U.S. Bancorp Annual Report 2005

FY2005 Annual Report · U.S. Bancorp

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F I V E S TA R S E RV I C E : U P C L O S E

2005 Annual Report and Form 10-K

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At U.S. Bancorp, we are committed to
delivering the best service possible —
in every way. In this Annual Report, we
share with you just some of the ways
in 2005 that we made improvements,
expanded capabilities, developed
new services and delivered on our
Five Star Service Guarantee, now in
its 10th year. Let us show you
Five Star Service up close…

C O R P O R AT E P R O F I L E :

U.S. Bancorp, with total assets of
$209 billion at year-end 2005, is the
6th largest ﬁnancial holding company
in the United States. Our company
operates 2,419 banking offices
and 5,003 bank-branded ATMs,
and provides a comprehensive line
of banking, brokerage, insurance,
investment, mortgage, trust and
payment services products to
consumers, businesses, government
entities and institutions.

Headquartered in Minneapolis,
U.S. Bancorp is the parent company
of U.S. Bank. Major lines of business
provided by U.S. Bancorp through
U.S. Bank and other subsidiaries
include Wholesale Banking; Payment
Services; Private Client, Trust & Asset
Management; and Consumer Banking.
More information about these lines
of business can be found throughout
this report.

Visit U.S. Bancorp on the web at
usbank.com.

USB_2005AR_complete.qxd 3/7/06 9:45 AM Page 1

Canada

MS AL

CT
NJ
DE
MD

United States

Sweden

Norway

Ireland

Denmark

Netherlands

Belgium

Poland

Germany

Austria

France

Spain

Italy

Specialized Services/Offices
Commercial Banking
Consumer Banking
Corporate Banking
Payment Services
Private Client, Trust & Asset Management
Technology and Operations Services
Payment Processing Nationally and in Europe

Metropolitan and Community Banking
2,419 banking offices in 24 states

24-Hour Banking
5,003
ATMs:
Internet:
usbank.com
Telephone: 800-USBANKS

U . S . B A N C O R P : AT A G L A N C E

Ranking

Asset size
Deposits
Loans
Earnings per share (diluted)
Return on average assets
Return on average equity
Efficiency ratio
Tangible efficiency ratio
Customers
Primary banking region
Bank branches
ATMs
NYSE symbol

At year-end 2005

6th largest U.S.
ﬁnancial holding
company
$209 billion
$125 billion
$138 billion
$2.42
2.21%
22.5%
44.3%
40.8%
13.4 million
24 states
2,419
5,003
USB

C O N T E N T S :

Selected Financial Highlights

Financial Summary

Letter to Shareholders

Five Star Service Up Close

F I N A N C I A L S :

Management’s Discussion and Analysis

Consolidated Financial Statements

Notes to Consolidated Financial Statements

Reports of Management and Independent Accountants

Five-Year Consolidated Financial Statements

Quarterly Consolidated Financial Data

Supplemental Financial Data

Annual Report on Form 10-K

CEO and CFO Certiﬁcations

Executive Officers

Directors

101

104

106

107

110

121

124

126

Corporate Information

inside back cover

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This report contains forward-looking statements. Statements that are not

historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These statements often include the words “may,”

“could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or

similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of
U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and many factors could cause actual results to differ materially from those
anticipated, including changes in general business and economic conditions, changes in interest rates, 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, and effects of critical
accounting policies and judgments. These and other risks are described in detail on pages 112 to 116 of this report, which you should read carefully.

U.S. BANCORP 1

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S E L E C T E D F I N A N C I A L H I G H L I G H T S :

Net Income
(Dollars in Millions)

9
8
4

7
6
1

3
3
7

8
6
1

3.00

1.50

Diluted Earnings
Per Common Share
(In Dollars)

8
1
3 2
9
5 1
6

6
7

2
4

Dividends Declared
Per Common Share
(In Dollars)

1.40

0
3
2

0
2
0
5 1
5
8

.70

0
5
7

0
8
7

5,000

2,500

2.4

1.2

5.00

2.50

9
7
4

Return on
Average Assets
(In Percents)

7
1

1
2

9
9

4
8

9
8

Net Interest Margin
(Taxable-Equivalent Basis)
(In Percents)

5
6

6
4

9
4

5
2

7
9

Average Assets
(Dollars in Millions)

220,000

8
9
1

3
0
2

0
3
6

7
8
1

3
9
5

1
9
1

4
4
9

5
6
1

8
4
9

1
7
1

110,000

Return on
Average Equity
(In Percents)

2
2

1
2 2
9
1

8
1

Efficiency Ratio (a)
(In Percents)

7
5

8
4

5
4

4
4

Average Shareholders’
Equity
(Dollars in Millions)

25,000

12,500

6
2
4

6
1

3
7
2

7
1

3
9
3

9
1

9
5
4

9
1

3
5
9

9
1

Dividend Payout Ratio
(In Percents)

7
9

7
4

4
4

6
4

0
5

Tier 1 Capital
(In Percents)

Total Risk-Based Capital
(In Percents)

3
4 1
2
1

3
1

2
1

1
1

100

7.5

(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.

2 U.S. BANCORP

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F I N A N C I A L S U M M A R Y:

Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data)

2005

2004

2003

Total net revenue (taxable-equivalent basis) . . . . . . . . . . . . . .

$ 13,133

$ 12,659

$ 12,530

Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income taxes and taxable-equivalent adjustments . . . . . . . . .

Income from continuing operations . . . . . . . . . . . . . . . . . . .

Discontinued operations (after-tax) . . . . . . . . . . . . . . . . . . . . .

5,863

666

2,115

4,489

—

5,785

669

2,038

4,167

—

5,597

1,254

1,969

3,710

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,489

$ 4,167

$ 3,733

2005
v 2004

3.7%

1.3

7.7

2004
v 2003

1.0%

3.4

12.3

11.6

Per Common Share

Earnings per share from continuing operations . . . . . . . . . . . .

$ 2.45

$ 2.21

$ 1.93

10.9%

14.5%

Diluted earnings per share from continuing operations . . . . . .

Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . .

Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Market value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Average common shares outstanding . . . . . . . . . . . . . . . . . . .

Average diluted common shares outstanding . . . . . . . . . . . . .

2.42

2.45

2.42

1.230

11.07

29.89

1,831

1,857

2.18

2.21

2.18

1.020

10.52

31.32

1,887

1,913

1.92

1.94

1.93

.855

10.01

29.78

1,924

1,936

11.0

10.9

11.0

20.6

5.2

(4.6)

(3.0)

(2.9)

13.5

13.9

13.0

19.3

5.1

5.2

(1.9)

(1.2)

Financial Ratios

Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.21%

2.17%

1.99%

Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net interest margin (taxable-equivalent basis) . . . . . . . . . . . . .

Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22.5

3.97

44.3

21.4

4.25

45.3

19.2

4.49

45.6

Average Balances

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$133,105

$122,141

$118,362

Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42,103

Earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

178,425

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

203,198

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

121,001

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19,953

43,009

168,123

191,593

116,222

19,459

37,248

160,808

187,630

116,553

19,393

9.0%

(2.1)

6.1

4.1

2.5

3.2%

15.5

4.5

2.1

(.3)

Period End Balances

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$137,806

$126,315

$118,235

9.1%

6.8%

Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,251

39,768

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

209,465

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

124,709

Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,086

2,269

41,481

195,104

120,741

19,539

2,369

43,334

189,471

119,052

19,242

(.8)

(4.1)

7.4

3.3

2.8

(4.2)

(4.3)

3.0

1.4

1.5

Regulatory capital ratios

Tangible common equity . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.9%

6.4%

6.5%

Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.2

12.5

7.6

8.6

13.1

7.9

9.1

13.6

8.0

U.S. BANCORP 3

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L E T T E R T O S H A R E H O L D E R S :

our 2005 results were excellent across a
wide range of key measures. I am pleased that we were
able to deliver on our promise to produce high-quality earnings and industry-
leading returns. At the same time, we maintained superior credit quality
and continued to make revenue-producing investments in this corporation.

Fellow Shareholders:

Industry-leading core earnings
and consistent performance
We achieved record earnings of
$4.5 billion in 2005. This represented
$2.42 per diluted share, an 11 percent
increase over our 2004 results. This
is the fourth consecutive year that
we have exceeded our long-term
goal of 10 percent earnings per share
growth. We also improved upon
our industry-leading performance
metrics and posted return on average
assets of 2.21 percent and return
on average equity of 22.5 percent
for the year.

Our ﬁnancial results reﬂect our
ability to execute our strategies for
success. These include our long-term
targets for earnings per share
growth of 10 percent and for return
on equity of 20 percent, both of
which we exceeded in 2005. Other
corporate goals include reducing
credit and earnings volatility of the
company and continuing to invest
for future growth. You will read
below more details about our
accomplishing these goals.

Finally, two overriding goals are
to provide high-quality service
to every customer and to target
80 percent return of earnings to
our shareholders. In the pages to
follow, you will see some excellent

4 U.S. BANCORP

examples of ways we are changing
and growing to enhance customer
service. And in the graphs at the
top of the next page, you can see
that we continue our commitment
to creating shareholder value.

reduce the company’s risk proﬁle
we believe will enable us to minimize
the impact of future changes in the
economy, keep our credit costs lower
than our peers and thereby lower the
volatility of operating results.

Positive operating leverage and
superior efficiency
Excluding securities gains and
losses and the valuation of our
mortgage servicing rights, we grew
revenue faster than expense in 2005,
thus creating positive operating
leverage — a fundamental objective
of this corporation. In this ﬁercely
competitive and commodity-like
banking industry, maintaining
superior operating efficiency is
critical. This management team is
dedicated to maintaining superior
operating efficiency, and the year
2005 was no exception, as we
obtained a tangible efficiency ratio
for the year of 40.8 percent.

Achieving our goal of lowering
our credit risk proﬁle
We are extremely proud of the
improvements we have made in
the company’s overall risk proﬁle.
Our net charge-offs were 51 basis
points of average loans in 2005,
a continued improvement compared
with prior years. Nonperforming
assets at December 31, 2005, were
$644 million, a 14 percent decrease
from the balance at December 31,
2004. The steps we have taken to

Continuing to invest in this company
We have continued to invest in
our company. In particular, the
acquisitions we have made in our
fee-based businesses over the past
few years have allowed us to achieve
our earnings objectives while
maintaining high returns, despite the
pressure on the net interest margin,
the challenges of the recent and
current interest rate cycle and an
incredibly competitive environment.

Our continued investments in fee-
based businesses, distribution channels
and market expansion provide future
growth opportunities for U.S. Bancorp.
These investments have strengthened
our presence and product offerings
for the beneﬁt of our entire customer
base. We operate with an advanta-
geous mix of businesses and have
strong market positions in fee-based
businesses, particularly merchant
processing and corporate trust. We
have strategically developed a number
of diverse national business lines,
which in addition to our powerhouse
regional consumer and small business
banking, have generated sustainable
proﬁtability.

USB_2005AR_complete.qxd 3/7/06 9:45 AM Page 5

$700

550

400

250

100

Total Shareholder Return
(A $100 investment in U.S. Bancorp in 1995 was worth $611 at year-end 2005)

Returning 80% of Earnings to Shareholders
(Earnings)

$611
U.S. Bancorp

$337 S&P
Commercial
Bank Index
$238
S&P 500
Index

Retention

Return to
Shareholders

Dividend
Payout

Share
Repurchase

40-50%

80%

30-40%

20%

In late 2003, our company made
a commitment to return 80 percent
of earnings to our shareholders in
the form of dividends and share
buybacks. In 2005, we returned
90 percent of earnings to our share-
holders, and since we originally
made that commitment, we have
returned 98 percent of our earnings
to shareholders. We expect to
continue to return 80 plus percent
in 2006.

As always, we want you to remember
that we manage this corporation to
increase the value of your investment
in U.S. Bancorp. It’s the reason we
come to work each day.

Jerry A. Grundhofer
Chairman and Chief Executive Officer
U.S. Bancorp

March 7, 2006

Standard & PoorÕ s Rating Services
raises ratings on U.S. Bancorp
In January 2006, Standard & Poor’s
(S&P) Ratings Services announced
that it has raised the ratings on
U.S. Bancorp, including its counterparty
credit ratings, to AA-/A-1+
from A+/A-1.

S&P also raised its long-term
counterparty credit ratings on
U.S. Bancorp’s subsidiaries, U.S. Bank
National Association and U.S. Bank
National Association ND, to
AA from AA-. This AA rating is
currently the highest rating given
by S&P to any domestic bank.

We are pleased that our performance
and outlook allowed the rating agen-
cies to make those ratings increases.

Managing this company in a way to
make you proud of your investment
U.S. Bancorp was ranked as the
second most respected banking
company in the United States and
the 50th most respected company
in the world, according to a survey
of institutional investors published
in the September 12, 2005 edition
of Barron’s. The survey ranked the
world’s 100 largest companies by
market capitalization. Six U.S.
banking corporations made the list,
with U.S. Bancorp one of only two
to make the top 50 ranking.

The publication noted that respon-
dents to the survey overwhelmingly
cited strong management and
business strategy as the two most
important criteria for ranking
corporations on the list. Other
criteria included competitive edge,
consistent sales and proﬁt growth,
ethical business practices and
product innovation.

Creating shareholder value is
always our priority
In December 2005, U.S. Bancorp
announced a 10 percent increase in
the dividend rate on U.S. Bancorp
common stock to $1.32 on an
annualized basis, or $0.33 on a
quarterly basis. The quarterly
common stock dividend of $0.33
per common share was payable
on January 16, 2006 to shareholders
of record at the close of business on
December 30, 2005.

That dividend action represents 34
consecutive years of increasing our
dividend. Since 1993, our dividend
has shown a compound annual
growth rate of 19.6 percent. Our
dividend program is an important
part of our shareholders’ total return
on their investment in U.S. Bancorp.
U.S. Bancorp, since 1863 through its
predecessor companies, has paid a
dividend for 143 consecutive years.

U.S. BANCORP 5

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W H O L E S A L E B A N K I N G :

New one-stop treasury management
product enhances efficiency

our business customers told us what’s
most important to them when it comes to treasury
management — the highest levels of convenience, ﬂexibility, control and
speed. We listened and responded, investing signiﬁcant resources and
technology into an exciting new product called U.S. Bank SinglePoint.®

Combining powerful monitoring, payment, image access and administrative
features, SinglePoint is a complete suite of treasury management services
delivered through one integrated website. U.S. Bank treasury management
customers now have a simpliﬁed, single point of access — one online
portal — to the data and tools they need.

With SinglePoint, treasury management customers can conveniently monitor
account activity — from broad trends to single transactions — for better
insight into cash ﬂow. Enhanced access to check images enables tighter
control over ﬁnances and improves fraud prevention, while extensive audit
reporting tracks user access to help keep data and accounts secure. Plus,
by providing a central hub for all electronic payment activities, SinglePoint
increases money transfer efficiency. We’re helping our customers get to the
point of all their treasury management needs — with U.S. Bank SinglePoint.

6 U.S. BANCORP

K E Y B U S I N E S S U N I T S :

Middle Market Commercial Banking

Commercial Real Estate

National Corporate Banking

Correspondent Banking

Dealer Commercial Services

Community Banking

Equipment Leasing

Foreign Exchange

Government Banking

International Banking

Specialized Industries

Specialty Lending

Treasury Management

USB_2005AR_complete.qxd 3/7/06 9:45 AM Page 7

U.S. Bank provides our wholesale banking

customers with the expert knowledge, ﬂexible

products and comprehensive service they

need to execute their ﬁnancial strategies.
Large corporations, middle market businesses,

ﬁnancial institutions, private sector customers

and government entities drive growth in

our economy, and we proudly serve as

their ﬁnancial partner. We’re continually

improving our lending, depository, treasury

management and other ﬁnancial offerings

to exceed our wholesale banking customers’

service expectations.

Above: In 2005, U.S. Bank launched SinglePoint,
which was created from the perspective of

our wholesale banking customer.

Left: We worked closely with treasurers,
cash managers, controllers and other users

through interviews and test-runs to identify

the features and functionality most important

to them, and then incorporated that feedback

into the SinglePoint design.

U.S. BANCORP 7

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PAY M E N T S E R V I C E S :

Merchant processing expands
global footprint

one of our best opportunities for revenue
growth is to leverage our position in payments. Electronic payment
products have become more widely accepted worldwide and represent the
potential to drive signiﬁcant revenue growth. The acquisition of payments
businesses and portfolios has been a strategic focus of U.S. Bancorp, as they
add capability, increase scale and give our company an advantaged position in
high-value, high-growth businesses. U.S. Bank’s growth in payments acquisitions
led the industry in 2005, far outnumbering those of our peer banks. Among our
major transactions was the acquisition of Citibank Card Acceptance in Europe.

NOVA Information Systems, Inc., a wholly owned subsidiary of U.S. Bancorp,
is a leader in the payment processing industry. Combined, NOVA and its affiliates
euroConex and Elan provide global merchant processing services to more than
800,000 customers in the U.S., Canada and Europe. In 2005, NOVA processed
more than one billion transactions worldwide.

U.S. Bank successfully combines information technology, business management
and customer service in payment services, as well as throughout all of our lines
of business. In November 2005, U.S. Bank won CIO magazine’s 14th Annual
CIO Enterprise Value Award in the banking and brokerage category. U.S. Bank
won for Access Online, an electronic program management tool used by major
corporations and government agencies, and created by U.S. Bank Corporate
Payment Systems.

K E Y B U S I N E S S U N I T S :

Corporate Payment Systems

Merchant Payment Services

NOVA Information Systems, Inc.

Card Services: Debit, Credit,
Specialty Cards and Gift Cards

Transactions Services:
ATM Driving and Servicing

8 U.S. BANCORP

USB_2005AR_complete.qxd 3/7/06 9:45 AM Page 9

Recent acquisitions have expanded our
merchant processing globally. At year-end
2005, euroConex acquired Citibank Card

Acceptance, a part of Citigroup, Inc., and

added 100,000 new merchant locations in

more than 30 countries, including Ireland,

the U.K., Spain, France, Belgium, Italy,

Germany, Poland, Austria, the Netherlands,

Norway and Sweden, raising the company’s

total pan-European portfolio to more than

200,000 merchant locations.

Left: U.S. Bancorp is providing bank
partners and merchants across Europe

with a greater array of payment processing

services, including cross-border acquiring,

multi-currency processing and dynamic

currency conversion solutions.

Below: The transaction doubled our merchant
count in Europe and is an investment in a

business with great growth potential.

U.S. BANCORP 9

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P R I VAT E C L I E N T, T R U S T A N D A S S E T M A N A G E M E N T:

Corporate trust and institutional
custody growth solidiﬁes our leadership

u.s. bank is a recognized national leader
in the corporate trust and institutional
custody businesses — the largest trustee in the area of tax-exempt
debt, the second largest in the area of asset-backed and mortgage-backed securities,
the third largest in new corporate bond issuances, and the ninth-largest institutional
custody provider.

U.S. Bank recently solidiﬁed this top tier position with the acquisition of a major
corporate trust and institutional custody portfolio. As a result of the transaction,
which closed on December 30, 2005, U.S. Bank Corporate Trust Services acquired
approximately 14,100 new client issuances and $410 billion in assets under
administration, and U.S. Bank Institutional Trust & Custody acquired approximately
1,700 new clients and $570 billion in assets under administration.

This transaction strongly complements our existing corporate trust and
institutional custody businesses, making us more competitive by increasing our
scale and leveraging our existing capabilities and operational platforms. In addition
to serving the specialized needs of our corporate trust and institutional custody
customers, U.S. Bancorp continues to enhance our top-notch service delivery to
affluent individuals and families, professional service corporations and nonproﬁt
organizations through The Private Client Group. Acting as a bank within a bank,
The Private Client Group works to build, manage and preserve our customers’
wealth by providing expert planning, programs and advice.

K E Y B U S I N E S S U N I T S :

The Private Client Group

Corporate Trust Services

Institutional Trust & Custody

U.S. Bancorp Asset Management, Inc.

