expected cash flows of purchased impaired loans resulted in an allowance for loan and lease losses of $556 million on $7.9 billion of the impaired loans while the remaining $2.5 billion of impaired loans required no allowance as expected cash flows improved or remained the same.
There was no such allowance on any of these loans at December 31, 2008.
Subsequent increases in cash flows will result in a recovery of any previously recorded allowance for loan and lease losses, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield.
Disposals of loans, which may include sales of loans or foreclosures, result in removal of the loan from the purchased impaired loan portfolio at its carrying amount.
The following table displays activity for the accretable yield of these loans for 2009.
Accretable Yield
## Table 2 ##
At December 31, 2009, PNC Bank, N. A. , our domestic bank subsidiary, was considered “well capitalized” based on US regulatory capital ratio requirements.
See the Supervision And Regulation section of Item 1 of this Report and Note 23 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information.
We believe PNC Bank, N. A.  will continue to meet these requirements during 2010.
OFF-BALANCE SHEET ARRANGEMENTS AND VIES We engage in a variety of activities that involve unconsolidated entities including qualified special purpose entities (QSPEs) or that are otherwise not reflected on our Consolidated Balance Sheet that are generally referred to as “off-balance sheet arrangements.
” The following sections of this Report provide further information on these types of activities: ?
Commitments, including contractual obligations and other commitments, included within the Risk Management section of this Item 7, and ?
Note 10 Loan Sales and Securitizations and Note 25 Commitments and Guarantees in the Notes To Consolidated Financial Statements included in Item 8 of this Report.
The following provides a summary of variable interest entities (VIEs), including those that we have consolidated and those in which we hold a significant variable interest but have not consolidated into our financial statements as of December 31, 2009 and December 31, 2008.
Consolidated VIEs – PNC Is Primary Beneficiary
## Table 3 ##
(a) Amounts reported primarily represent investments in low income housing projects.
Impact of New Accounting Guidance in 2010 We transfer loans to QSPEs sponsored by PNC or third parties in connection with loan sales and securitization transactions.
These transactions effectively transfer the risk to the QSPE and permit the loans to be excluded from our Consolidated Balance Sheet.
See Note 10 Loan Sales and Securitizations included in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information.
The FASB issued guidance during 2009 that removes the nonconsolidation exception for QSPEs and includes new criteria for determining the primary beneficiary of a VIE.
The guidance also increases the frequency of required reassessments to determine whether an entity is the primary beneficiary of a VIE and requires enhanced disclosures.
We adopted this guidance effective January 1, 2010.
Based on the new guidance, we consolidated Market Street effective January 1, 2010.
Accordingly, we recognized the assets, liabilities and noncontrolling interests of Market Street on our Consolidated Balance Sheet based on their respective carrying amounts as prescribed by the guidance.
We also consolidated the QSPE associated with the securitization of credit card loans effective January 1, 2010.
These changes had a minimal impact on our capital ratios.
We are continuing to analyze other entities, including non-PNC sponsored securitization trusts where we provide loan servicing, for possible consolidation of the trusts.
The impact on total assets of adopting this new accounting standard on January 1, 2010 for those VIEs that were consolidated is as follows:
## Table 4 ##
Non-Consolidated VIEs – Significant Variable Interests
## Table 5 ##
(a) PNC’s risk of loss consists of off-balance sheet liquidity commitments to Market Street of $5.6 billion and other credit enhancements of $.6 billion at December 31, 2009.
The comparable amounts were $6.4 billion and $.6 billion at December 31, 2008.
(b) Amounts reported primarily represent investments in low income housing projects.
(c) Aggregate assets and aggregate liabilities represent estimated balances due to limited availability of financial information associated with certain acquired National City partnerships.
Market Street Market Street is a multi-seller asset-backed commercial paper conduit that is owned by an independent third party.
Market Street’s activities primarily involve purchasing assets or making loans secured by interests in pools of receivables from US corporations that desire access to the commercial paper market.
Market Street funds the purchases of assets or loans by issuing commercial paper which has been rated A1/P1/F1 by Standard & Poor’s, Moody’s, and Fitch, respectively, and is supported by pool-specific credit enhancements, liquidity facilities and program-level credit enhancement.
Generally,
BUSINESS SEGMENTS REVIEW In the first quarter of 2009, we made changes to our business organization structure and management reporting in conjunction with the acquisition of National City.
Business segment results for 2008 have been reclassified to reflect current methodologies and current business and management structure and to present prior periods on the same basis.
As a result of its pending sale, GIS is no longer a reportable business segment.
Results for 2009 for all of our business segments except BlackRock include revenues and expenses associated with businesses acquired with National City.
Business segment results, including inter-segment revenues, and a description of each business are included in Note 27 Segment Reporting included in the Notes To Consolidated Financial Statements of this Report.
Certain revenue and expense amounts included in this Item 7 differ from the amounts shown in Note 27 primarily due to the presentation in this Item 7 of business net interest revenue on a taxableequivalent basis.
Results of individual businesses are presented based on our management accounting practices and management structure.
There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of our individual businesses are not necessarily comparable with similar information for any other company.
We refine our methodologies from time to time as our management accounting practices are enhanced and our businesses and management structure change.
We typically update key cost allocation components annually.
Certain prior period amounts have been reclassified to reflect current methodologies and our current business and management structure.
Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis.
We have aggregated the business results for certain similar operating segments for financial reporting purposes.
Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product maturities, duration and other factors.
Capital is intended to cover unexpected losses and is assigned to the banking and servicing businesses using our risk-based economic capital model.