U.S. Bancorp Fund Services, LLC

10 U.S. BANCORP

USB_2005AR_complete.qxd 3/7/06 9:45 AM Page 11

Our recent acquisition of a major corporate

trust and institutional custody portfolio
reﬂects our acquisition strategy to grow

revenue and create businesses capable of

competing with anyone. This addition expanded

our presence primarily in the mid-Atlantic

and southeastern states.

Above: From Wall Street to the West Coast,
U.S. Bank delivers full value to our customers

and prospects. Shown here is (center)

U.S. Bank corporate trust customer

Christopher Schoen, Managing Director

in Mortgage Finance at Credit Suisse, with

Edward Kachinski, Senior Vice President,

Business Development, and Barbara Nastro,

Vice President, Business Development, of

our New York City corporate trust office.

Left: U.S. Bank customers beneﬁt from the
signiﬁcant scale of our national resources,

which are delivered by local relationship

managers who have a highly sophisticated

understanding of area market needs.

U.S. BANCORP 11

USB_2005AR_complete.qxd 3/7/06 9:45 AM Page 12

C O N S U M E R B A N K I N G :

Small Business Service Center
streamlines service delivery

we listen to our customers. When our small business
banking customers said they wanted a one-stop resource for all their special
banking needs and questions, we immediately began the development of
our Small Business Service Center. We created a model that tackled such
issues as staffing with a team of experts, ensuring the highest level of product
knowledge, taking full ownership of issues, and one-and-done problem
resolution, among others.

The system is designed to make banking smooth and effortless for these
valuable customers. Diverse customer service groups within the bank that may
previously have worked separately now are pulled together and collaborate
through the Service Center. Communication with customers has increased,
and customer satisfaction scores in the pilot markets have improved signiﬁcantly.

Based on the success of our Denver pilot program, the Small Business
Service Center program has been expanded throughout Colorado and into
the St. Louis marketplace. Expansion into additional markets is planned
for 2006 to ensure that we are delivering Five Star Service to all of our
small business banking customers.

K E Y B U S I N E S S U N I T S :

24-Hour Banking & Financial Sales

Business Equipment Finance

Community Banking

Community Development

Consumer Lending

Home Mortgage

In-store and Corporate On-site Banking

Investments and Insurance

Metropolitan Branch Banking

Small Business Banking

SBA Division

Workplace and Student Banking

12 U.S. BANCORP

USB_2005AR_complete.qxd 3/7/06 9:45 AM Page 13

U.S. Bank is proud to be a leader in small

business banking across our primary 24-state
footprint. Small businesses are crucial to our
nation’s economy — and to the very existence of

cities and towns across our country. Nearly 90%

of the country’s 5.6 million employers have fewer

than 20 workers. And these small businesses

create 75% of new jobs. Banks are the single

most important source of ﬁnancing for most

small businesses, and we take that responsibility

seriously. U.S. Bank provides a wide range

of ﬁnancial products and services to meet the

unique needs of small business owners, including

deposit and investment accounts; credit in the

form of loans, lines, leases, cards and SBA lending;

cash management and insurance products.

Above: U.S. Bank Small Business customer,
Tina Stoeberl, owner of College Hill Coffee Co.

and Casual Gourmet in Cincinnati, greets a

customer at her inviting new coffee shop.

Left: Lori Hamilton, operations manager
of the U.S. Bank Small Business Service

Center in Colorado.

U.S. BANCORP 13

USB_2005AR_complete.qxd 3/7/06 9:45 AM Page 14

C O N S U M E R B A N K I N G :

On-site banking promotes
powerful ﬁnancial partnerships

as a r e c o g n i z e d i n du s t ry l e a d e r i n
on-site banking, U.S. Bank offers full-service branches inside
corporate headquarters, healthcare facilities, university campuses, retirement
centers, airport malls and other specialized locations. Our on-site banking
branches set the standard for convenient and accessible service, bringing
comprehensive banking options directly to our customers. Every U.S. Bank
on-site branch location is speciﬁcally tailored to meet the unique ﬁnancial
needs of the customers located at the site — through dedicated management
and support services, ﬂexible marketing and merchandising, customized
sales efforts and specialized training.

The partnership doesn’t stop there. In addition to meeting the needs of our
customers by bringing a full range of banking options right to them, we’re
providing our corporate customers with a valuable, exclusive beneﬁt they can
offer their employees and patrons — a convenient U.S. Bank on-site branch office.

U.S. Bank continues to invest in our highly successful in-store banking
business — which delivers all the access of traditional branches to our customers
inside grocery and convenience stores — through expansion in fast-growing
markets, making ours the third largest in-store network in the industry. With
a full range of banking options, extended hours and convenient locations,
U.S. Bank is committed to powerful on-site and in-store banking partnerships.

K E Y B U S I N E S S U N I T S :

24-Hour Banking & Financial Sales

Business Equipment Finance

Community Banking

Community Development

Consumer Lending

Home Mortgage

In-store and Corporate On-site Banking

Investments and Insurance

Metropolitan Branch Banking

Small Business Banking

SBA Division

Workplace and Student Banking

14 U.S. BANCORP

USB_2005AR_complete.qxd 3/7/06 9:45 AM Page 15

The potential for growth in on-site banking
is tremendous. U.S. Bank currently operates
55 on-site branches, leading the industry with

our commitment to bring comprehensive banking

services to locations where customers need

them most. Our expertise in this arena and

proven track record of successful partnerships

enhances our ability to attract new corporate

customers and positions U.S. Bank to leverage

our existing corporate relationships.

Left: U.S. Bank on-site customers save time
by banking at work, save money with special

on-site offers, and enjoy free consultations

and ﬁnancial seminars.

Below: Our on-site branch located at the
Minneapolis corporate headquarters of Best Buy,

North America’s number-one specialty retailer

of consumer electronics, personal computers,

entertainment software and appliances.

U.S. BANCORP 15

USB_2005AR_complete.qxd 3/7/06 9:45 AM Page 16

C O M M U N I T Y D E V E L O P M E N T:

U.S. Bancorp invests in our
communities through active
leadership, employee volunteerism,
and ﬁnancial support. By helping to
build strong, vibrant communities,
we’re building a healthy marketplace
for our company and fostering
neighborhoods where businesses
succeed and people want to live
and work. We do this by investing
in affordable housing, economic
opportunity, education, arts and
culture, and community service
initiatives. By devoting time, talent
and money to projects, programs
and organizations focused on
invigorating our communities, we
provide residents and businesses
with access to opportunities that will
enable them to thrive and prosper.

U.S. Bancorp provides superior,
competitive products to every
customer we serve. In addition,
we help customers and businesses
overcome challenging ﬁnancial
situations through customized
ﬁnancial solutions. U.S. Bancorp
provides loans and investments to
help build, rehabilitate and ﬁnance
affordable housing units throughout
our corporate footprint.

U.S. Bancorp also helps communities
foster economic growth and revital-
ization by providing loans, grants
and investments to small businesses
and other entities in support of projects
and organizations designed to create
jobs and rehabilitate communities.

U.S. Bancorp Foundation
2005 Charitable Contributions
by Program Area

18%

23%

Arts &
Culture

Civic &
Community

Economic
Opportunity

Education

Foundation
Programs

27%

Health &
Human Services

22%

Through the U.S. Bancorp Foundation,

we provide cash contributions to nonproﬁt

organizations in support of affordable

housing, economic opportunities, education

and artistic and cultural enrichment. In

2005, total charitable contributions from

the U.S. Bancorp Foundation exceeded

$21 million.

Through volunteer efforts,
U.S. Bancorp employees are
providing their expertise, time
and talents to help improve our
communities. The U.S. Bank
Development Network, comprised
of 50 geographically based
chapters, provides a forum
where our employees engage in
community service activities,
mentoring opportunities, charitable
fundraising drives and more. In
2005, U.S. Bancorp recognized
250 of our most exceptional
employee volunteers through the
U.S. Bank Five Star Volunteer
Award program. In addition
to recognition as outstanding
volunteers, winners were honored
through a $1,000 contribution to
their volunteer organizations.

16 U.S. BANCORP

U.S. Bank connects our communities
with opportunities. Recently, U.S. Bank
provided community development loans totaling

almost $5.6 million for the construction and

permanent ﬁnancing of Seniors on Broadway.

This new 42-unit affordable housing and

retail development is located adjacent to the

Chula Vista Learning Community Charter

School in San Diego County. The program

helps create a valuable link between seniors

and elementary school students through

literacy, technology, art, after-school programs

and other inter-generational activities. All

units in the complex are affordable to seniors

with incomes below 50% of the area median

income. Our nonproﬁt partner is MAAC Project,

a multi-purpose social service agency with a

successful 40-year history of serving various

communities throughout San Diego County.

USB_2005AR_complete.qxd 3/7/06 9:45 AM Page 17

F I N A N C I A L R E V I E W 2 0 0 5 :

We focus on service, ﬁnancial
strength, shareholder value

We are proud of the strides we have made in improving customer service —
through expansion, added capabilities, new products and services, more
offices in more convenient locations — and in delivering the very best we
have to offer to every customer, every time. We are pleased that we can
show you in this report our Five Star Service up close through ﬁve examples
of our initiatives.

Our investments in expansion of markets, products, delivery systems and
locations inﬂuence our ﬁnancial results greatly. We invite you to read about
management’s discussion and analysis of our ﬁnancial results in the
following pages.

F I N A N C I A L S :

Management’s Discussion and Analysis

Consolidated Financial Statements

Notes to Consolidated Financial Statements

Reports of Management and Independent Accountants

Five-Year Consolidated Financial Statements

Quarterly Consolidated Financial Data

Supplemental Financial Data

Annual Report on Form 10-K

CEO and CFO Certiﬁcations

Executive Officers

Directors

101

104

106

107

110

121

124

126

Corporate Information

inside back cover

U.S. BANCORP 17

Management’s Discussion and Analysis

O V E RV I E W

In 2005, U.S. Bancorp and its subsidiaries (the ‘‘Company’’)
continued to demonstrate its ﬁnancial strength and
shareholder focus. The Company achieved record earnings
in 2005 and grew earnings per share, on a diluted basis, by
11.0 percent despite industry challenges related to rising
interest rates. This represents the fourth consecutive year
that earnings growth has exceeded the Company’s long-
term goal of achieving 10 percent earnings per share
growth. The Company continues to meet this goal through
its focus on organic growth, investing in business initiatives
that strengthen our presence and product offerings for
customers, and acquiring fee-based businesses with
operating scale. As a result of this focus, the Company’s
fee-based revenue grew 9.4 percent over 2004 with growth
in most product categories. Fee income growth was led by
growth in deposit service charges and revenues generated by
payment processing businesses. In addition, average loans
outstanding rose 9.0 percent year-over-year despite very
competitive credit pricing. In 2006, the Company will
continue to focus on revenue growth driven by disciplined
strategic business initiatives, customer service and an
emphasis on payment processing, ﬁduciary and trust
businesses, retail banking and commercial lending. The
Company’s performance was also driven by continued
improvement in the credit quality of the Company’s loan
portfolios. During the year, nonperforming assets declined
13.9 percent from a year ago and total net charge-offs
decreased to .51 percent of average loans outstanding in
2005, compared with .63 percent in 2004. In 2006, the
Company will continue to focus on credit quality and
minimizing volatility of credit-related losses. Finally,
effectively managing costs is always a goal for the Company
and an important factor of ﬁnancial performance. During
2005, the Company’s efﬁciency ratio (the ratio of
noninterest expense to taxable-equivalent net revenue
excluding net securities gains or losses) improved to
44.3 percent, compared with 45.3 percent in 2004, and the
Company continues to be an industry leader in this
category.

The Company’s strong performance is also reﬂected in
its capital levels and the favorable credit ratings assigned by
various credit rating agencies. Equity capital of the
Company continued to be strong at 5.9 percent of tangible
common assets at December 31, 2005, compared with
6.4 percent at December 31, 2004. In 2005, credit ratings
for the Company were upgraded by Moody’s Investors
Service. On January 27, 2006, Standard & Poor’s Rating
Services upgraded the Company’s credit ratings to AA–/A-
1+. Standard & Poor’s also upgraded the Company’s
primary banking subsidiaries to an AA long-term debt

18 U.S. BANCORP

rating. Credit ratings assigned by various credit rating
agencies reﬂect the rating agencies’ recognition of the
Company’s sector-leading earnings performance and lower
credit risk proﬁle.

In concert with achieving stated ﬁnancial objectives, the

Company exceeded its objective to return at least
80 percent of earnings to shareholders in the form of
dividends and share repurchases by returning 90 percent of
2005 earnings to shareholders. In December 2005, the
Company further increased its cash dividend, resulting in a
10 percent increase from the dividend rate in the fourth
quarter of 2004. Throughout 2005, the Company continued
to repurchase shares under its share repurchase program.
The Company continues to afﬁrm its goal of returning at
least 80 percent of earnings to shareholders. During 2006,
the Company will also continue its focus on its ﬁnancial
objectives of strong earnings growth, creating operating
leverage and a strong credit risk proﬁle, as well as its ﬁve-
star customer service to further strengthen customer loyalty.

Earnings Summary The Company reported net income of
$4.5 billion in 2005, or $2.42 per diluted share, compared
with $4.2 billion, or $2.18 per diluted share, in 2004.
Return on average assets and return on average equity were
2.21 percent and 22.5 percent, respectively, in 2005,
compared with returns of 2.17 percent and 21.4 percent,
respectively, in 2004.

Total net revenue, on a taxable-equivalent basis for
2005, was $474 million (3.7 percent) higher than 2004
despite the adverse impact of rising interest rates on product
margins generally experienced by the banking industry. The
increase in net revenue was comprised of a 9.5 percent
increase in noninterest income and a .7 percent decline in
net interest income. The increase in noninterest income was
driven by 9.4 percent growth in fee-based revenue across
the majority of fee categories and expansion in payment
processing businesses from a year ago. The decline in net
interest income reﬂected growth in average earning assets,
more than offset by lower net interest margins. In 2005,
average earning assets increased $10.3 billion (6.1 percent),
compared with 2004, primarily due to growth in residential
mortgages, commercial loans and retail loans. The net
interest margin in 2005 was 3.97 percent, compared with
4.25 percent in 2004. The year-over-year decline in net
interest margin reﬂected narrower credit spreads due to the
competitive lending environment, the mix of growth in
lower-spread ﬁxed-rate credit products and the impact of
changes in the yield curve from a year ago. The net interest
margin also declined due to share repurchases during the
year, funding incremental growth with higher cost

wholesale funding, and asset/liability decisions given rising
shorter-term interest rates. Slightly higher loan fees and the
increasing margin beneﬁt of deposits and net free funds
partially offset the impact of these factors during the year.

Total noninterest expense in 2005 increased

$78 million (1.3 percent), compared with 2004. Noninterest
expense reﬂected incremental costs related to expanding the
payment processing businesses, investments in in-store
branches (branches located within grocery stores) and
service-related business initiatives, expenses related to
investments in affordable housing or other similar tax-

advantaged development projects and higher medical and
pension costs from a year ago. These incremental expenses
were partially offset by a favorable change in impairment
charges related to the mortgage servicing rights (‘‘MSRs’’)
portfolio of $110 million due to changing longer-term
interest rates and a $101 million reduction in debt
prepayment charges, compared with 2004. The efﬁciency
ratio (the ratio of noninterest expense to taxable-equivalent
net revenue excluding net securities gains or losses) was
44.3 percent in 2005, compared with 45.3 percent in 2004.
The improvement in the efﬁciency ratio reﬂected these

Table 1

S E L E C T E D F I N A N C I A L D ATA

Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data)

Condensed Income Statement
Net interest income (taxable-equivalent basis) (a) ****************
Noninterest income******************************************
Securities gains (losses), net **********************************
Total net revenue ****************************************
Noninterest expense*****************************************
Provision for credit losses ************************************
Income from continuing operations before taxes *************
Taxable-equivalent adjustment ********************************
Applicable income taxes *************************************
Income from continuing operations *************************
Discontinued operations (after-tax)*****************************
Cumulative effect of accounting change (after-tax) ***************
Net income *********************************************

2005

2004

2003

2002

2001

$ 7,088
6,151
(106)

$ 7,140
5,624
(105)

$ 7,217
5,068
245

13,133
5,863
666

6,604
33
2,082

4,489
—
—

12,659
5,785
669

6,205
29
2,009

4,167
—
—

12,530
5,597
1,254

5,679
28
1,941

3,710
23
—

$ 6,847
4,911
300

12,058
5,740
1,349

4,969
33
1,708

3,228
(23)
(37)

$ 6,405
4,340
329

11,074
6,149
2,529

2,396
54
818

1,524
(45)
—

$ 4,489

$ 4,167

$ 3,733

$ 3,168

$ 1,479

Per Common Share
Earnings per share from continuing operations ******************
Diluted earnings per share from continuing operations ***********
Earnings per share ******************************************
Diluted earnings per share ***********************************
Dividends declared per share *********************************
Book value per share ****************************************
Market value per share **************************************
Average common shares outstanding **************************
Average diluted common shares outstanding *******************

2.45
2.42
2.45
2.42
1.230
11.07
29.89
1,831
1,857

2.21
2.18
2.21
2.18
1.020
10.52
31.32
1,887
1,913

1.93
1.92
1.94
1.93
.855
10.01
29.78
1,924
1,936

1.68
1.68
1.65
1.65
.780
9.62
21.22
1,916
1,925

.79
.79
.77
.76
.750
8.58
20.93
1,928
1,940

Financial Ratios
Return on average assets ************************************
Return on average equity ************************************
Net interest margin (taxable-equivalent basis) *******************
Efﬁciency ratio (b) *******************************************

Average Balances
Loans *****************************************************
Loans held for sale ******************************************
Investment securities ****************************************
Earning assets**********************************************
Assets*****************************************************
Noninterest-bearing deposits *********************************
Deposits ***************************************************
Short-term borrowings ***************************************
Long-term debt *********************************************
Shareholders’ equity*****************************************

Period End Balances
Loans *****************************************************
Allowance for credit losses ***********************************
Investment securities ****************************************
Assets*****************************************************
Deposits ***************************************************
Long-term debt *********************************************
Shareholders’ equity*****************************************
Regulatory capital ratios

Tangible common equity **********************************
Tier 1 capital ********************************************
Total risk-based capital ***********************************
Leverage ***********************************************

2.21%
22.5
3.97
44.3

2.17%
21.4
4.25
45.3

1.99%
19.2
4.49
45.6

1.84%
18.3
4.65
48.8

.89%
9.0
4.46
57.2

$133,105
1,795
42,103
178,425
203,198
29,229
121,001
19,382
36,141
19,953

$137,806
2,251
39,768
209,465
124,709
37,069
20,086

$122,141
1,608
43,009
168,123
191,593
29,816
116,222
14,534
35,115
19,459

$126,315
2,269
41,481
195,104
120,741
34,739
19,539

$118,362
3,616
37,248
160,808
187,630
31,715
116,553
10,503
33,663
19,393

$118,235
2,369
43,334
189,471
119,052
33,816
19,242

$114,453
2,644
28,829
147,410
171,948
28,715
105,124
10,116
32,172
17,273

$116,251
2,422
28,488
180,027
115,534
31,582
18,436

$118,177
1,911
21,916
143,501
165,944
25,109
104,956
11,679
26,088
16,426

$114,405
2,457
26,608
171,390
105,219
28,542
16,745

5.9%
8.2
12.5
7.6

6.4%
8.6
13.1
7.9

6.5%
9.1
13.6
8.0

5.7%
8.0
12.4
7.7

5.9%
7.8
11.9
7.9

(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.

U.S. BANCORP 19

changes and the Company’s ability to generate operating
leverage within its businesses.

The provision for credit losses was $666 million for

2005, a decrease of $3 million (.4 percent) from 2004 due
to improving credit quality reﬂected in lower levels of
nonperforming loans, somewhat offset by the effects of a
$56 million provision recorded in 2005 for charge-offs
related to new bankruptcy legislation that became effective
in October, 2005.

Signiﬁcant Acquisitions On December 30, 2005, the
Company acquired the corporate trust and institutional
custody businesses of Wachovia Corporation in a cash
transaction valued at $720 million initially with an
additional $80 million payable in one year based on
business retention levels. As a result of this transaction, the
Company acquired approximately 14,100 new Corporate
Trust client issuances with $410 billion in assets under
administration and approximately 1,700 new Institutional
Trust and Custody clients with $570 billion in assets under
administration. The transaction represented total assets
acquired of $730 million and liabilities assumed of
$10 million at the closing date. Included in total assets were
contract and other intangibles with an estimated fair value
of $227 million and goodwill of $500 million. The goodwill
reﬂected the strategic value of the combined organization’s
leadership position in the corporate trust and institutional
custody businesses and economies of scale resulting from
the transaction.

Refer to Notes 3 and 4 of the Notes to Consolidated
Financial Statements for additional information regarding
business combinations and discontinued operations.

Table 2

A N A LY S I S O F N E T I N T E R E S T I N C O M E

S TAT E M E N T O F I N C O M E A N A LY S I S

Net Interest Income Net interest income, on a taxable-
equivalent basis, was $7.1 billion in 2005, $7.1 billion in
2004 and $7.2 billion in 2003. Net interest income declined
$52 million in 2005, reﬂecting growth in average earning
assets, more than offset by lower net interest margins.
Average earning assets were $178.4 billion for 2005,
compared with $168.1 billion and $160.8 billion for 2004
and 2003, respectively. The $10.3 billion (6.1 percent)
increase in average earning assets for 2005, compared with
2004, was primarily driven by increases in residential
mortgages, commercial loans and retail loans. The net
interest margin in 2005 was 3.97 percent, compared with
4.25 percent and 4.49 percent in 2004 and 2003,
respectively. The 28 basis point decline in the 2005 net
interest margin, compared with 2004, reﬂected the current
competitive lending environment, asset/liability management
decisions and the impact of changes in the yield curve from
a year ago. Compared with 2004, credit spreads have
tightened by approximately 19 basis points in 2005 across
most lending products due to competitive pricing and a
change in mix due to growth in lower-spread, ﬁxed-rate
credit products. The net interest margin also declined due to
the impact of share repurchases, funding incremental
growth of earning assets with higher cost wholesale
funding, and asset/liability management decisions designed
to minimize the Company’s rate sensitivity position,
including issuing longer-term ﬁxed-rate debt and a
reduction in the Company’s net receive-ﬁxed interest rate
swap position of 18.3 percent since December 31, 2004.

(Dollars in Millions)

2005

2004

2003

Components of net interest income

Income on earning assets (taxable-equivalent basis) (a)********
Expense on interest-bearing liabilities ***********************

$ 10,584
3,496

$ 9,215
2,075

$ 9,286
2,069

Net interest income (taxable-equivalent basis) *******************

$ 7,088

$ 7,140

$ 7,217

Net interest income, as reported ******************************

$ 7,055

$ 7,111

$ 7,189

Average yields and rates paid

Earning assets yield (taxable-equivalent basis) ***************
Rate paid on interest-bearing liabilities **********************

Gross interest margin (taxable-equivalent basis) *****************

Net interest margin (taxable-equivalent basis) *******************

Average balances

5.93%
2.37

3.56%

3.97%

5.48%
1.53

3.95%

4.25%

5.77%
1.60

4.17%

4.49%

Investment securities *************************************
Loans **************************************************
Earning assets ******************************************
Interest-bearing liabilities **********************************
Net free funds (b) ****************************************

$ 42,103
133,105
178,425
147,295
31,130

$ 43,009
122,141
168,123
136,055
32,068

$ 37,248
118,362
160,808
129,004
31,804

2005
v 2004

2004
v 2003

$ 1,369
1,421

(52)

(56)

.45%
.84

(.39)%

(.28)%

(906)
10,964
10,302
11,240
(938)

(71)
6

(77)

(78)

(.29)%
(.07)

(.22)%

(.24)%

$5,761
3,779
7,315
7,051
264

(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, allowance for loan losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity.

20 U.S. BANCORP

Slightly higher loan fees and the increasing margin beneﬁt
of deposits and net free funds partially offset these factors.
Average loans in 2005 were higher by $11.0 billion
(9.0 percent), compared with 2004, driven by growth in
residential mortgages, commercial loans and retail loans of
$3.7 billion (25.9 percent), $3.3 billion (8.4 percent) and
$3.3 billion (7.9 percent), respectively. The signiﬁcant
growth in residential mortgages was, in part, due to an
asset/liability management decision to retain adjustable-rate
mortgage production over the last several quarters. Total
average commercial real estate loans increased only
2.6 percent, relative to 2004, principally due to higher
reﬁnancing activities during the past two years given the
interest rate environment.

Average investment securities were $906 million
(2.1 percent) lower in 2005, compared with 2004. The
Company utilizes the investment portfolio as part of its
liquidity and asset/liability management practices to
minimize structural interest rate and market valuation risks
associated with changing interest rates. The reduction in
average investment securities in 2005 principally reﬂected
maturities and prepayments utilized to fund earning asset
growth. It also reﬂected the net impact of repositioning the
investment portfolio as part of asset/liability risk
management decisions to acquire primarily variable-rate
securities to minimize the Company’s rate sensitivity
position given the changing rate environment and mix of
loan growth. During 2005, the Company received proceeds
from prepayments and maturities of securities of
$10.3 billion. In response to structural interest rate risk due
to changing interest rates and the mix of loan growth, the
Company also made decisions to sell $4.3 billion of
securities, classiﬁed as available-for-sale, recognizing net
securities losses of $106 million. In 2005, approximately
$13.2 billion was reinvested in principally adjustable-rate
securities, giving consideration to the Company’s
asset/liability position. At December 31, 2005, the
Company’s investment portfolio consisted of approximately
41 percent variable-rate securities. Refer to the ‘‘Interest
Rate Risk Management’’ section for further information on
the sensitivity of net interest income to changes in interest
rates.

Average noninterest-bearing deposits in 2005 were
lower by $587 million (2.0 percent), compared with 2004.
The year-over-year change in the average balances of
noninterest-bearing deposits was impacted by product
changes in the Consumer Banking business line. In late
2004, the Company migrated approximately $1.3 billion of
noninterest-bearing deposit balances to interest checking
accounts as an enhancement to its Silver Elite Checking
product. Average branch-based noninterest-bearing deposits
in 2005, excluding the migration of certain high-value
customers to Silver Elite Checking, were higher by

approximately $210 million (1.8 percent), over 2004.
Average noninterest-bearing deposits in other areas,
including commercial banking and Private Client, Trust and
Asset Management, also increased year-over-year. These
favorable variances were offset somewhat by expected
declines in average noninterest-bearing deposits in corporate
banking as these customers utilized their excess liquidity to
fund their operations.

Average total savings products declined $1.7 billion

(2.9 percent) year-over-year, compared with 2004, due to
reductions in average money market savings account
balances and savings accounts, partially offset by higher
interest checking balances. During 2005, average branch-
based interest checking deposits increased by $2.2 billion
(14.7 percent) due to strong new account growth of 9.0
percent, as well as the $1.3 billion migration of the Silver
Elite Checking product. This positive variance in branch-
based interest checking account deposits was partially offset
by reductions in other business units. Average money
market savings account balances declined year-over-year by
$3.5 billion (10.8 percent), with declines in both the
branches and other business lines. The decline was primarily
the result of deposit pricing by the Company for money
market products in relation to other ﬁxed-rate deposit
products offered. A portion of the money market balances
have migrated to time deposits greater than $100,000 as
rates increased on the time deposit products. Average time
deposits greater than $100,000 grew $7.0 billion
(51.0 percent) in 2005, compared with 2004, most notably
in corporate banking, as customers migrated balances to
higher rate deposits.

The decline in net interest income in 2004, compared

with 2003, reﬂected modest growth in average earning
assets, more than offset by lower net interest margins. Also
contributing to the year-over-year decline was a $38 million
reduction in loan fees, the result of fewer loan prepayments
in a rising rate environment. The $7.3 billion (4.5 percent)
increase in average earning assets for 2004, compared with
2003, was primarily driven by increases in residential
mortgages, retail loans and investment securities, partially
offset by a decline in commercial loans and loans held for
sale related to mortgage banking activities. The decline in
average commercial loans reflected soft loan demand in 2003
and through the third quarter of 2004. The 24 basis point
decline in 2004 net interest margin, compared with 2003,
primarily reflected the competitive credit pricing environment,
a preference to acquire adjustable-rate securities which have
lower yields and a decline in prepayment fees. The net
interest margin was also impacted by a modest increase in
the percent of total earning assets funded by wholesale
sources of funding and higher interest rates paid on
wholesale funding due to the impact of rising rates. In
addition, the net interest margin declined year-over-year as a

U.S. BANCORP 21

result of consolidating high credit quality, low margin loans
from a commercial loan conduit previously maintained by
the Company onto the Company’s balance sheet beginning in
the third quarter of 2003.

Average loans in 2004 were $3.8 billion (3.2 percent)

higher than in 2003, reﬂecting growth in residential
mortgages, retail loans and commercial real estate loans of
$2.6 billion (22.5 percent), $3.0 billion (7.9 percent) and
$.1 billion (.5 percent), respectively. Growth in these
categories was offset somewhat by an overall decline in
average commercial loans of $2.0 billion (4.8 percent).
Average investment securities were $5.8 billion
(15.5 percent) higher in 2004, compared with 2003,
reﬂecting the reinvestment of proceeds from declining
average commercial loan balances and loans held for sale.
Average noninterest-bearing deposits in 2004 were lower by
$1.9 billion (6.0 percent), compared with 2003. While
average branch-based noninterest-bearing deposits increased
by 2.7 percent from 2003, mortgage-related escrow
balances and business-related noninterest-bearing deposits,
including corporate banking, mortgage banking and
government deposits, declined. Average interest-bearing
deposits were higher by $1.6 billion (1.8 percent), compared
with 2003. The year-over-year increase in average interest-
bearing deposits included increases in average savings

products deposits of $2.6 billion (4.6 percent) and time
deposits greater than $100,000 of $1.4 billion
(11.0 percent), partially offset by a decrease in time
certiﬁcates of deposit less than $100,000 of $2.4 billion
(15.6 percent). The decrease in time certiﬁcates of deposit
less than $100,000 was primarily due to pricing decisions
by management in connection with the Company’s overall
funding and risk management activities. Average net free
funds increased $.3 billion in 2004, compared with 2003,
including a decrease in average noninterest-bearing deposits,
other liabilities and other assets of $1.9 billion
(6.0 percent), $1.3 billion (16.7 percent) and $3.1 billion
(10.5 percent), respectively. The decrease in other assets and
liabilities principally reﬂected the impact of the spin-off of
Piper Jaffray Companies.

Provision for Credit Losses The provision for credit losses
is recorded to bring the allowance for credit losses to a level
deemed appropriate by management based on factors
discussed in the ‘‘Analysis and Determination of Allowance
for Credit Losses’’ section. The provision for credit losses
was $666 million in 2005, compared with $669 million and
$1,254 million in 2004 and 2003, respectively.

The decrease in the provision for credit losses of
$3 million (.4 percent) in 2005 reﬂected improving levels of
nonperforming loans resulting in lower total net charge-offs

Table 3

N E T I N T E R E S T I N C O M E — C H A N G E S D U E T O R AT E A N D V O L U M E ( a )

(Dollars in Millions)

Increase (decrease) in

Interest income

2005 v 2004

2004 v 2003

Volume

Yield/Rate

Total

Volume

Yield/Rate

Total

Investment securities*********************
Loans held for sale **********************
Commercial loans ***********************
Commercial real estate *******************
Residential mortgages********************
Retail loans *****************************

Total loans **************************
Other earning assets*********************

Total********************************

Interest expense

Interest checking ************************
Money market accounts ******************
Savings accounts ***********************
Time certiﬁcates of deposit less than

$100,000 ****************************
Time deposits greater than $100,000 ******

Total interest-bearing deposits *********
Short-term borrowings *******************
Long-term debt *************************

Total********************************

$ (39)
11
185
39
211
207

642
4

618

6
(25)
—

3
123

107
88
27

222

Increase (decrease) in net interest income***

$396

$ 165
4
103
222
(22)
273

576
6

751

58
148
—

45
297

548
339
312

$ 126
15
288
261
189
480

1,218
10

1,369

64
123
—

48
420

655
427
339

1,199

$ (448)

1,421

(52)

$ 263
(112)
(111)
7
160
210

266
(14)

403

8
5
1

(70)
25

(31)
64
35

$(124)
1
9
(49)
(61)
(264)

(365)
14

(474)

(21)
(88)
(7)

(40)
(6)

(162)
32
68

(62)

$ 139
(111)
(102)
(42)
99
(54)

(99)
—

(71)

(13)
(83)
(6)

(110)
19

(193)
96
103

$ 335

$(412)

$ (77)

(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.

22 U.S. BANCORP

in 2005. Nonperforming loans, principally reﬂecting
changes in the quality of commercial and commercial real
estate loans, declined $96 million from December 31, 2004.
Net charge-offs declined $82 million from 2004, the result
of lower gross charge-offs within the commercial and
commercial real estate loan portfolios. This improvement in
commercial and commercial real estate net charge-offs was
offset somewhat by higher residential and retail net charge-
offs reﬂecting changes in the mix of these portfolios and the
impact of recently enacted bankruptcy legislation.

In 2004, the decline in the provision for credit losses of

$585 million (46.7 percent) reﬂected continuing
improvement in the credit quality of the loan portfolio and
changing economic conditions. The changes in credit quality
were broad-based across most industries resulting in
improving credit risk ratings, a decline in nonperforming
assets and lower total net charge-offs. Commercial loan
demand was soft in most markets within the banking
footprint during much of 2003 and 2004. Overall, credit
quality of the Company’s portfolios has improved since
2002 due to better economic conditions and enhancements
in collection efforts, underwriting and risk management
practices. In response to these changes, the Company’s
allowance for credit losses has trended downward since
2002. 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 2005 was
$6.0 billion, compared with $5.5 billion in 2004 and
$5.3 billion in 2003. The $526 million (9.5 percent)
increase in 2005 over 2004 was driven by strong organic
growth in the majority of fee income categories, particularly
payment processing revenues and deposit service charges.

The growth in credit and debit card revenue of

9.9 percent was principally driven by higher customer
transaction volumes and rate changes from a year ago. The
corporate payment products revenue growth of 19.9 percent
reﬂected growth in sales, card usage, rate changes and the
recent acquisition of a small aviation card business. ATM
processing services revenue was higher by 30.9 percent
primarily due to the expansion of the ATM business in May
of 2005. Merchant processing services revenue was higher
by 14.1 percent in 2005, compared with 2004, reﬂecting an
increase in merchant sales volume and business expansion
in European markets. The increase in trust and investment
management fees was primarily attributable to improved
equity market conditions and account growth. Deposit
service charges were higher by 15.0 percent year-over-year
due to new account growth in the branches and higher
transaction-related service activities. The growth in
mortgage banking revenue was due to origination fees and
gains from higher production volumes and increased
servicing income. Other income increased by 24.1 percent
from 2004, primarily due to higher income from equity
investments and the cash surrender value of insurance
products relative to 2004. Partially offsetting these positive
variances year-over-year were decreases in treasury
management fees and commercial products revenue of
6.4 percent and 7.4 percent, respectively. The decrease in
treasury management fees was due to higher earnings
credits on customers’ compensating balances, reﬂecting
rising interest rates relative to a year ago, partially offset by
growth in treasury management-related activities.
Commercial products revenue declined due to reductions in
non-yield loan fees, syndications and fees for letters of
credit.

In 2004, noninterest income increased $206 million

(3.9 percent), compared with 2003, driven by strong
organic growth in most fee-based products and services
categories, particularly in payment processing revenue.

Table 4

N O N I N T E R E S T I N C O M E

(Dollars in Millions)

Credit and debit card revenue **********************************
Corporate payment products revenue ****************************
ATM processing services ***************************************
Merchant processing services ***********************************
Trust and investment management fees **************************
Deposit service charges ****************************************
Treasury management fees *************************************
Commercial products revenue **********************************
Mortgage banking revenue *************************************
Investment products fees and commissions***********************
Securities gains (losses), net ************************************
Other ********************************************************

2005

$ 713
488
229
770
1,009
928
437
400
432
152
(106)
593

Total noninterest income ************************************

$6,045

* Not meaningful

2004

$ 649
407
175
675
981
807
467
432
397
156
(105)
478

$5,519

2003

$ 561
361
166
561
954
716
466
401
367
145
245
370

$5,313

2005
v 2004

9.9%

19.9
30.9
14.1
2.9
15.0
(6.4)
(7.4)
8.8
(2.6)
1.0
24.1

9.5%

2004
v 2003

15.7%
12.7
5.4
20.3
2.8
12.7
0.2
7.7
8.2
7.6
*
29.2

3.9%

U.S. BANCORP 23

Partially offsetting the increase in fee-based revenue growth
in 2004 was a year-over-year reduction in net securities
gains (losses) of $350 million. The growth in credit and
debit card revenue was driven by higher transaction
volumes and rate changes. This growth in sales volumes
was somewhat muted due to the impact of the settlement of
the antitrust litigation brought against VISA USA and
MasterCard by Wal-Mart Stores, Inc., Sears Roebuck & Co.
and other retailers, which lowered interchange rates on
signature debit transactions beginning in August 2003. The
year-over-year impact of VISA’s settlement on debit card
revenue for 2004 was approximately $33 million. The
corporate payment products revenue growth reﬂected
growth in sales, card usage and rate changes. The favorable
variance in ATM processing services revenue was also due
to increases in transaction volumes and sales. Merchant
processing services revenue was higher in 2004, compared
with 2003, reﬂecting an increase in same store sales volume,
new business and expansion of the Company’s merchant
acquiring business in Europe. Deposit service charges
increased in 2004 primarily due to account growth, revenue
enhancement initiatives and transaction-related fees. Trust
and investment management fees increased as gains from
equity market valuations were partially offset by lower fees,
partially due to a change in mix of fund balances and
customers’ migration from money market mutual funds to
interest-bearing deposits with marginally better pricing.
During 2004, commercial products revenue increased
primarily due to syndication fees and commercial leasing
revenue. The growth in mortgage banking revenue was due
to an increase in loan servicing revenues, offset somewhat
by lower gains from the sale of mortgage loan production.
Other noninterest income increased principally due to
improving retail lease residual values resulting in lower end-
of-term residual losses, a residual value insurance recovery
of $17 million during 2004 and improving equity
investment valuations.

Table 5

N O N I N T E R E S T E X P E N S E

Noninterest Expense Noninterest expense in 2005 was
$5.9 billion, compared with $5.8 billion and $5.6 billion in
2004 and 2003, respectively. The $78 million (1.3 percent)
increase in noninterest expenses in 2005, compared with
2004, was primarily driven by production-based incentives
and expenses related to business initiatives, including
acquisitions investments, acquired businesses, and
production-based, offset by a $110 million favorable change
in the MSR valuation and a $101 million decrease in debt
prepayment charges. Compensation expense was higher by
5.8 percent year-over-year principally due to business
expansion, including in-store branches, expanding the
Company’s payment processing businesses and other
product sales initiatives. Employee beneﬁts increased
10.8 percent, year-over-year, primarily as a result of higher
pension expense, medical costs, payroll taxes and other
beneﬁts. Professional services expense was higher by
11.4 percent due to increases in legal and other professional
services related to business initiatives, technology
development and integration costs of speciﬁc payment
processing businesses. Marketing and business development
expense increased 21.1 percent principally related to brand
awareness, credit card and prepaid gift card programs.
Technology and communications expense was higher in
2005 by 8.4 percent, reﬂecting depreciation of technology
investments, network costs associated with the expansion of
the payment processing businesses, and higher outside data
processing expense associated with expanding a prepaid gift
card program. Other expense declined 1.7 percent primarily
due to lower operating and fraud losses and insurance costs,
partially offset by increased investments in affordable
housing and other tax-advantaged projects and higher
merchant processing costs due to the expansion of the
payment processing businesses relative to 2004.