We have assigned capital equal to 6% of funds to Retail Banking to approximate market comparables for this business.
We have allocated the allowances for loan and lease losses and unfunded loan commitments and letters of credit based on our assessment of risk inherent in the business segment loan portfolios.
Our allocation of the costs incurred by operations and other shared support areas not directly aligned with the businesses is primarily based on the use of services.
Total business segment financial results differ from consolidated results from continuing operations.
The impact of these differences is reflected in the “Other” category.
“Other” for purposes of this Business Segments Review and the Business Segment Highlights in the Executive Summary includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as gains or losses related to BlackRock transactions including LTIP share distributions and obligations, earnings and gains related to Hilliard Lyons for the first quarter of 2008, integration costs, asset and liability management activities including net securities gains or losses and certain trading activities, exited businesses, equity management activities, tax credit investments, alternative investments, intercompany eliminations, most corporate overhead, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests.
Period-end Employees

<table><tr><td></td><td><i>Commitment Expiration By Period</i></td></tr><tr><td><i>(In millions)</i></td><td><i>Total Commitment</i></td><td><i>Less Than 1 Year</i> <sup>(a)</sup></td><td><i>1-3</i>  <i>Years</i> <sup>(a)</sup></td><td><i>3-5 Years</i></td><td><i>After</i> <i>5 Years</i></td></tr><tr><td>Standby letters of credit</td><td>$2,630</td><td>$2,425</td><td>$171</td><td>$18</td><td>$16</td></tr><tr><td>Surety bonds</td><td>434</td><td>79</td><td>352</td><td>3</td><td>—</td></tr><tr><td>Guarantees</td><td>2</td><td>1</td><td>1</td><td>—</td><td>—</td></tr><tr><td>Total commitments</td><td>$3,066</td><td>$2,505</td><td>$524</td><td>$21</td><td>$16</td></tr></table>
<table><tr><td></td><td colspan="2"> December 31, 2009</td><td colspan="2">December 31,2008</td></tr><tr><td>In millions</td><td> Recorded Investment</td><td> Outstanding Balance</td><td>Recorded Investment</td><td>Outstanding Balance</td></tr><tr><td>Commercial (a)</td><td>$558</td><td>$1,016</td><td>$1,016</td><td>$2,485</td></tr><tr><td>Commercial real estate (a)</td><td>1,694</td><td>2,705</td><td>1,911</td><td>3,856</td></tr><tr><td>Consumer</td><td>3,457</td><td>5,097</td><td>3,887</td><td>6,618</td></tr><tr><td>Residential real estate</td><td>4,663</td><td>6,620</td><td>5,895</td><td>8,959</td></tr><tr><td>Total</td><td>$10,372</td><td>$15,438</td><td>$12,709</td><td>$21,918</td></tr></table>
<table><tr><td>In millions</td><td>2009</td></tr><tr><td>January 1</td><td>$3,668</td></tr><tr><td>Accretion (including cash recoveries)</td><td>-1,118</td></tr><tr><td>Adjustments resulting from changes in purchase price allocation</td><td>349</td></tr><tr><td>Net reclassifications from non- accretable to accretable</td><td>837</td></tr><tr><td>Disposals</td><td>-234</td></tr><tr><td>December 31</td><td>$3,502</td></tr></table>
<table><tr><td>In millions</td><td>AggregateAssets</td><td>Aggregate Liabilities</td></tr><tr><td>Tax credit investments (a)</td><td></td><td></td></tr><tr><td> December 31, 2009</td><td>$1,933</td><td>$808</td></tr><tr><td>December 31, 2008</td><td>$1,690</td><td>$921</td></tr><tr><td>Credit Risk Transfer Transaction</td><td></td><td></td></tr><tr><td> December 31, 2009</td><td>$860</td><td>$860</td></tr><tr><td>December 31, 2008</td><td>$1,070</td><td>$1,070</td></tr></table>
<table><tr><td>In millions</td><td>IncrementalAssets</td></tr><tr><td>Market Street</td><td>$2,486</td></tr><tr><td>Credit card loans</td><td>1,480</td></tr><tr><td>Total</td><td>$3,966</td></tr></table>
<table><tr><td>In millions</td><td>Aggregate Assets</td><td>Aggregate Liabilities</td><td>PNC Riskof Loss</td><td></td></tr><tr><td> December 31, 2009</td><td></td><td></td><td></td><td></td></tr><tr><td>Market Street</td><td>$3,698</td><td>$3,718</td><td>$6,155</td><td> (a)</td></tr><tr><td>Tax credit investments (b) (c)</td><td>1,786</td><td>1,156</td><td>743</td><td> </td></tr><tr><td>Collateralized debt obligations</td><td>23</td><td></td><td>2</td><td> </td></tr><tr><td>Total</td><td>$5,507</td><td>$4,874</td><td>$6,900</td><td> </td></tr><tr><td> December 31, 2008</td><td></td><td></td><td></td><td></td></tr><tr><td>Market Street</td><td>$4,916</td><td>$5,010</td><td>$6,965(a)</td><td></td></tr><tr><td>Tax credit investments (b) (c)</td><td>1,517</td><td>1,041</td><td>811</td><td></td></tr><tr><td>Collateralized debt obligations</td><td>20</td><td></td><td>2</td><td></td></tr><tr><td>Total</td><td>$6,453</td><td>$6,051</td><td>$7,778</td><td></td></tr></table>

Question: Which year has the greatest proportion of Tax credit investments (b) (c) for Aggregate Assets?
Answer: December 31, 2008