The noninterest expense increase of $188 million

(3.4 percent) in 2004, compared with 2003, principally
reﬂected a $155 million charge related to the prepayment of

(Dollars in Millions)

Compensation ************************************************
Employee beneﬁts*********************************************
Net occupancy and equipment**********************************
Professional services*******************************************
Marketing and business development ****************************
Technology and communications ********************************
Postage, printing and supplies **********************************
Other intangibles **********************************************
Debt prepayment *********************************************
Other ********************************************************

2005

$2,383
431
641
166
235
466
255
458
54
774

Total noninterest expense ***********************************

$5,863

2004

$2,252
389
631
149
194
430
248
550
155
787

$5,785

2003

$2,177
328
644
143
180
418
246
682
—
779

$5,597

2005
v 2004

2004
v 2003

5.8%

3.4%

10.8
1.6
11.4
21.1
8.4
2.8
(16.7)
(65.2)
(1.7)

18.6
(2.0)
4.2
7.8
2.9
.8
(19.4)
*
1.0

1.3%

3.4%

Efﬁciency ratio (a) *********************************************

44.3%

45.3%

45.6%

(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.
* Not meaningful

24 U.S. BANCORP

a portion of the Company’s long-term debt, costs related to
business initiatives and incremental expenses of $63 million
due to the expansion of the Company’s European merchant
processing business. These increases were offset somewhat
by a net reduction in MSR impairments of $152 million
and lower merger and restructuring-related charges.
Compensation expense increased due to increases in salaries
and stock-based compensation. The increase in salaries
reﬂected business expansion of in-store branches, the
expansion of the Company’s merchant acquiring business in
Europe and other initiatives. Stock-based compensation was
higher due to lower employee stock-award forfeitures
relative to prior years. Employee beneﬁts increased
primarily as a result of higher payroll taxes and pension
expense. Marketing and business development increased due
to corporate brand advertising and an increase in product
marketing campaigns. Technology and communications
expense was higher year-over-year, reﬂecting technology
investments that increased software amortization and the
write-off of capitalized software being replaced. Other
expense increased in 2004, compared with 2003, related to
higher fraud and operating losses, insurance costs, operating
costs associated with affordable housing investments and
merchant processing costs for payment services products,
the result of the expansion of the payment processing
business and increases in transaction volume year-over-year.

Pension Plans Because of the long-term nature of pension
plans, the administration and accounting for pensions is
complex and can be impacted by several factors, including
investment and funding policies, accounting methods and
the plan’s actuarial assumptions. The Company and its
Compensation Committee have an established process for
evaluating the plans, their performance and signiﬁcant plan
assumptions, including the assumed discount rate and the
long-term rate of return (‘‘LTROR’’). At least annually, an
independent consultant is engaged to assist the Company’s
Compensation Committee in evaluating plan objectives,
funding policies and investment policies considering its
long-term investment time horizon and asset allocation
strategies. Note 18 of the Notes to Consolidated Financial
Statements provides further information on funding
practices, investment policies and asset allocation strategies.
Periodic pension expense (or credits) includes service
costs, interest costs based on the assumed discount rate, the
expected return on plan assets based on an actuarially
derived market-related value and amortization of actuarial
gains and losses. The Company’s pension accounting policy

follows guidance outlined in Statement of Financial
Accounting Standards No. 87, ‘‘Employer’s Accounting for
Pension Plans,’’ and reﬂects the long-term nature of beneﬁt
obligations and the investment horizon of plan assets. This
accounting guidance has the effect of reducing earnings
volatility related to short-term changes in interest rates and
market valuations. Actuarial gains and losses include the
impact of plan amendments and various unrecognized gains
and losses which are deferred and amortized over the future
service periods of active employees. The actuarially derived
market-related value utilized to determine the expected
return on plan assets is based on fair value adjusted for the
difference between expected returns and actual performance
of plan assets. The unrealized difference between actual
experience and expected returns is included in the
actuarially derived market-related value ratably over a ﬁve-
year period. At September 30, 2005, the accumulated
unrecognized gain approximated $206 million, compared
with an accumulated unrecognized loss of approximately
$139 million at September 30, 2004. The impact to pension
expense of the unrecognized asset gains or losses will
incrementally increase (decrease) pension costs in each year
from 2006 to 2010, by approximately $30 million,
$(3) million, $(21) million, $(13) million and $(9) million,
respectively. This assumes that the performance of plan
assets equals the assumed LTROR. Actual results will vary
depending on the performance of plan assets and changes to
assumptions required in the future. Refer to Note 1 of the
Notes to Consolidated Financial Statements for further
discussion of the Company’s accounting policies for pension
plans.

In 2005, the Company recognized a pension cost of
$33 million compared with a pension cost of $9 million in
2004 and pension credit of $24 million in 2003. The
$24 million increase in pension costs in 2005 was driven by
recognition of deferred actuarial (gains) losses and the
impact of a lower discount rate. In 2004, pension costs
increased by $33 million, compared with 2003, driven by a
recognition of deferred actuarial (gains) losses and the
impact of a lower discount rate, partially offset by the
beneﬁt of higher investment income related to pension
contributions made in 2003.

In 2006, the Company anticipates that pension costs
will increase by approximately $48 million. The increase
will be primarily driven by the lower discount rate and
amortization of unrecognized actuarial losses from prior
years, accounting for approximately $12 million and
$39 million of the anticipated increase, respectively.

U.S. BANCORP 25

Note 18 of the Notes to Consolidated Financial Statements provides a summary of the signiﬁcant pension plan assumptions.
Because of the subjective nature of plan assumptions, a sensitivity analysis to hypothetical changes in the LTROR and the
discount rate is provided below:

LTROR

Incremental beneﬁt (cost) *****************************************************************
Percent of 2005 net income **************************************************************

Discount rate

Incremental beneﬁt (cost) *****************************************************************
Percent of 2005 net income **************************************************************

6.9%

$ (43)

7.9%

$ (22)

Base
8.9%

$ —

9.9%

$ 22

10.9%

$ 43

(.59)%

(.30)%

—%

.30%

.59%

3.7%

$ (91)

4.7%

$ (45)

Base
5.7%

$ —

6.7%

$ 40

7.7%

$ 75

(1.26)%

(.62)%

—%

.55%

1.04%

Due to the complexity of forecasting pension plan
activities, the accounting method utilized for pension plans,
management’s ability to respond to factors impacting the
plans and the hypothetical nature of this information, the
actual changes in periodic pension costs could be different
than the information provided in the sensitivity analysis.

Income Tax Expense The provision for income taxes was
$2,082 million (an effective rate of 31.7 percent) in 2005,
compared with $2,009 million (an effective rate of
32.5 percent) in 2004 and $1,941 million (an effective rate
of 34.3 percent) in 2003. The decrease in the effective tax
rate from 2004 primarily reﬂects higher tax exempt income
from investment securities and insurance products and
incremental tax credits generated from investments in
affordable housing and similar tax-advantaged projects.

Table 6

L O A N P O RT F O L I O D I S T R I B U T I O N

Included in 2005 was a reduction of income tax
expense of $94 million related to the resolution of federal
income tax examinations covering substantially all of the
Company’s legal entities for the years 2000 through 2002.
Included in 2004 was a reduction in income tax expense of
$90 million related to the resolution of federal income tax
examinations covering substantially all of the Company’s
legal entities for the years 1995 through 1999 and
$16 million related to the resolution of a state tax
examination for tax years through 2000. The Company
anticipates its effective tax rate for the foreseeable future to
approximate 33 percent.

For further information on income taxes, refer to
Note 20 of the Notes to Consolidated Financial Statements.

At December 31 (Dollars in Millions)

Commercial

2005

2004

2003

2002

2001

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Commercial ****************************** $ 37,844
Lease ﬁnancing ***************************
5,098

27.5% $ 35,210
4,963

3.7

27.9% $ 33,536
4,990

3.9

28.4% $ 36,584
5,360

4.2

31.5% $ 40,472
5,858

4.6

35.4%
5.1

Total commercial***********************

42,942

31.2

40,173

31.8

38,526

32.6

41,944

36.1

46,330

40.5

Commercial real estate

Commercial mortgages ********************
Construction and development **************

20,272
8,191

Total commercial real estate *************

28,463

Residential mortgages

Residential mortgages *********************
Home equity loans, ﬁrst liens****************

14,538
6,192

Total residential mortgages **************

20,730

Retail

Credit card *******************************
Retail leasing *****************************
Home equity and second mortgages*********
Other retail

Revolving credit************************
Installment ****************************
Automobile****************************
Student ******************************

7,137
7,338
14,979

2,504
3,582
8,112
2,019

Total other retail ********************

16,217

Total retail*****************************

45,671

14.7
6.0

20.7

10.5
4.5

15.0

5.2
5.3
10.9

1.8
2.6
5.9
1.4

11.7

33.1

20,315
7,270

27,585

9,722
5,645

16.1
5.7

21.8

7.7
4.5

20,624
6,618

27,242

7,332
6,125

17.4
5.6

23.0

6.2
5.2

15,367

12.2

13,457

11.4

6,603
7,166
14,851

2,541
2,767
7,419
1,843

14,570

43,190

5.2
5.7
11.8

2.0
2.2
5.9
1.4

11.5

34.2

5,933
6,029
13,210

2,540
2,380
7,165
1,753

13,838

39,010

5.0
5.1
11.2

2.1
2.0
6.1
1.5

11.7

33.0

20,325
6,542

26,867

6,446
3,300

9,746

5,665
5,680
13,572

2,650
2,258
6,343
1,526

12,777

37,694

17.5
5.6

23.1

5.6
2.8

8.4

4.9
4.9
11.6

2.3
1.9
5.5
1.3

11.0

32.4

18,765
6,608

25,373

5,746
2,083

7,829

5,889
4,906
12,235

2,673
2,292
5,660
1,218

11,843

34,873

16.4
5.8

22.2

5.0
1.8

6.8

5.1
4.3
10.7

2.3
2.0
5.0
1.1

10.4

30.5

Total loans************************* $137,806

100.0% $126,315

100.0% $118,235

100.0% $116,251

100.0% $114,405

100.0%

26 U.S. BANCORP

B A L A N C E S H E E T A N A LY S I S

Average earning assets were $178.4 billion in 2005,
compared with $168.1 billion in 2004. The increase in
average earning assets of $10.3 billion (6.1 percent) was
primarily driven by growth in residential mortgages,
commercial loans and retail loans. The change in average
earning assets was principally funded by increases of
$5.4 billion in interest-bearing deposits and $5.9 billion in
wholesale funding.

For average balance information, refer to Consolidated

Daily Average Balance Sheet and Related Yields and Rates
on pages 108 and 109.

Loans The Company’s total loan portfolio was
$137.8 billion at December 31, 2005, an increase of
$11.5 billion (9.1 percent) from December 31, 2004. The
increase in total loans was driven by growth in residential
mortgages (34.9 percent), commercial loans (6.9 percent),
retail loans (5.7 percent) and commercial real estate loans

(3.2 percent). Table 6 provides a summary of the loan
distribution by product type while Table 10 provides a
summary of selected loan maturity distribution by loan
category. Average total loans increased $11.0 billion
(9.0 percent) in 2005, compared with 2004. The increase
was due to growth in residential mortgages, commercial
loans and retail loans.

Commercial Commercial loans, including lease ﬁnancing,
increased $2.8 billion (6.9 percent) at December 31, 2005,
compared with December 31, 2004. The increase in
commercial loans was driven by new customer relationships
and increases in mortgage banking and corporate card
balances. Average commercial loans increased by
$3.3 billion (8.4 percent) in 2005, compared with 2004,
primarily due to an increase in commercial loan demand
driven by general economic conditions in 2005.

Table 7 provides a summary of commercial loans by

industry and geographical locations.

Table 7

C O M M E R C I A L L O A N S B Y I N D U S T RY G R O U P A N D G E O G R A P H Y

Industry Group (Dollars in Millions)

December 31, 2005

December 31, 2004

Loans

Percent

Loans

Percent

Consumer products and services***********************************************
Financial services ************************************************************
Commercial services and supplies **********************************************
Capital goods ***************************************************************
Property management and development ****************************************
Agriculture ******************************************************************
Healthcare ******************************************************************
Paper and forestry products, mining and basic materials **************************
Consumer staples************************************************************
Transportation ***************************************************************
Private investors *************************************************************
Energy**********************************************************************
Information technology********************************************************
Other***********************************************************************

$ 8,723
5,416
4,326
3,881
3,182
2,693
2,064
1,990
1,785
1,565
1,477
842
700
4,298

20.3%
12.6
10.1
9.0
7.4
6.3
4.8
4.6
4.2
3.7
3.4
2.0
1.6
10.0

$ 8,073
4,784
3,870
3,825
2,334
2,601
1,826
1,905
1,887
1,592
1,630
730
644
4,472

20.1%
11.9
9.6
9.5
5.8
6.5
4.6
4.7
4.7
4.0
4.1
1.8
1.6
11.1

Total ********************************************************************

$42,942

100.0%

$40,173

100.0%

Geography

California********************************************************************
Colorado********************************************************************
Illinois **********************************************************************
Minnesota*******************************************************************
Missouri ********************************************************************
Ohio ***********************************************************************
Oregon *********************************************************************
Washington *****************************************************************
Wisconsin*******************************************************************
Iowa, Kansas, Nebraska, North Dakota, South Dakota ****************************
Arkansas, Indiana, Kentucky, Tennessee ****************************************
Idaho, Montana, Wyoming ****************************************************
Arizona, Nevada, Utah ********************************************************

Total banking region *******************************************************
Outside the Company’s banking region *****************************************

$ 3,561
2,578
2,919
6,806
2,056
2,640
1,649
2,404
2,421
3,721
2,214
825
1,163

34,957
7,985

8.3%
6.0
6.8
15.8
4.8
6.2
3.8
5.6
5.6
8.7
5.2
1.9
2.7

81.4
18.6

$ 3,786
2,064
2,549
6,649
2,525
2,528
1,441
2,695
2,604
3,455
1,747
830
926

33,799
6,374

9.4%
5.1
6.3
16.6
6.3
6.3
3.6
6.7
6.5
8.6
4.3
2.1
2.3

84.1
15.9

Total ********************************************************************

$42,942

100.0%

$40,173

100.0%

U.S. BANCORP 27

Table 8

C O M M E R C I A L R E A L E S TAT E B Y P R O P E RT Y T Y P E A N D G E O G R A P H Y

Property Type (Dollars in Millions)

Business owner occupied *****************************************************
Multi-family ******************************************************************
Commercial property

Industrial*****************************************************************
Ofﬁce *******************************************************************
Retail********************************************************************
Other *******************************************************************
Homebuilders****************************************************************
Hotel/motel******************************************************************
Health care facilities **********************************************************

December 31, 2005

December 31, 2004

Loans

Percent

Loans

Percent

$ 9,221
3,843

32.4%
13.5

$ 8,551
3,903

1,025
2,306
3,558
2,704
3,899
1,423
484

3.6
8.1
12.5
9.5
13.7
5.0
1.7

1,103
2,676
3,586
2,359
2,952
1,848
607

31.0%
14.1

4.0
9.7
13.0
8.6
10.7
6.7
2.2

Total ********************************************************************

$28,463

100.0%

$27,585

100.0%

Geography

Total banking region *******************************************************
Outside the Company’s banking region *****************************************

$ 5,806
1,366
1,025
1,765
1,452
1,537
1,736
2,846
1,679
1,935
1,565
1,110
2,362

26,184
2,279

20.4%
4.8
3.6
6.2
5.1
5.4
6.1
10.0
5.9
6.8
5.5
3.9
8.3

92.0
8.0

$ 5,252
1,181
996
1,721
1,525
1,975
1,730
2,855
1,768
2,003
1,710
880
1,948

25,544
2,041

19.0%
4.3
3.6
6.2
5.5
7.2
6.3
10.3
6.4
7.3
6.2
3.2
7.1

92.6
7.4

Total ********************************************************************

$28,463

100.0%

$27,585

100.0%

Commercial Real Estate The Company’s portfolio of
commercial real estate loans, which includes commercial
mortgages and construction loans, increased $878 million
(3.2 percent) at December 31, 2005, compared with
December 31, 2004. Speciﬁcally, construction and
development loans increased by $921 million (12.7 percent)
as developers continued to take advantage of relatively low
interest rates. Commercial mortgages outstanding decreased
modestly by $43 million (.2 percent) as growth in Small
Business Administration (‘‘SBA’’) real estate mortgages was
more than offset by reductions in traditional commercial
real estate mortgages due to reﬁnancing activities. Average
commercial real estate loans increased by $697 million
(2.6 percent) in 2005, compared with 2004, primarily
driven by growth in construction and development loans.
Table 8 provides a summary of commercial real estate by
property type and geographical locations.

The Company maintains the real estate construction

designation until the completion of the construction phase
and, if retained, the loan is reclassiﬁed to the commercial
mortgage category. Approximately $187 million of
construction loans were permanently ﬁnanced and

28 U.S. BANCORP

reclassiﬁed to the commercial mortgage loan category in
2005. At year-end 2005, $219 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
$9.8 billion at December 31, 2005, compared with
$7.9 billion at December 31, 2004. 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 $1.9 billion at December 31, 2005.

Residential Mortgages Residential mortgages held in the
loan portfolio at December 31, 2005, increased $5.4 billion
(34.9 percent) from December 31, 2004. The increase was
primarily the result of asset/liability risk management
decisions to retain a greater portion of the Company’s
adjustable-rate loan production and an increase in consumer
ﬁnance originations. Average residential mortgages increased
$3.7 billion (25.9 percent) in 2005, primarily due to
retaining adjustable-rate residential mortgages beginning in
mid-2004.

Table 9

R E S I D E N T I A L M O RT G A G E S A N D R E TA I L L O A N S B Y G E O G R A P H Y

At December 31, 2005 (Dollars in Millions)

Loans

Percent

Loans

Percent

Residential Mortgages

Retail Loans

California ***********************************************************
Colorado ***********************************************************
Illinois**************************************************************
Minnesota **********************************************************
Missouri************************************************************
Ohio***************************************************************
Oregon ************************************************************
Washington*********************************************************
Wisconsin **********************************************************
Iowa, Kansas, Nebraska, North Dakota, South Dakota *******************
Arkansas, Indiana, Kentucky, Tennessee********************************
Idaho, Montana, Wyoming ********************************************
Arizona, Nevada, Utah ***********************************************

Total banking region **********************************************
Outside the Company’s banking region*********************************

Total************************************************************

Retail Total retail loans outstanding, which include credit
card, retail leasing, home equity and second mortgages and
other retail loans, increased $2.5 billion (5.7 percent) at
December 31, 2005, compared with December 31, 2004.
The increase was driven by an increase in automobile loans
and installment loans, credit cards, home equity loans,
student loans and retail leasing, which increased
$1.5 billion, $534 million, $352 million, $176 million and
$172 million, respectively, during 2005. The increases in
these loan categories were offset somewhat by a reduction
in home equity lines of credit of $223 million during the
year. Average retail loans increased $3.3 billion
(7.9 percent) in 2005, reﬂecting growth in home equity
lines, installment loans, retail leasing and credit card. Of the
total retail loans and residential mortgages outstanding,
approximately 82.8 percent were to customers located in
the Company’s primary banking regions. Table 9 provides a
geographic summary of residential mortgages and retail
loans outstanding as of December 31, 2005.

Loans Held for Sale At December 31, 2005, loans held for
sale, consisting of residential mortgages to be sold in the
secondary market, were $1.7 billion, compared with
$1.4 billion at December 31, 2004. Average loans held for

$ 1,351
1,406
1,402
2,350
1,549
1,487
964
1,245
1,136
1,536
1,570
489
1,161

17,646
3,084

$20,730

6.5%
6.8
6.8
11.3
7.4
7.2
4.6
6.0
5.5
7.4
7.6
2.4
5.6

85.1
14.9

$ 5,292
2,381
2,354
5,026
2,517
3,335
1,986
2,217
2,532
3,125
3,421
1,293
1,833

37,312
8,359

11.6%
5.2
5.2
11.1
5.5
7.3
4.3
4.9
5.5
6.8
7.5
2.8
4.0

81.7
18.3

100.0%

$45,671

100.0%

sale were $1.8 billion in 2005, compared with $1.6 billion
in 2004. The balance of loans held for sale is primarily a
function of mortgage loan production during the past ninety
days. During the fourth quarter of 2005, mortgage loan
production was approximately $6.1 billion compared with
$4.4 billion during the same period of 2004.

Investment Securities The Company uses its investment
securities portfolio for several purposes. It serves as a
vehicle to manage interest rate and prepayment risk,
generates interest and dividend income from the investment
of excess funds depending on loan demand, provides
liquidity and is used as collateral for public deposits and
wholesale funding sources. While it is the Company’s intent
to hold its investment securities indeﬁnitely, the Company
may take actions in response to structural changes in the
balance sheet and related interest rate risks and to meet
liquidity requirements.

At December 31, 2005, investment securities, both

available-for-sale and held-to-maturity, totaled
$39.8 billion, compared with $41.5 billion at December 31,
2004. The $1.7 billion (4.1 percent) decrease primarily
reﬂected purchases of $13.2 billion of securities, more than
offset by sales, maturities and prepayments. During 2005,

Table 10

S E L E C T E D L O A N M AT U R I T Y D I S T R I B U T I O N

December 31, 2005 (Dollars in Millions)

Commercial ****************************************************************
Commercial real estate*******************************************************
Residential mortgages *******************************************************
Retail **********************************************************************

One Year
or Less

$18,928
8,076
898
14,005

Total loans **************************************************************

$41,907

Total of loans due after one year with

Predetermined interest rates ***********************************************
Floating interest rates *****************************************************

Over One
Through
Five Years

$20,717
14,073
2,630
19,845

$57,265

Over Five
Years

$ 3,297
6,314
17,202
11,821

$38,634

Total

$ 42,942
28,463
20,730
45,671

$137,806

$ 44,503
$ 51,396

U.S. BANCORP 29

securities transactions were principally related to
asset/liability management decisions. At December 31, 2005,
approximately 41 percent of the investment securities
portfolio represented adjustable-rate ﬁnancial instruments,
compared with 39 percent at December 31, 2004.
Adjustable-rate ﬁnancial instruments include variable-rate
collateralized mortgage obligations, mortgage-backed
securities, agency securities, adjustable-rate money market

accounts and asset-backed securities. Average investment
securities were $.9 billion (2.1 percent) lower in 2005,
compared with 2004. The decline principally reﬂected the
net impact of repositioning the investment portfolio as part
of asset/liability risk management decisions to acquire
variable-rate securities.

The weighted-average yield of the available-for-sale

portfolio was 4.89 percent at December 31, 2005,

Table 11

I N V E S T M E N T S E C U R I T I E S

Available-for-Sale

Held-to-Maturity

December 31, 2005 (Dollars in Millions)

U.S. Treasury and agencies

Amortized
Cost

Fair
Value

Weighted-
Average
Maturity in
Years

Weighted-
Average
Yield (c)

Amortized
Cost

Maturing in one year or less*****************
Maturing after one year through ﬁve years*****
Maturing after ﬁve years through ten years ****
Maturing after ten years ********************

101
41
29
325

101
41
30
317

Total ******************************

496

489

Mortgage-backed securities (a)

Maturing in one year or less*****************
Maturing after one year through ﬁve years*****
Maturing after ﬁve years through ten years ****
Maturing after ten years ********************

379
20,606
13,629
3,547

381
20,208
13,342
3,583

Total ******************************

$38,161

$37,514

Asset-backed securities (a)

Maturing in one year or less*****************
Maturing after one year through ﬁve years*****
Maturing after ﬁve years through ten years ****
Maturing after ten years ********************

Total ******************************

Obligations of state and political

subdivisions
Maturing in one year or less*****************
Maturing after one year through ﬁve years*****
Maturing after ﬁve years through ten years ****
Maturing after ten years ********************

12
—
—
—

67
59
231
283

12
—
—
—

67
61
231
278

Total ******************************

640

637

Other debt securities

Maturing in one year or less*****************
Maturing after one year through ﬁve years*****
Maturing after ﬁve years through ten years ****
Maturing after ten years ********************

Total ******************************

Other investments ***********************

301
12
15
626

954

301
12
15
621

949

Total investment securities (b) *******************

$40,321

$39,659

.72
2.67
7.34
14.58

10.36

.70
3.61
7.19
13.38

5.77

.74
—
—
—

.74

.31
2.31
9.40
15.49

10.49

.08
1.28
10.00
21.69

14.44

—

6.10

4.63%
5.96
5.65
5.71

5.51%

5.70%
4.65
4.93
5.69

4.86%

5.40%
—
—
—

5.40%

7.28%
7.24
6.42
6.25

6.51%

3.65%
3.82
5.30
5.15

4.66%

—%

4.89%

$ —
—
—
—

$ —

$ —
8
—
—

$ —
—
—
—

$ —

$ 12
23
15
34

$ 84

5
11
1
—

Fair
Value

$ —
—
—
—

$ —

$ —
8
—
—

$ —
—
—
—

$ —

$ 12
24
17
35

$ 88

5
11
1
—

Weighted-
Average
Maturity in
Years

Weighted-
Average
Yield (c)

—
—
—
—

—

—
3.05
—
—

3.05

—
—
—
—

—

.33
3.30
7.92
15.15

8.51

.57
3.46
6.25
—

2.73

—

7.21

—%
—
—
—

—%

5.08
—
—

5.08%

—%
—
—
—

—%

6.37%
6.65
7.68
6.57

6.76%

6.16%
5.23
4.15
—

5.45%

—%

6.44%

$ 17

$ —

$109

$ —

$113

(a) Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
(b) The weighted-average maturity of the available for sale investment securities was 4.45 years at December 31, 2004, with a corresponding weighted-average yield of 4.43 percent. The

weighted-average maturity of the held-to-maturity investment securities was 6.19 years at December 31, 2004, with a corresponding weighted-average yield of 6.28 percent.

(c) 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.

(Dollars in Millions)

U.S. Treasury and agencies ********************************************
Mortgage-backed securities ********************************************
Asset-backed securities ***********************************************
Obligations of state and political subdivisions *****************************
Other debt securities and investments ***********************************

Total investment securities ******************************************

30 U.S. BANCORP

2005

2004

Amortized
Cost

496
38,169
12
724
1,029

$40,430

Percent
of Total

1.2%

94.4
.1
1.8
2.5

100.0%

Amortized
Cost

684
39,820
64
303
881

$41,752

Percent
of Total

1.6%

95.4
.2
.7
2.1

100.0%

compared with 4.43 percent at December 31, 2004. The
average maturity of the available-for-sale portfolio increased
to 6.10 years at December 31, 2005, up from 4.45 years at
December 31, 2004. The relative mix of the type of
investment securities maintained in the portfolio is provided
in Table 11. At December 31, 2005, the available-for-sale
portfolio included a $662 million net unrealized loss,
compared with a net unrealized loss of $271 million at
December 31, 2004.

Deposits Total deposits were $124.7 billion at
December 31, 2005, compared with $120.7 billion at
December 31, 2004, resulting from increases in time
deposits greater than $100,000, time certiﬁcates of deposit
less than $100,000 and noninterest-bearing deposits,
partially offset by a decrease in money market savings
accounts. Average total deposits in 2005 increased
$4.8 billion (4.1 percent) from 2004, reﬂecting growth in
average time deposits greater than $100,000 and interest
checking accounts. The increases in these categories were
offset somewhat by lower average money market savings
account balances and lower noninterest-bearing deposits.
Noninterest-bearing deposits at December 31, 2005,

increased $1.5 billion (4.7 percent) from December 31,
2004. The increase was primarily attributable to increasing

Table 12

D E P O S I T S

The composition of deposits was as follows:

deposits related to corporate business deposits, mortgage
banking businesses and government banking deposits in the
Wholesale Banking business line relative to a year ago.
Corporate business deposits increased due to new customer
relationships and business customers utilizing less of their
deposit liquidity to fund business growth. Average
noninterest-bearing deposits in 2005 decreased $.6 billion
(2.0 percent), compared with 2004.

Interest-bearing savings deposits decreased $2.6 billion

(4.3 percent) at December 31, 2005, compared with
December 31, 2004. The decrease was primarily due to a
decrease in money market savings accounts. The
$2.5 billion (8.3 percent) decrease in money market savings
account balances reﬂected the Company’s deposit pricing
decisions in selected markets, given excess customer
liquidity throughout 2004 and a migration of some
customer balances to time deposits greater than $100,000
as rates increased on time deposit products. Average
interest-bearing savings deposits in 2005 decreased
$1.7 billion (2.9 percent), compared with 2004, primarily
driven by a reduction in money market savings account
balances of $3.5 billion (10.8 percent) offset by higher
interest checking account balances of $1.9 billion
(8.8 percent).

December 31 (Dollars in Millions)

2005

2004

2003

2002

2001

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Amount

Percent
of Total

Noninterest-bearing deposits***************** $ 32,214
Interest-bearing deposits

Interest checking************************
Money market savings*******************
Savings accounts ***********************

Total of savings deposits *************
Time certificates of deposit less than $100,000 ***
Time deposits greater than $100,000

23,274
27,934
5,602

56,810
13,214

Domestic ******************************
Foreign ********************************

14,341
8,130

Total interest-bearing deposits *********

92,495

25.8% $ 30,756

25.5% $ 32,470

27.3% $ 35,106

30.4% $ 31,212

29.7%

18.7
22.4
4.5

45.6
10.6

11.5
6.5

74.2

23,186
30,478
5,728

59,392
12,544

11,956
6,093

19.2
25.2
4.8

49.2
10.4

9.9
5.0

21,404
34,025
5,630

61,059
13,690

5,902
5,931

18.0
28.6
4.7

51.3
11.5

4.9
5.0

17,467
27,753
5,021

50,241
17,973

9,427
2,787

15.1
24.0
4.4

43.5
15.5

8.2
2.4

15,251
24,835
4,637

44,723
20,724

7,286
1,274

14.5
23.6
4.4

42.5
19.7

6.9
1.2

89,985

74.5

86,582

72.7

80,428

69.6

74,007

70.3

Total deposits ************************** $124,709

100.0% $120,741

100.0% $119,052

100.0% $115,534

100.0% $105,219

100.0%

The maturity of time certiﬁcates of deposit less than $100,000 and time deposits greater than $100,000 was as follows:

Time Certiﬁcates of
Deposit Less Than $100,000

Time Deposits
Greater Than $100,000

December 31, 2005 (Dollars in Millions)

Three months or less **************************************************
Three months through six months ***************************************
Six months through one year *******************************************
2007 ****************************************************************
2008 ****************************************************************
2009 ****************************************************************
2010 ****************************************************************
Thereafter ************************************************************

Total *************************************************************

$ 2,560
2,705
3,478
2,914
801
535
212
9

$13,214

$17,115
2,234
1,509
983
254
230
133
13

Total

$19,675
4,939
4,987
3,897
1,055
765
345
22

$22,471

$35,685

U.S. BANCORP 31

Interest-bearing time deposits at December 31, 2005,

increased $5.1 billion (16.6 percent), compared with
December 31, 2004. The increase was driven by increases of
$4.4 billion (24.5 percent) and $.7 billion (5.3 percent) in
time deposits greater than $100,000 and time certiﬁcates of
deposits less than $100,000, respectively. Changes in these
deposit categories were principally due to pricing decisions
based on the relative cost of funding. Average time deposits
greater than $100,000 increased $7.0 billion (51.0 percent)
and average time certiﬁcates of deposit less than $100,000
increased $125 million (1.0 percent) in 2005, compared
with 2004. Time deposits greater than $100,000 are largely
viewed as purchased funds and are managed to levels
deemed appropriate given alternative funding sources.

Borrowings The Company utilizes both short-term and
long-term borrowings to fund growth of earning assets in
excess of deposit growth. Short-term borrowings, which
include federal funds purchased, securities sold under
agreements to repurchase and other short-term borrowings,
were $20.2 billion at December 31, 2005, compared with
$13.1 billion at December 31, 2004. Short-term funding is
managed, within approved liquidity policies, to levels
deemed appropriate given alternative funding sources. The
increase of $7.1 billion in short-term borrowings reﬂected
wholesale funding associated with the Company’s earning
asset growth and asset/liability management activities.

Long-term debt was $37.1 billion at December 31,
2005, compared with $34.7 billion at December 31, 2004,
reﬂecting the issuances of $5.5 billion of bank notes, $4.5
billion of convertible senior debentures, $.5 billion of
medium-term notes, $.9 billion of subordinated debt,
$1.0 billion of junior subordinated debentures and the
addition of $3.1 billion of Federal Home Loan Bank
(‘‘FHLB’’) advances, offset by long-term debt maturities,
repayments and the impact of the tender offer completed
during 2005. Refer to Note 14 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.

C O R P O R AT E R I S K P R O F I L E

Overview Managing risks is an essential part of successfully
operating a ﬁnancial services company. The most prominent
risk exposures are credit, residual, 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 risk is the potential
reduction in the end-of-term value of leased assets or the
residual cash ﬂows related to asset securitization and other
off-balance sheet structures. Operational risk includes risks
related to fraud, legal and compliance risk, processing

32 U.S. BANCORP

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. Rate movements can
affect the repricing of assets and liabilities differently, as
well as their market value. Market risk arises from
ﬂuctuations in interest rates, foreign exchange rates, and
equity 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 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 experiencing 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, take any necessary charge-
offs promptly and maintain adequate reserve levels for
probable loan losses inherent in the portfolio. 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 as 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 utilizes a credit risk rating
system to measure the credit quality of individual
commercial loan transactions. The Company uses the risk
rating system for 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. In the Company’s retail banking operations,
standard credit scoring systems are used to assess credit
risks of consumer, small business and small-ticket leasing
customers and to price consumer 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. Since mid-2003, economic conditions have steadily
improved as evidenced by stronger earnings across many
corporate sectors, higher equity valuations, and stronger retail
sales and consumer spending. In late 2003, unemployment
rates stabilized and began to decline from a high of
6.13 percent in the third quarter of that year. However, the
banking industry continued to have elevated levels of
nonperforming assets and net charge-offs in 2003 compared
with the late 1990’s. Conditions within certain industries,
including manufacturing and airline transportation sectors,
lagged behind the growth in the broader economy especially
in some markets served by the Company.

During 2004, unemployment rates and bankruptcy
levels continued to improve. The trends related to consumer
spending for retail goods and services expanded throughout
the year. While corporate proﬁts were strong, the index of
corporate proﬁts retreated somewhat in the second quarter
of 2004. As a result, equity markets stalled in the second
and third quarters of 2004 due to uncertainty related to
corporate proﬁts and world events. Within the Company’s

customer base, commercial loan demand continued to be
somewhat soft through mid-2004. In the fourth quarter of
2004, most economic indicators again began to expand and
commercial loan balances for the Company displayed year-
over-year quarterly growth for the ﬁrst time since mid-
2001.

Economic conditions continued to improve in 2005, as
reﬂected in strong expansion of the gross domestic product
index, lower unemployment rates, favorable trends related
to corporate proﬁts and consumer spending for retail goods
and services. The Federal Reserve Bank pursued a measured
approach to increasing short-term rates in an effort to
prevent an acceleration of inﬂation and maintain the current
rate of economic growth.

In addition to economic factors, changes in regulations

and legislation can have an impact on the credit
performance of the loan portfolios. During 2005, the
Company began implementing higher minimum balance
payment requirements for its credit card customers in
response to industry guidance issued by the banking
regulatory agencies. This industry guidance was provided to
minimize the likelihood that minimum balance payments
would not be sufﬁcient to cover interest, fees and a portion
of the principal balance of a credit card loan resulting in
negative amortization, or increasing account balances. Also,
new bankruptcy legislation was enacted in October 2005,
making it more difﬁcult for borrowers to have their debts
forgiven during bankruptcy proceedings. While these
changes may have a long term beneﬁt, the lending industry
may experience increasing levels of nonperforming loans,
restructured loans and delinquencies over the short-term
related to consumer credit.

Credit Diversiﬁcation The Company manages its credit risk,
in part, through diversification of its loan portfolio. As part
of its normal business activities, it 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 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 2005.

The commercial portfolio reﬂects the Company’s focus

on serving small business customers, middle market and

U.S. BANCORP 33

larger corporate businesses throughout its 24-state banking
region and large national customers within certain niche
industry groups. Table 7 provides a summary of the
signiﬁcant industry groups and geographic locations of
commercial loans outstanding at December 31, 2005 and
2004. The commercial loan portfolio is diversiﬁed among
various industries with somewhat higher concentrations in
consumer products and services, ﬁnancial services,
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 81.4 percent of total commercial loans within
the 24-state banking region. Credit relationships outside of
the Company’s banking region 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.

The commercial real estate portfolio reﬂects the
Company’s focus on serving business owners within its
footprint as well as regional and national investment-based
real estate. At December 31, 2005, the Company had
commercial real estate loans of $28.5 billion, or
20.7 percent of total loans, compared with $27.6 billion at
December 31, 2004. 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 geographic locations of commercial real estate
loans outstanding at December 31, 2005 and 2004. At
December 31, 2005, approximately 32.4 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 multi-family, ofﬁce and
retail properties. While investment-based commercial real
estate continues to perform with relatively strong occupancy
levels and cash ﬂows, these categories of loans can be
adversely impacted during a rising rate environment.
Included in commercial real estate at year end 2005 was
approximately $.5 billion in loans related to land held for
development and $1.9 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. Acquisition and development loans continued to
perform well with strong market conditions; however, these

34 U.S. BANCORP

loans can be adversely impacted by a slow down in the
housing market and softening of demand. The commercial
real estate portfolio is diversiﬁed across the Company’s
geographical markets with 92.0 percent of total commercial
real estate loans outstanding at December 31, 2005, within
the 24-state banking region.

Residential mortgages are originated through the
Company’s branches, loan production ofﬁces, a wholesale
network of originators and a consumer ﬁnance company.
Within the residential mortgage portfolio approximately
71 percent had a loan-to-value of 80 percent or less at the
date of origination (39 percent of the consumer ﬁnance
company portfolio and 86 percent of the traditional
mortgage portfolio). Interest-only mortgages at
December 31, 2005 represent 18 percent of the residential
mortgage portfolio (20 percent of the consumer ﬁnance
company portfolio and 17 percent of the traditional
mortgage portfolio). The Company does not have any
residential mortgages whose payment schedule would cause
balances to increase over time. The retail loan portfolio
principally reﬂects the Company’s focus on consumers
within its footprint of branches and certain niche lending
activities that are nationally focused. Within the Company’s
retail loan portfolio approximately 83.1 percent of the
credit card balances relate to bank branch, co-branded and
afﬁnity programs that generally experience better credit
quality performance than portfolios generated through
national direct mail programs. At December 31, 2005,
approximately 84.7 percent of the student loan portfolio is
federally guaranteed through various programs reducing its
risk proﬁle. Table 9 provides a geographical summary of the
residential mortgage and retail loan portfolios.

Loan Delinquencies Trends in delinquency ratios represent
an indicator, among other considerations, of credit risk
within the Company’s loan portfolios. The entire balance of
an account is considered delinquent if the minimum
payment contractually required to be made is not received
by the speciﬁed date on the billing statement. The Company
measures delinquencies, both including and excluding
nonperforming loans, to enable comparability with other
companies. Advances made pursuant to servicing
agreements to Government National Mortgage Association
(‘‘GNMA’’) mortgage pools whose repayments of principal
and interest are substantially insured by the Federal
Housing Administration or guaranteed by the Department
of Veterans Affairs are excluded from delinquency statistics.
In addition, under certain situations, a retail customer’s
account may be re-aged to remove it from delinquent status.
Generally, the intent of a re-aged account is to assist
customers who have recently overcome temporary ﬁnancial
difﬁculties, and have demonstrated both the ability and
willingness to resume regular payments. To qualify for re-

Table 13

D E L I N Q U E N T L O A N R AT I O S A S A P E R C E N T O F E N D I N G L O A N B A L A N C E S

At December 31,
90 days or more past due excluding nonperforming loans

Commercial

2005

2004

2003

2002

2001

Commercial *************************************************
Lease ﬁnancing **********************************************

.06%
—

Total commercial ******************************************

.05

Commercial real estate

Commercial mortgages ***************************************
Construction and development *********************************

Total commercial real estate ********************************

—
—

—

Residential mortgages***************************************

.32

Retail

Credit card **************************************************
Retail leasing ************************************************
Other retail **************************************************

Total retail ************************************************

1.26
.04
.22

.36

.05%
.02

.05

—
—

—

.46

1.74
.08
.29

.47

.06%
.04

.06

.02
.03

.02

.61

1.68
.14
.41

.56

.14%
.10

.14

.03
.07

.04

.90

2.09
.19
.54

.72

.14%
.45

.18

.03
.02

.02

.78

2.18
.11
.74

.90

Total loans ********************************************

.18%

.23%

.28%

.37%

.40%

At December 31,
90 days or more past due including nonperforming loans

Commercial*****************************************************
Commercial real estate *******************************************
Residential mortgages (a) *****************************************
Retail **********************************************************

Total loans **************************************************

2005

.69%
.55
.55
.50

.58%

2004

.99%
.73
.74
.51

.74%

2003

1.97%
.82
.91
.62

1.14%

2002

2.35%
.90
1.44
.79

1.43%

2001

1.71%
.68
1.79
1.03

1.28%

(a) Delinquent loan ratios exclude advances made pursuant to servicing agreements to Government National Mortgage Association (‘‘GNMA’’) mortgage pools whose repayments are insured

by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Including the guaranteed amounts, the ratio of residential mortgages 90 days or more past due
was 4.35 percent, 5.19 percent, and 6.07 percent at December 31, 2005, 2004 and 2003, respectively. Information prior to 2003 is not available.

aging, the account must have been open for at least one
year and cannot have been re-aged during the preceding
365 days. An account may not be re-aged more than two
times in a ﬁve year period. To qualify for re-aging, the
customer must also have made three regular minimum
monthly payments within the last 90 days. In addition, the
Company may re-age the retail account of a customer who
has experienced longer-term ﬁnancial difﬁculties and apply
modiﬁed, concessionary terms and conditions to the
account. Such additional re-ages are limited to one in a ﬁve
year period, must meet the qualiﬁcations for re-aging
described above, except that the customer’s three
consecutive minimum monthly payments may be based on
the modiﬁed terms and conditions applied to the account,
and continue to be reported in restructured loans. All re-
aging strategies must be independently approved by the
Company’s credit administration function and are limited to
credit card and other retail accounts. Commercial loans are
not subject to re-aging policies.

Accruing loans 90 days or more past due totaled

$253 million at December 31, 2005, compared with
$294 million at December 31, 2004, and $329 million at
December 31, 2003. These loans were not included in
nonperforming assets and continue to accrue interest
because they are adequately secured by collateral, and/or
are in the process of collection and are reasonably expected
to result in repayment or restoration to current status. The
ratio of 90 day delinquent loans to total loans was
.18 percent at December 31, 2005, compared with
.23 percent at December 31, 2004.

To monitor credit risk associated with retail loans, the

Company also monitors delinquency ratios in the various
stages of collection. In general, delinquency ratios for retail
loans continued to improve relative to December 31, 2004,
reflecting the Company’s ongoing improvement in collection
efforts, underwriting, risk management and stable economic
conditions.

U.S. BANCORP 35

The following table provides summary delinquency

information for residential mortgages and retail loans:

December 31
(Dollars in Millions)

Residential mortgages

30-89 days***********
90 days or more ******
Nonperforming ********

Total ************

Retail

Credit card

30-89 days***********
90 days or more ******
Nonperforming ********

Total ************

Retail leasing

30-89 days***********
90 days or more ******
Nonperforming ********

Total ************

Other retail

30-89 days***********
90 days or more ******
Nonperforming ********

Total ************

Amount

As a Percent
of Ending Loan
Balances

2005

2004

2005

2004

$112
67
48

$227

$147
90
49

$286

$ 43
3
—

$ 46

$206
70
17

$293

$108
70
43

$221

$142
115
—

$257

$ 59
6
—

$ 65

$224
84
17

$325

.55%
.32
.23

.70%
.46
.28

1.10%

1.44%

2.06%
1.26
.69

2.15%
1.74
—

4.01%

3.89%

.59%
.04
—

.63%

.66%
.22
.06

.83%
.08
—

.91%

.76%
.29
.05

.94%

1.10%

Nonperforming Assets The level of nonperforming assets
represents another indicator of the potential for future
credit losses. The Company’s continued focus on improving
the credit process and improving economic conditions since
mid-2003 were the primary factors in reducing the overall
credit risk proﬁle during the past several years. Recent
changes in regulation and bankruptcy laws may effect
delinquency levels in the short-term.

Nonperforming assets include nonaccrual loans,
restructured loans not performing in accordance with
modiﬁed terms, other real estate and other nonperforming

assets owned by the Company. Interest payments collected
from assets on nonaccrual status are typically applied
against the principal balance and not recorded as income.
At December 31, 2005, total nonperforming assets were
$644 million, compared with $748 million at year-end 2004
and $1,148 million at year-end 2003. The ratio of total
nonperforming assets to total loans and other real estate
decreased to .47 percent at December 31, 2005, compared
with .59 percent and .97 percent at the end of 2004 and
2003, respectively. The $104 million decrease in total
nonperforming assets in 2005 principally reﬂected decreases
in nonperforming commercial and commercial real estate
loans, partially offset by increases in nonperforming retail
loans and residential mortgages. The decrease in
nonperforming commercial loans in 2005 was broad-based
across most industry sectors within the commercial loan
portfolio including capital goods, consumer-related sectors,
manufacturing and certain segments of transportation. The
transportation industry, particularly the airline industry,
continues to be economically stressed and has had difﬁculty
improving cash ﬂows from operations. While airline travel
continues to improve, the recovery of the industry has been
prolonged due to intense competition from low-cost
providers, the nature of their cost structure and rising fuel
prices. The reduction in nonperforming commercial real
estate loans during 2005, was broad-based and extended
across most property types. Nonperforming retail loans
increased by $49 million from a year ago, primarily due to
implementing a program for customers having ﬁnancial
difﬁculties meeting recent minimum balance payment
requirements. Retail customers that meet certain criteria
may have the terms of their credit card and other loan
agreements modiﬁed to allow amortization of their balances
over a period of up to 60 months. The Company has
considered these loans in the determination of the allowance
for credit losses.

36 U.S. BANCORP

Table 14

N O N P E R F O R M I N G A S S E T S ( a )

At December 31, (Dollars in Millions)

2005

2004

2003

2002

2001

Commercial

Commercial *************************************************
Lease ﬁnancing**********************************************
Total commercial *****************************************

$231
42

273

Commercial real estate

Commercial mortgages ***************************************
Construction and development ********************************
Total commercial real estate********************************

Residential mortgages **************************************

Retail

Credit card *************************************************
Retail leasing************************************************
Other retail**************************************************
Total retail ***********************************************
Total nonperforming loans ******************************

Other real estate ********************************************

Other assets*************************************************
Total nonperforming assets *****************************
Accruing loans 90 days or more past due **************************
Nonperforming loans to total loans ********************************
Nonperforming assets to total loans plus other real estate ************
Net interest lost on nonperforming loans ***************************

134
23

157

49
—
17

544

$644

$253

.39%
.47%

$ 30

$289
91

380

175
25

200

—
—
17

640

$748

$294

.51%
.59%

$ 42

$ 624
113

737

$ 760
167

927

$ 526
181

707

178
40

218

—
—
25

175
57

232

—
1
25

131
36

167

—
7
41

1,020

1,237

1,001

$1,148

$ 329

.86%
.97%
67

$1,373

$ 426

1.06%
1.18%
65

$1,120

$ 463

.87%
.98%
63

Changes in Nonperforming Assets

(Dollars in Millions)

Commercial and
Commercial Real Estate

Retail and
Residential Mortgages (c)

Total

Balance December 31, 2004 ************************************

$ 619

$129

$ 748

Additions to nonperforming assets

New nonaccrual loans and foreclosed properties ******************
Advances on loans********************************************
Total additions ********************************************

Reductions in nonperforming assets

Paydowns, payoffs********************************************
Net sales ****************************************************
Return to performing status ************************************
Charge-offs (b) ***********************************************
Total reductions *******************************************
Net additions (reductions) in nonperforming assets **********

397
35

432

(265)
(78)
(66)
(185)

(594)

(162)

101
—

101

(29)
—
(11)
(3)

(43)

498
35

533

(294)
(78)
(77)
(188)

(637)

(104)

Balance December 31, 2005 ************************************

$ 457

$187

$ 644

(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Charge-offs exclude actions for certain card products and loan sales that were not classiﬁed as nonperforming at the time the charge-off occurred.
(c) Residential mortgage information excludes changes related to residential mortgages serviced by others.

Residential mortgage loans on nonaccrual status increased
slightly during 2005 primarily reﬂecting growth in the
portfolio. As a percentage of loan balances, nonperforming
residential mortgages declined to .23 percent at
December 31, 2005 compared with .28 percent at
December 31, 2004.

The $400 million decrease in total nonperforming
assets in 2004, as compared with 2003, reﬂected decreases
in nonperforming commercial, commercial real estate and
retail loans, partially offset by an increase in nonperforming
residential mortgages. The decrease in nonperforming assets
in 2004 was also broad-based across most industry sectors
within the commercial loan portfolio including capital

goods, consumer-related sectors, manufacturing and certain
segments of transportation.

Included in nonperforming loans were restructured

commercial, commercial real estate and retail loans of
$75 million and $58 million at December 31, 2005 and
2004, respectively. Commitments to lend additional funds
under restructured loans were $9 million at December 31,
2005, compared with $12 million as of December 31, 2004.
Restructured loans performing under the restructured terms
beyond a speciﬁed timeframe are reported as ‘‘restructured
loans’’ and accrue interest.

Restructured Loans Accruing Interest On a case-by-case
basis, management determines whether an account that
experiences ﬁnancial difﬁculties should be modiﬁed as to its

U.S. BANCORP 37

interest rate or repayment terms to maximize the
Company’s collection of its balance. Loans restructured at a
rate equal to or greater than that of a new loan with
comparable risk at the time the contract is modiﬁed are
excluded from restructured loans once repayment
performance, in accordance with the modiﬁed agreement,
has been demonstrated over several payment cycles. Loans
that have interest rates reduced below comparable market
rates remain classiﬁed as restructured loans; however,
interest income is accrued at the reduced rate as long as the
customer complies with the revised terms and conditions.

The following table provides a summary of restructured

loans that continue to accrue interest:

December 31
(Dollars in Millions)

Amount

As a Percent
of Ending Loan
Balances

2005

2004

2005

2004

Commercial *****************
Residential mortgages ********
Credit card *****************
Other retail******************

6
59
218
32

Total*******************

$315

$ 14
44
138
31

$227

.01%
.28
3.05
.08

.03%
.29
2.09
.08

.23%

.18%

Analysis of Loan Net Charge-Offs Total loan net charge-offs
were $685 million in 2005, compared with $767 million in
2004 and $1,252 million in 2003. The ratio of total loan
net charge-offs to average loans was .51 percent in 2005,
compared with .63 percent in 2004 and 1.06 percent in
2003. The overall level of net charge-offs in 2005 and 2004
reﬂected improving economic conditions and the Company’s
efforts to reduce the overall risk proﬁle of the portfolio

through ongoing improvement in collection efforts
underwriting and risk management. These factors have
resulted in improving credit quality, lower gross charge-offs
and high levels of commercial loan recoveries.

Commercial and commercial real estate loan net
charge-offs for 2005 were $90 million (.13 percent of
average loans outstanding), compared with $196 million
(.29 percent of average loans outstanding) in 2004 and
$609 million (.89 percent of average loans outstanding) in
2003. The year-over-year improvement in net charge-offs
was broad-based across most industries within the
commercial loan portfolio. The Company anticipates
commercial loan recoveries will decline somewhat over the
next several quarters causing commercial loan net charge-
offs to stabilize or slightly increase in 2006. The decrease in
commercial and commercial real estate loan net charge-offs
in 2004, when compared with 2003, was broad-based and
extended across most industries within the commercial loan
portfolio and reﬂected higher levels of commercial loan
recoveries principally within the Wholesale Banking line of
business.

Retail loan net charge-offs in 2005 were $559 million
(1.26 percent of average loans outstanding), compared with
$542 million (1.32 percent of average loans outstanding) in
2004 and $616 million (1.61 percent of average loans
outstanding) in 2003. Higher levels of retail loan net charge-
offs in 2005, compared with 2004, reflected approximately
$56 million of charge-offs related to the new bankruptcy
legislation. The Company anticipates that the higher level of

Table 15

N E T C H A R G E - O F F S A S A P E R C E N T O F AV E R A G E L O A N S O U T S TA N D I N G

Year Ended December 31

Commercial

2005

2004

2003

2002

2001

Commercial *************************************************
Lease ﬁnancing **********************************************

.12%
.85

Total commercial ******************************************

.20

Commercial real estate

Commercial mortgages ***************************************
Construction and development *********************************

Total commercial real estate ********************************

Residential mortgages***************************************

Retail

Credit card **************************************************
Retail leasing ************************************************
Home equity and second mortgages****************************
Other retail **************************************************

Total retail ************************************************

.03
(.04)

.01

.20

4.20
.35
.46
1.20

1.26

.29%

1.42

.43

.09
.13

.10

.20

4.14
.59
.54
1.21

1.32

1.34%
1.65

1.38

.14
.16

.14

.23

4.62
.86
.70
1.60

1.61

1.29%
2.67

1.46

.17
.11

.15

.23

4.97
.72
.73
2.11

1.85

1.62%
1.95

1.66

.22
.17

.20

.15

4.80
.64
.85
2.16

1.94

Total loans (a) *****************************************

.51%

.63%

1.06%

1.20%

1.31%

(a) In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category
based on the lower of cost or fair value. At the time of transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies and
methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses was reported separately as a reduction of the allowance for
credit losses under ‘‘Losses from loan sales/transfers.’’ Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been $1,876 million (1.59 percent
of average loans) for the year ended December 31, 2001.

38 U.S. BANCORP

bankruptcy filings that occurred in late 2005 will result in
lower bankruptcy filings through the first half of 2006 before
returning to more normalized levels. Lower levels of retail
loan net charge-offs in 2004, compared with 2003,
principally reflected changes by the Company in
underwriting, ongoing collection efforts and other risk
management activities. The decline also reflected lower
delinquency ratios from 2003 as the economy continued to
improve.

The Company’s retail lending business utilizes several
distinct business processes and channels to originate retail
credit including traditional branch credit, indirect lending
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 Banking,
U.S. Bank Consumer Finance (‘‘USBCF’’) participates in all
facets of the Company’s consumer lending activities. USBCF
specializes in serving channel-speciﬁc and alternative lending
markets in residential mortgages, home equity and
installment loan ﬁnancing. USBCF 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.

The following table provides an analysis of net charge-
offs as a percentage of average loans outstanding managed
by the consumer ﬁnance division, compared with traditional
branch related loans:

Year Ended December 31
(Dollars in Millions)

Consumer Finance (a)

Residential mortgages *****
Home equity and second

mortgages ************
Other retail ***************

Traditional Branch

Residential mortgages *****
Home equity and second

mortgages ************
Other retail ***************

Total Company

Residential mortgages *****
Home equity and second

mortgages ************
Other retail ***************

Average Loan
Amount

Percent of
Average Loans

2005

2004

2005

2004

$ 5,947

$ 4,531

.52% .44%

2,431
393

2,412
414

1.81
5.09

2.07
5.07

$12,089

$ 9,791

.04% .09%

12,514
15,165

11,628
14,007

.19
1.10

.22
1.10

$18,036

$14,322

.20% .20%

14,945
15,558

14,040
14,421

.46
1.20

.54
1.21

(a) Consumer ﬁnance category included credit originated and managed by USBCF, as well
as home equity and second mortgages with a loan-to-value greater than 100 percent
that were originated in the branches.

U.S. BANCORP 39

Table 16

S U M M A RY O F A L L O WA N C E F O R C R E D I T L O S S E S

(Dollars in Millions)
Balance at beginning of year************************************

2005

$2,269

2004

$2,369

2003

$2,422

2002

$2,457

2001

$1,787

Charge-offs
Commercial

Commercial ********************************************
Lease ﬁnancing*****************************************
Total commercial ************************************

Commercial real estate

Commercial mortgages **********************************
Construction and development ***************************
Total commercial real estate***************************
Residential mortgages **************************************
Retail

Recoveries

Commercial

Commercial ********************************************
Lease ﬁnancing*****************************************
Total commercial ************************************

Commercial real estate

Net Charge-offs
Commercial

Commercial ********************************************
Lease ﬁnancing*****************************************
Total commercial ************************************

Commercial real estate

Credit card*********************************************
Retail leasing *******************************************
Home equity and second mortgages **********************
Other retail*********************************************
Total retail ******************************************
Total net charge-offs ******************************
Provision for credit losses **************************************
Losses from loan sales /transfers (a)******************************
Acquisitions and other changes *********************************
Balance at end of year *****************************************

140
76

216

16
3

19
39

313
38
83
241

675

949

95
34

129

10
6

16
3

35
12
15
54

116

264

45
42

6
(3)

3
36

278
26
68
187

559

685

666
—
1

244
110

354

29
13

42
33

282
49
89
225

645

556
139

695

44
13

57
30

282
57
105
268

712

559
189

748

41
9

50
23

305
45
108
312

770

779
144

923

50
13

63
16

294
34
113
329

770

1,074

1,494

1,591

1,772

144
41

185

11
4

15
4

30
10
13
50

103

307

100
69

169

18
9

27
29

252
39
76
175

542

767

669
—
(2)

70
55

125

16
2

18
3

27
7
12
50

242

486
84

570

28
11

39
27

255
50
93
218

616

1,252

1,254
—
(55)

$2,369

$2,184
185

$2,369

2.00%
232
206
189

67
40

107

9
2

11
4

25
6
11
54

218

492
149

641

32
7

39
19

280
39
97
258

674

61
30

9
1

10
3

23
5
13
80

121

225

718
114

832

41
12

53
13

271
29
100
249

649

1,373

1,349
—
(11)

$2,422

1,547

2,529
(329)
17

$2,457

2.08%
196
176
176

2.15%
245
219
159

$2,251

$2,269

Components

Allowance for loan losses ***********************************
Liability for unfunded credit commitments *********************
Total allowance for credit losses ***********************

Allowance for credit losses as a percentage of

Period-end loans*******************************************
Nonperforming loans ***************************************
Nonperforming assets **************************************
Net charge-offs (a) *****************************************

$2,041
210

$2,251

1.63%
414
350
329

$2,080
189

$2,269

1.80%
355
303
296

(a) In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category
based on the lower of cost or fair value. At the time of the transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies
and methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses was reported separately as a reduction of the
allowance for credit losses under ‘‘Losses from loan sales/transfers.’’ Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been $1,876 million
for the year ended 2001. Additionally, the allowance as a percent of net charge-offs would have been 131 percent for the year ended December 31, 2001.

40 U.S. BANCORP

Analysis and Determination of the Allowance for Credit

The allowance recorded for commercial and

Losses The allowance for loan losses provides coverage for
probable and estimable losses inherent in the Company’s
loan and lease portfolio. Management evaluates the
allowance each quarter to determine that it is adequate to
cover these inherent losses. The evaluation of each element
and the overall allowance is based on a continuing
assessment of problem loans, recent loss experience and
other factors, including regulatory guidance and economic
conditions. 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, which is included in other liabilities in the
Consolidated Balance Sheet. Both the allowance for loan
losses and the liability for unfunded credit commitments are
included in the Company’s analysis of credit losses.

At December 31, 2005, the allowance for credit losses
was $2,251 million (1.63 percent of loans). This compares
with an allowance of $2,269 million (1.80 percent of loans)
at December 31, 2004, and $2,369 million (2.00 percent of
loans) at December 31, 2003. The ratio of the allowance
for credit losses to nonperforming loans was 414 percent at
year-end 2005, compared with 355 percent at year-end
2004 and 232 percent at year-end 2003. The ratio of the
allowance for credit losses to loan net charge-offs was
329 percent at year-end 2005, compared with 296 percent
at year-end 2004 and 189 percent at year-end 2003.
Management determined that the allowance for credit losses
was adequate at December 31, 2005.

Several factors were taken into consideration in
evaluating the allowance for credit losses at December 31,
2005, including the risk proﬁle of the portfolios and loan
net charge-offs during the period, the level of
nonperforming assets, accruing loans 90 days or more past
due and delinquency ratios compared with December 31,
2004. Management also considered the uncertainty related
to certain industry sectors, including the airline industry,
and the extent of credit exposure to other borrowers within
the portfolio. In addition, concentration risks associated
with commercial real estate and the mix of loans, including
credit cards, loans originated through the consumer ﬁnance
division and residential mortgages balances, and their
relative credit risks were evaluated. Finally, the Company
considered current economic conditions that might impact
the portfolio. Management determines the allowance that is
required for speciﬁc loan categories based on relative risk
characteristics of the loan portfolio. On an ongoing basis,
management evaluates its methods for determining the
allowance for each element of the portfolio and makes
enhancements considered appropriate. Table 17 shows the
amount of the allowance for credit losses by portfolio
category.

commercial real estate loans is based on a regular review of
individual credit relationships. The Company’s risk rating
process is an integral component of the methodology
utilized to determine these elements of the allowance for
credit losses. An allowance for credit losses is established
for pools of commercial and commercial real estate loans
and unfunded commitments based on the risk ratings
assigned. An analysis of the migration of commercial and
commercial real estate loans and actual loss experience
throughout the business cycle is also conducted quarterly to
assess the exposure for credits with similar risk
characteristics. In addition to its risk rating process, the
Company separately analyzes the carrying value of impaired
loans to determine whether the carrying value is less than or
equal to the appraised collateral value or the present value
of expected cash ﬂows. Based on this analysis, an allowance
for credit losses may be speciﬁcally established for impaired
loans. The allowance established for commercial and
commercial real estate loan portfolios, including impaired
commercial and commercial real estate loans, was
$929 million at December 31, 2005, compared with
$941 million and $1,015 million at December 31, 2004 and
2003, respectively. The decline in the allowance for
commercial and commercial real estate loans of $12 million
at December 31, 2005, compared with December 31, 2004,
reﬂected a $21 million reduction related to changes in loss
severity rates, offset somewhat by the impact of growth in
the portfolios and a $9 million increase related to changes
in risk classiﬁcations.

The allowance recorded for the residential mortgages
and retail loan portfolios is based on an analysis of product
mix, credit scoring and risk composition of the portfolio,
loss and bankruptcy experiences, economic conditions and
historical and expected delinquency and charge-off statistics
for each homogenous group of loans. Based on this
information and analysis, an allowance was established
approximating a rolling twelve-month estimate of net
charge-offs. The allowance established for residential
mortgages was $39 million at December 31, 2005,
compared with $33 million at December 31, 2004 and
2003, respectively. The increase in the allowance for the
residential mortgage portfolio year-over-year was primarily
due to growth of the portfolio during 2005. The allowance
established for retail loans was $558 million at
December 31, 2005, compared with $610 million and
$651 million at December 31, 2004 and 2003, respectively.
The decline in the allowance for the retail portfolio in 2005
reﬂected improved credit quality favorably impacting
inherent loss ratios and declining delinquency trends,
partially offset by the impact of portfolio growth.

U.S. BANCORP 41

Regardless of the extent of the Company’s analysis of

customer performance, portfolio trends or risk management
processes, certain inherent but undetected losses are
probable within the loan portfolios. This is due to several
factors, including inherent delays in obtaining information
regarding a customer’s ﬁnancial condition or changes in
their unique business conditions, the judgmental nature of
individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or
customer-speciﬁc conditions affecting the identiﬁcation and
estimation of losses from larger non-homogeneous credits
and the sensitivity of assumptions utilized to establish
allowances for homogeneous groups of loans, loan portfolio
concentrations, and other subjective considerations are
among other factors. Because of these subjective factors, the
process utilized to determine each element of the allowance
for credit losses by speciﬁc loan category has some
imprecision. As such, the Company estimates a range of
inherent losses in the portfolio based on statistical analyses
and management judgment, and maintains an ‘‘allowance
available for other factors’’ that is related to but not
allocated to a speciﬁc loan category. A statistical analysis
attempts to measure the extent of imprecision by
determining the volatility of losses over time across loan
categories. Also, management judgmentally considers loan
concentrations, risks associated with speciﬁc industries, the
stage of the business cycle, economic conditions and other
qualitative factors. Based on this process, the amount of the
allowance available for other factors was $725 million at

December 31, 2005, compared with $685 million at
December 31, 2004, and $670 million at December 31,
2003. At December 31, 2005, approximately $592 million
was related to estimated imprecision as described above. Of
this amount, commercial and commercial real estate
represented approximately 68 percent while residential and
retail loans represented approximately 32 percent. The
remaining allowance available for other factors of
$133 million was related to concentration risk, including
risks associated with the sluggish airline industry, relative
size of the consumer ﬁnance and commercial real estate
portfolios, highly leveraged enterprise-value credits,
uncertainty regarding credit card losses during the transition
to higher minimum balance payments and other qualitative
factors. Given the many subjective factors affecting the
credit portfolio, changes in the allowance for other factors
may not directly coincide with changes in the risk ratings or
the credit portfolio.

Although the Company determines the amount of each

element of the allowance separately and this process is an
important credit management tool, the entire allowance for
credit losses is available for the entire loan portfolio. The
actual amount of losses incurred can vary signiﬁcantly from
the estimated amounts. Refer to Note 1 of the Notes to
Consolidated Financial Statements for accounting policies
related to the allowance for credit losses.

Residual Risk Management The Company manages its risk
to changes in the residual value of leased assets through
disciplined residual valuation setting at the inception of a

Table 17

E L E M E N T S O F T H E A L L O WA N C E F O R C R E D I T L O S S E S

December 31 (Dollars in Millions)

2005

2004

2003

2002

2001

2005

2004

2003

2002

2001

Allowance Amount

Allowance as a Percent of Loans

Commercial

Commercial *********************
Lease ﬁnancing ******************

$ 656
105

$ 664
106

$ 696
90

$ 776
108

$1,068
108

1.73%
2.06

1.89%
2.14

2.08%
1.80

2.12%
2.01

2.64%
1.84

Total commercial**************

761

770

786

884

1,176

1.77

1.92

2.04

2.11

2.54

Commercial real estate

Commercial mortgages ***********
Construction and development*****

Total commercial real estate ****

Residential mortgages***********

Retail

Credit card **********************
Retail leasing ********************
Home equity and second

mortgages *******************
Other retail **********************

Total retail********************

Total allocated allowance*******
Available for other factors ******

115
53

168

284
24

62
188

558

131
40

171

283
44

88
195

610

170
59

229

268
47

101
235

651

153
53

206

272
44

115
269

700

177
76

253

295
39

88
283

705

1,526
725

1,584
685

1,699
670

1,824
598

2,156
301

.57
.65

.59

.19

3.98
.33

.41
1.16

1.22

1.11
.52

.64
.55

.62

.21

4.29
.61

.59
1.34

1.41

1.26
.54

.82
.89

.84

.25

4.52
.78

.76
1.70

1.67

1.43
.57

.75
.81

.77

.35

4.80
.77

.85
2.11

1.86

1.57
.51

.94
1.15

1.00

.28

5.01
.79

.72
2.39

2.02

1.89
.26

Total allowance *********************

$2,251

$2,269

$2,369

$2,422

$2,457

1.63%

1.80%

2.00%

2.08%

2.15%

42 U.S. BANCORP

lease, diversiﬁcation of its leased assets, regular residual
asset valuation reviews and monitoring of residual value
gains or losses upon the disposition of assets. Commercial
lease originations are subject to the same well-deﬁned
underwriting standards referred to in the ‘‘Credit Risk
Management’’ section which includes an evaluation of the
residual risk. Retail lease residual risk is mitigated further
by originating longer-term vehicle leases and effective end-
of-term marketing of off-lease vehicles. Also, to reduce the
ﬁnancial risk of potential changes in vehicle residual values,
the Company maintains residual value insurance. The
catastrophic insurance maintained by the Company provides
for the potential recovery of losses on individual vehicle
sales in an amount equal to the difference between:
(a) 105 percent or 110 percent of the average wholesale
auction price for the vehicle at the time of sale and (b) the
vehicle residual value speciﬁed by the Automotive Lease
Guide (an authoritative industry source) at the inception of
the lease. The potential recovery is calculated for each
individual vehicle sold in a particular policy year and is
reduced by any gains realized on vehicles sold during the
same period. The Company will receive claim proceeds
under this insurance program if, in the aggregate, there is a
net loss for such period. In addition, the Company obtains
separate residual value insurance for all vehicles at lease
inception where end of lease term settlement is based solely
on the residual value of the individual leased vehicles.
Under this program, the potential recovery is computed for
each individual vehicle sold and does not allow the
insurance carrier to offset individual determined losses with
gains from other leases. This individual vehicle coverage is
included in the calculation of minimum lease payments
when making the capital lease assessment. To reduce the
risk associated with collecting insurance claims, the
Company monitors the ﬁnancial viability of the insurance
carrier based on insurance industry ratings and available
ﬁnancial information.

Included in the retail leasing portfolio was

approximately $4.3 billion of retail leasing residuals at
December 31, 2005, compared with $4.0 billion at
December 31, 2004. The Company monitors concentrations
of leases by manufacturer and vehicle ‘‘make and model.’’
At year-end 2005, no vehicle-type concentration exceeded
ﬁve percent of the total number of vehicles in the aggregate
portfolio. Because retail residual valuations tend to be less
volatile for longer-term leases, relative to the estimated
residual at inception of the lease, the Company actively
manages lease origination production to achieve a longer-
term portfolio. At December 31, 2005, the weighted-
average origination term of the portfolio was 51 months.
Since early 2003, the wholesale market for used vehicles has
been in a period of sustained recovery, resulting in the
improvement of residual values. Within vehicle categories,

wholesale values for automobiles have performed better
than trucks, experiencing an increase in average wholesale
prices of 13.6 percent during 2005, while trucks have seen
an increase of 2.8 percent. The smaller increase in truck
values is attributed to a market decline in demand for full
size, midsize, and luxury sport utility vehicles. These models
have not experienced price increases as great as automobiles
due to the impact of higher gas prices on consumer buying
patterns, an oversupply in the marketplace, and the
emergence of the crossover segments. The improvement in
the used car marketplace combined with the mix of the
Company’s lease residual portfolio have reduced the
exposure to retail lease residual impairments relative to a
year ago.

At December 31, 2005, the commercial leasing
portfolio had $678 million of residuals, compared with
$769 million at December 31, 2004. At year-end 2005,
lease residuals related to trucks and other transportation
equipment were 25.1 percent of the total residual portfolio.
Railcars represented 17.7 percent of the aggregate portfolio,
while business and ofﬁce equipment and aircraft were
17.2 percent and 16.6 percent, respectively. No other
signiﬁcant concentrations of more than 10 percent existed
at December 31, 2005. In 2005, residual values in general
improved or remained stable. The transportation industry
residual values improved for marine, rail and corporate
aircraft. Commercial aircraft continues to experience lower
values due to the abundance of supply and technological
efﬁciencies on newer models.

Operational Risk Management Operational risk represents
the risk of loss resulting from the Company’s operations,
including, but not limited to, the risk of fraud by employees
or persons outside the Company, the execution of
unauthorized transactions by employees, errors relating to
transaction processing and technology, breaches of the
internal control system and compliance requirements and
business continuation and disaster recovery. This risk of
loss also includes the potential legal actions that could arise
as a result of an operational deﬁciency or as a result of
noncompliance with applicable regulatory standards,
adverse business decisions or their implementation, and
customer attrition due to potential negative publicity.

The Company operates in many different businesses in

diverse markets and relies on the ability of its employees
and systems to process a high number of transactions.
Operational risk is inherent in all business activities, and the
management of this risk is important to the achievement of
the Company’s objectives. In the event of a breakdown in
the internal control system, improper operation of systems
or improper employees’ actions, the Company could suffer
ﬁnancial loss, face regulatory action and suffer damage to
its reputation.

U.S. BANCORP 43

The Company manages operational risk through a risk
management framework and its internal control processes.
Within this framework, the Corporate Risk Committee
(‘‘Risk Committee’’) provides oversight and assesses the
most signiﬁcant operational risks facing the Company
within its business lines. Under the guidance of the Risk
Committee, enterprise risk management personnel establish
policies and interact with business lines to monitor
signiﬁcant operating risks on a regular basis. Business lines
have direct and primary responsibility and accountability
for identifying, controlling, and monitoring operational risks
embedded in their business activities. Business managers
maintain a system of controls with the objective of
providing proper transaction authorization and execution,
proper system operations, safeguarding of assets from
misuse or theft, and ensuring the reliability of ﬁnancial and
other data. Business managers ensure that the controls are
appropriate and are implemented as designed.

Each business line within the Company has designated

risk managers. These risk managers are responsible for,
among other things, coordinating the completion of ongoing
risk assessments and ensuring that operational risk
management is integrated into business decision-making
activities. Business continuation and disaster recovery
planning is also critical to effectively manage operational
risks. Each business unit of the Company is required to
develop, maintain and test these plans at least annually to
ensure that recovery activities, if needed, can support
mission critical functions including technology, networks
and data centers supporting customer applications and
business operations. The Company’s internal audit function
validates the system of internal controls through risk-based,
regular and ongoing audit procedures and reports on the
effectiveness of internal controls to executive management
and the Audit Committee of the Board of Directors.

Customer-related business conditions may also increase
operational risk or the level of operational losses in certain
transaction processing business units, including merchant
processing activities. Ongoing risk monitoring of customer
activities and their ﬁnancial condition and operational
processes serve to mitigate customer-related operational
risk. Refer to Note 23 of the Notes to Consolidated
Financial Statements for further discussion on merchant
processing.

While the Company believes that it has designed
effective methods to minimize operational risks, there is no
absolute assurance that business disruption or operational
losses would not occur in the event of a disaster. On an
ongoing basis, management makes process changes and
investments to enhance its systems of internal controls and
business continuity and disaster recovery plans.

44 U.S. BANCORP

Interest Rate Risk Management In the banking industry,
changes in interest rates is a signiﬁcant risk that can impact
earnings, market valuations and safety and soundness of an
entity. To minimize the volatility of net interest income and
of the market value of assets and liabilities, the Company
manages its exposure to changes in interest rates through
asset and liability management activities within guidelines
established by its Asset Liability Policy Committee
(‘‘ALPC’’) and approved by the Board of Directors. ALPC
has the responsibility for approving and ensuring
compliance with ALPC management policies, including
interest rate risk exposure. The Company uses Net Interest
Income Simulation Analysis and Market Value of Equity
Modeling for measuring and analyzing consolidated interest
rate risk.

Net Interest Income Simulation Analysis One of the
primary tools used to measure interest rate risk and the
effect of interest rate changes on rate sensitive income and
net interest income is simulation analysis. The monthly
analysis incorporates substantially all of the Company’s
assets and liabilities and off-balance sheet instruments,
together with forecasted changes in the balance sheet and
assumptions that reﬂect the current interest rate
environment. Through these simulations, management
estimates the impact on interest rate sensitive income of a
300 basis point upward or downward gradual change of
market interest rates over a one-year period. The
simulations also estimate the effect of immediate and
sustained parallel shifts in the yield curve of 50 basis points
as well as the effect of immediate and sustained ﬂattening
or steepening of the yield curve. These simulations include
assumptions about how the balance sheet is likely to be
affected by changes in loan and deposit growth.
Assumptions are made to project interest rates for new
loans and deposits based on historical analysis,
management’s outlook and repricing strategies. These
assumptions are validated on a periodic basis. A sensitivity
analysis is provided for key variables of the simulation. The
results are reviewed by ALPC monthly and are used to
guide asset/liability management strategies.

The table on page 45 summarizes the interest rate risk

of net interest income and rate sensitive income based on
forecasts over the succeeding 12 months. At December 31,
2005, the Company’s overall interest rate risk position was
liability sensitive to changes in interest rates. Rate sensitive
income includes net interest income as well as other income
items that are sensitive to interest rates, including asset
management fees, mortgage banking and the impact from
compensating deposit balances. The Company manages its
interest rate risk position by holding assets on the balance
sheet with desired interest rate risk characteristics,
implementing certain pricing strategies for loans and

Sensitivity of Net Interest Income and Rate Sensitive Income:

December 31, 2005

December 31, 2004

Down 50
Immediate

Up 50
Immediate

Down 300
Gradual

Up 300
Gradual

Down 50
Immediate

Up 50
Immediate

Down 300
Gradual

Up 300
Gradual

Net interest income ******************
Rate sensitive income ****************

.66%
.73%

(.73)%
(.89)%

(.30)%
(.21)%

(2.58)%
(3.03)%

(.49)%
(.40)%

.04%
(.13)%

*%
*%

(.19)%
(.69)%

* Due to the level of interest rates at December 31, 2004, a downward 300 basis point scenario could not be computed.

deposits and through the selection of derivatives and
various funding and investment portfolio strategies. The
Company manages the overall interest rate risk proﬁle
within policy limits. ALPC policy guidelines limit the
estimated change in interest rate sensitive income to
5.0 percent of forecasted interest rate sensitive income over
the succeeding 12 months. At December 31, 2005 and
2004, the Company was within its policy guidelines.

Market Value of Equity Modeling The Company also utilizes
the market value of equity as a measurement tool in
managing interest rate sensitivity. The market value of
equity measures the degree to which the market values of
the Company’s assets and liabilities and off-balance sheet
instruments will change given a change in interest rates.
ALPC guidelines limit the change in market value of equity
in a 200 basis point parallel rate shock to 15 percent of the
market value of equity assuming interest rates at
December 31, 2005. The up 200 basis point scenario
resulted in a 6.8 percent decrease in the market value of
equity at December 31, 2005, compared with a 2.7 percent
decrease at December 31, 2004. The down 200 basis point
scenario resulted in a 4.1 percent decrease in the market
value of equity at December 31, 2005, compared with a
4.2 percent decrease at December 31, 2004. At
December 31, 2005 and 2004, the Company was within its
policy guidelines.

The valuation analysis is dependent upon certain key
assumptions about the nature of assets and liabilities with
non-contractual maturities. Management estimates the
average life and rate characteristics of asset and liability
accounts based upon historical analysis and management’s
expectation of rate behavior. These assumptions are
validated on a periodic basis. A sensitivity analysis of key
variables of the valuation analysis is provided to ALPC
monthly and is used to guide asset/liability management
strategies. The Company also uses duration of equity as a
measure of interest rate risk. The duration of equity is a
measure of the net market value sensitivity of the assets,
liabilities and derivative positions of the Company. The
duration of assets was 1.61 years at December 31, 2005,
compared with 1.63 years at December 31, 2004. The
duration of liabilities was 1.57 years at December 31, 2005,
compared with 1.89 years at December 31, 2004. At
December 31, 2005, the duration of equity was 1.84 years,
compared with .12 years at December 31, 2004. The

increased duration of equity measure shows that sensitivity
of the market value of equity of the Company was liability
sensitive to changes in interest rates.

Use of Derivatives to Manage Interest Rate Risk In the
ordinary course of business, the Company enters into
derivative transactions to manage its interest rate,
prepayment and foreign currency risks (‘‘asset and liability
management positions’’) and to accommodate the business
requirements of its customers (‘‘customer-related
positions’’). To manage its interest rate risk, the Company
may enter into interest rate swap agreements and interest
rate options such as caps and ﬂoors. Interest rate swaps
involve the exchange of ﬁxed-rate and variable-rate
payments without the exchange of the underlying notional
amount on which the interest payments are calculated.
Interest rate caps protect against rising interest rates while
interest rate ﬂoors protect against declining interest rates. In
connection with its mortgage banking operations, the
Company enters into forward commitments to sell mortgage
loans related to ﬁxed-rate mortgage loans held for sale and
ﬁxed-rate mortgage loan commitments. The Company also
acts as a seller and buyer of interest rate contracts and
foreign exchange rate contracts on behalf of customers. The
Company minimizes its market and liquidity risks by taking
similar offsetting positions.

All interest rate derivatives that qualify for hedge
accounting are recorded at fair value as other assets or
liabilities on the balance sheet and are designated as either
‘‘fair value’’ or ‘‘cash ﬂow’’ hedges. The Company performs
an assessment, both at inception and quarterly thereafter,
when required, to determine whether these derivatives are
highly effective in offsetting changes in the value of the
hedged items. Hedge ineffectiveness for both cash ﬂow and
fair value hedges is recorded in noninterest income. Changes
in the fair value of derivatives designated as fair value
hedges, and changes in the fair value of the hedged items,
are recorded in earnings. Changes in the fair value of
derivatives designated as cash ﬂow hedges are recorded in
other comprehensive income until income from the cash
ﬂows of the hedged items is realized. Customer-related
interest rate swaps, foreign exchange rate contracts, and all
other derivative contracts that do not qualify for hedge
accounting are recorded at fair value and resulting gains or
losses are recorded in trading account gains or losses or
mortgage banking revenue.

U.S. BANCORP 45

By their nature, derivative instruments are subject to

market risk. The Company does not utilize derivative
instruments for speculative purposes. Of the Company’s
$30.2 billion of total notional amount of asset and liability
management derivative positions at December 31, 2005,
$27.4 billion was designated as either fair value or cash flow
hedges, or net investment hedges of foreign operations. The
cash flow hedge derivative positions are interest rate swaps
that hedge the forecasted cash flows from the underlying
variable-rate LIBOR loans and floating-rate debt. The fair

Table 18

D e r i v a t i v e P o s i t i o n s

Asset and Liability Management Positions

value hedges are primarily interest rate swaps that hedge the
change in fair value related to interest rate changes of
underlying fixed-rate debt and subordinated obligations.

In addition, the Company uses forward commitments
to sell residential mortgage loans to hedge its interest rate
risk related to residential mortgage loans held for sale. The
Company commits to sell the loans at speciﬁed prices in a
future period, typically within 90 days. The Company is
exposed to interest rate risk during the period between
issuing a loan commitment and the sale of the loan into the
secondary market. Related to its mortgage banking

December 31, 2005
(Dollars in Millions)

Interest rate contracts

Receive ﬁxed/pay ﬂoating swaps

Notional amount ********************
Weighted-average

Receive rate ********************
Pay rate ************************

Pay ﬁxed/receive ﬂoating swaps

Notional amount ********************
Weighted-average

Receive rate ********************
Pay rate ************************
Futures and forwards *******************
Buy****************************
Sell ****************************

Maturing

2006

2007

2008

2009

2010

Thereafter

Total

Weighted-
Average
Remaining
Maturity
In Years

Fair
Value

$ 800

$3,970

$3,750

$1,750

$500

$5,600

$16,370

$ (82)

7.79

3.82%
4.36

4.22%
4.34

3.98%
4.32

4.62%
4.41

4.56%
4.46

6.15%
4.77

4.86%
4.49

$4,450

$3,600

$1,000

$ —

$ 113

$ 9,163

$139

1.33

4.32%
2.95

4.29%
3.42

4.37%
3.75

—%
—

4.46%
4.91

4.32%
3.24

$ 104
2,669

$ — $ — $ —
—

—

$ —
—

104
2,669

$ —
(15)

.07
.09

.08

Options

Written ***************************

Foreign exchange contracts

$1,086

$ — $ — $ —

$ —

$ 1,086

Cross-currency swaps

Notional amount ********************
Weighted average

Receive rate ********************
Pay rate ************************

$ — $ — $ — $ —

$ —

$ 387

387

$ 11

9.61

—%
—

3.80%
4.46

Forwards *****************************

$ 404

$ — $ — $ —

Equity contracts ***********************

$ — $ — $ — $

$ —

404

.05

3.29

Customer-related Positions

December 31, 2005
(Dollars in Millions)

Interest rate contracts

Receive ﬁxed/pay ﬂoating swaps

Notional amount***********************

Pay ﬁxed/receive ﬂoating swaps

Notional amount***********************

Options

Purchased****************************
Written *******************************

Risk participation agreements

Purchased****************************
Written *******************************

Foreign exchange rate contracts

Forwards, spots and swaps

Maturing

2006

2007

2008

2009

2010

Thereafter

Total

Weighted-
Average
Remaining
Maturity
In Years

Fair
Value

$1,060

$1,184

$1,653

$959

$1,410

$3,487

$9,753

$(69)

5.25

1,055

1,163

1,633

960

1,403

3,493

9,707

121

5.25

239
239

5
22

642
642

35
3

191
191

3
25

45
46

—
—

165
165

21
17

$ 39
39

—
—

179
179

6
43

37
37

—
—

37
37

73
59

1,453
1,453

143
169

$ — $2,042
2,018

—

—
—

56
56

6
(5)

—
—

$ 77
(73)

1
(1)

2.26
2.26

8.02
4.64

.43
.46

.24
.24

Buy**********************************
Sell **********************************

$1,810
1,778

$ 111
118

Options

Purchased****************************
Written *******************************

56
56

—
—

46 U.S. BANCORP

operations, the Company held $1.1 billion of forward
commitments to sell mortgage loans and $1.1 billion of
unfunded mortgage loan commitments that were derivatives
in accordance with the provisions of the Statement of
Financial Accounting Standards No. 133, ‘‘Accounting for
Derivative Instruments and Hedge Activities.’’ The unfunded
mortgage loan commitments are reported at fair value as
options in Table 18.

Derivative instruments are also subject to credit risk
associated with counterparties to the derivative contracts.
Credit risk associated with derivatives is measured based on
the replacement cost should the counterparties with
contracts in a gain position to the Company fail to perform
under the terms of the contract. The Company manages this
risk through diversiﬁcation of its derivative positions among
various counterparties, requiring collateral agreements with
credit-rating thresholds, entering into master netting
agreements in certain cases and entering into interest rate
swap risk participation agreements. These agreements are
credit derivatives that transfer the credit risk related to
interest rate swaps from the Company to an unafﬁliated
third-party. The Company also provides credit protection to
third-parties with risk participation agreements, for a fee, as
part of a loan syndication transaction.

At December 31, 2005, the Company had $10 million

in accumulated other comprehensive income related to
realized and unrealized losses on derivatives classiﬁed as
cash ﬂow hedges. The unrealized losses will be reﬂected in
earnings when the related cash ﬂows or hedged transactions
occur and will offset the related performance of the hedged
items. The estimated amount of gain to be reclassiﬁed from
accumulated other comprehensive income into earnings
during the next 12 months is $26 million.

Gains or losses on customer-related derivative positions
were not material in 2005. The change in fair value of forward
commitments attributed to hedge ineffectiveness recorded in
noninterest income was a decrease of $4 million in 2005,
compared with an increase of $1 million in 2004. The change
in the fair value of all other asset and liability management
derivative positions attributed to hedge ineffectiveness was a
decrease of $2 million in 2005.

The Company may enter into derivatives to protect its
net investment in certain foreign operations. The Company
uses forward commitments to sell specified amounts of
certain foreign currencies to hedge its capital volatility risk
associated with fluctuations in foreign currency exchange
rates. The net amount of gains or losses included in the
cumulative translation adjustment for 2005 was not material.
Table 18 summarizes information on the Company’s
derivative positions at December 31, 2005. Refer to Notes 1
and 21 of the Notes to Consolidated Financial Statements
for signiﬁcant accounting policies and additional
information regarding the Company’s use of derivatives.

Market Risk Management In addition to interest rate risk,
the Company is exposed to other forms of market risk as a
consequence of conducting normal trading activities.
Business activities that contribute to market risk include,
among other things, proprietary trading and foreign
exchange positions. Value at Risk (‘‘VaR’’) is a key measure
of market risk for the Company. Theoretically, VaR
represents the maximum amount that the Company has
placed at risk of loss, with a ninety-ninth percentile degree
of conﬁdence, to adverse market movements in the course
of its risk taking activities.

VaR modeling of trading activities is subject to certain
limitations. Additionally, it should be recognized that there
are assumptions and estimates associated with VaR
modeling, and actual results could differ from those
assumptions and estimates. The Company mitigates these
uncertainties through regular monitoring of trading
activities by management and other risk management
practices, including stop-loss and position limits related to
its trading activities. Stress-test models are used to provide
management with perspectives on market events that VaR
models do not capture.

The Company establishes market risk limits, subject to

approval by the Company’s Board of Directors. The
Company’s VaR limit was $20 million at December 31,
2005 and 2004. The market valuation risk inherent in its
customer-based derivative trading, mortgage banking
pipeline and foreign exchange, as estimated by the VaR
analysis, was $1 million at December 31, 2005, and
$2 million at December 31, 2004.

Liquidity Risk Management ALPC establishes policies, as
well as analyzes and manages liquidity, to ensure that
adequate funds are available to meet normal operating
requirements in addition to unexpected customer demands
for funds, such as high levels of deposit withdrawals or
loan demand, in a timely and cost-effective manner. The
most important factor in the preservation of liquidity is
maintaining public conﬁdence that facilitates the retention
and growth of a large, stable supply of core deposits and
wholesale funds. Ultimately, public conﬁdence is generated
through profitable operations, sound credit quality and a
strong capital position. The Company’s performance in these
areas has enabled it to develop a large and reliable base of
core funding within its market areas and in domestic and
global capital markets. Liquidity management is viewed from
long-term and short-term perspectives, as well as from an asset
and liability perspective. Management monitors liquidity
through a regular review of maturity profiles, funding sources,
and loan and deposit forecasts to minimize funding risk.
The Company maintains strategic liquidity and

contingency plans that are subject to the availability of asset
liquidity in the balance sheet. Monthly, ALPC reviews the

U.S. BANCORP 47

Table 19

D E B T R AT I N G S

Moody’s

Standard &
Poor’s

U.S. Bancorp

Short-term borrowings ******************************************************************
Senior debt and medium-term notes******************************************************
Subordinated debt *********************************************************************
Preferred stock ************************************************************************
Commercial paper**********************************************************************

Aa2
Aa3
A1
P-1

U.S. Bank National Association

Short-term time deposits ****************************************************************
Long-term time deposits ****************************************************************
Bank notes****************************************************************************
Subordinated debt *********************************************************************
Commercial paper**********************************************************************

P-1
Aa1
Aa1/P-1
Aa2
P-1

AA–
A+
A
A-1+

A-1+
AA
AA/A-1+
AA–
A-1+

Fitch

F1+
AA–
A+
A+
F1+

F1+
AA
AA–/F1+
A+
F1+

Company’s ability to meet funding requirements due to
adverse business events. These funding needs are then
matched with specific asset-based sources to ensure sufficient
funds are available. Also, strategic liquidity policies require
diversification of wholesale funding sources to avoid
concentrations in any one market source. Subsidiary banks
are members of various Federal Home Loan Banks (‘‘FHLB’’)
that provide a source of funding through FHLB advances.
The Company maintains a Grand Cayman branch for issuing
eurodollar time deposits. The Company also issues
commercial paper through its Canadian branch. In addition,
the Company establishes relationships with dealers to issue
national market retail and institutional savings certificates
and short- and medium-term bank notes. The Company’s
subsidiary banks also have significant correspondent banking
networks and corporate accounts. Accordingly, the Company
has access to national fed funds, funding through repurchase
agreements and sources of more stable, regionally-based
certificates of deposit and commercial paper.

The Company’s ability to raise negotiated funding at

competitive prices is inﬂuenced by rating agencies’ views of
the Company’s credit quality, liquidity, capital and
earnings. On January 27, 2006, Standard & Poor’s Rating
Services upgraded the Company’s credit ratings to
AA–/A-1+. Standard & Poor’s also upgraded the
Company’s primary banking subsidiaries to an AA long-
term debt rating. At January 27, 2006, the credit ratings
outlook for the Company was considered ‘‘Stable’’ by
Moody’s Investors Service, Standard & Poor’s and Fitch
Ratings. The debt ratings noted in Table 19, upgraded for
the Standard & Poor’s January of 2006 upgrade, reﬂect the
rating agencies’ recognition of the Company’s sector-leading
core earnings performance and lower credit risk proﬁle.
The parent company’s routine funding requirements

consist primarily of operating expenses, dividends to
shareholders, debt service, repurchases of common stock
and funds used for acquisitions. The parent company
obtains funding to meet its obligations from dividends

48 U.S. BANCORP

collected from its subsidiaries and the issuance of debt
securities.

At December 31, 2005, parent company long-term debt

outstanding was $10.9 billion, compared with $6.9 billion
at December 31, 2004. The $4.0 billion increase was
primarily due to issuances of convertible senior debentures
of $4.5 billion, medium-term notes of $.5 billion and junior
subordinated debentures of $1.0 billion, offset by long-term
debt maturities and repayments during 2005. Total parent
company debt scheduled to mature in 2006 is $626 million.
These debt obligations may be met through medium-term
note and capital security issuances and dividends from
subsidiaries, as well as from parent company cash and cash
equivalents.

Federal banking laws regulate the amount of dividends

that may be paid by banking subsidiaries without prior
approval. The amount of dividends available to the parent
company from its banking subsidiaries after meeting the
regulatory capital requirements for well-capitalized banks
was approximately $1.0 billion at December 31, 2005. For
further information, see Note 24 of the Notes to
Consolidated Financial Statements.

Refer to Table 20 for further information on signiﬁcant

contractual obligations at December 31, 2005.

Off-Balance Sheet Arrangements Off-balance sheet
arrangements include any contractual arrangement to which an
unconsolidated entity is a party, under which the Company
has an obligation to provide credit or liquidity enhancements
or market risk support. Off-balance sheet arrangements
include certain defined guarantees, asset securitization trusts
and conduits. Off-balance sheet arrangements also include any
obligation under a variable interest held by an unconsolidated
entity that provides financing, liquidity, credit enhancement or
market risk support.

In the ordinary course of business, the Company enters

into an array of commitments to extend credit, letters of
credit and various forms of guarantees that may be
considered off-balance sheet arrangements. The nature and

Table 20

C O N T R A C T U A L O B L I G AT I O N S

(Dollars in Millions)

Contractual Obligations

Long-term debt (a) ****************************************
Capital leases ********************************************
Operating leases ******************************************
Purchase obligations***************************************
Beneﬁt obligations (b) **************************************
Total*****************************************************

Payments Due By Period

Over One
Through
Three Years

Over Three
Through
Five Years

$12,874
7
299
136
78

$13,394

$3,499
6
227
19
78

$3,829

Over Five
Years

$13,006
12
461
—
193

$13,672

Total

$37,069
30
1,158
290
386

$38,933

One Year
or Less

$7,690
5
171
135
37

$8,038

(a) In the banking industry, interest-bearing obligations are principally utilized to fund interest-bearing assets. As such, interest charges on related contractual obligations were excluded from

reported amounts as the potential cash outﬂows would have corresponding cash inﬂows from interest-bearing assets.
(b) Amounts only include obligations related to the unfunded non-qualiﬁed pension plan and post-retirement medical plans.

extent of these arrangements are provided in Note 23 of the
Notes to Consolidated Financial Statements.

Asset securitizations and conduits represent a source of
funding for the Company through off-balance sheet structures.
Credit, liquidity, operational and legal structural risks exist due
to the nature and complexity of asset securitizations and other
off-balance sheet structures. ALPC regularly monitors the
performance of each off-balance sheet structure in an effort to
minimize these risks and ensure compliance with the
requirements of the structures. The Company utilizes its credit
risk management systems to evaluate the credit quality of
underlying assets and regularly forecasts cash flows to evaluate
any potential impairment of retained interests. Also, regulatory
guidelines require consideration of asset securitizations in the
determination of risk-based capital ratios. The Company does
not rely significantly on off-balance sheet arrangements for
liquidity or capital resources.

The Company sponsors an off-balance sheet conduit, a

qualified special purpose entity (‘‘QSPE’’), to which it
transferred high-grade investment securities, funded by the
issuance of commercial paper. Because QSPE’s are exempt
from consolidation under the provisions of Financial
Accounting Standards Board Interpretation No. 46R,
‘‘Consolidation of Variable Interest Entities’’ (‘‘FIN 46R’’),
the Company does not consolidate the conduit structure in
its financial statements. The conduit held assets of
$3.8 billion at December 31, 2005, and $5.7 billion at
December 31, 2004. These investment securities include
primarily (i) private label asset-backed securities, which are
insurance ‘‘wrapped’’ by AAA/Aaa–rated mono-line insurance
companies and (ii) government agency mortgage-backed
securities and collateralized mortgage obligations. The
conduit had commercial paper liabilities of $3.8 billion at
December 31, 2005, and $5.7 billion at December 31, 2004.
The Company provides a liquidity facility to the conduit.
Utilization of the liquidity facility would be triggered if the
conduit is unable to, or does not, issue commercial paper to
fund its assets. A liability for the estimate of the potential
risk of loss the Company has as the liquidity facility provider

is recorded on the balance sheet in other liabilities. The
liability is adjusted downward over time as the underlying
assets pay down with the offset recognized as other
noninterest income. The liability for the liquidity facility was
$20 million and $32 million at December 31, 2005 and
2004, respectively. In addition, the Company recorded at fair
value its retained residual interest in the investment securities
conduit of $28 million and $57 million at December 31,
2005 and 2004, respectively.

Capital Management The Company is committed to
managing capital for maximum shareholder beneﬁt and
maintaining strong protection for depositors and creditors.
The Company has targeted returning 80 percent of earnings
to our shareholders through a combination of dividends and
share repurchases. In keeping with this target, the Company
returned 90 percent of earnings in 2005. The Company
continually assesses its business risks and capital position.
The Company also manages its capital to exceed regulatory
capital requirements for well-capitalized bank holding
companies. To achieve these capital goals, the Company
employs a variety of capital management tools, including
dividends, common share repurchases, and the issuance of
subordinated debt and other capital instruments. Total
shareholders’ equity was $20.1 billion at December 31,
2005, compared with $19.5 billion at December 31, 2004.
The increase was the result of corporate earnings, offset by
share repurchases and dividends.

On December 20, 2005, the Company increased its
dividend rate per common share by 10 percent, from $.30
per quarter to $.33 per quarter. On December 21, 2004,
the Company increased its dividend rate per common share
by 25.0 percent, from $.24 per quarter to $.30 per quarter.

On December 16, 2003, the Board of Directors

approved an authorization to repurchase 150 million shares
of common stock over the following 24 months. In 2004,
the Company repurchased 89 million shares of common
stock under the December 2003 plan. On December 21,
2004, the Board of Directors approved an authorization to
repurchase 150 million shares of common stock during the

U.S. BANCORP 49

Table 21

R E G U L AT O RY C A P I TA L R AT I O S

At December 31 (Dollars in Millions)

2005

2004

U.S. Bancorp
Tangible common equity **************************************************************************************
As a percent of tangible assets *****************************************************************************
Tier 1 capital ************************************************************************************************
As a percent of risk-weighted assets ************************************************************************
As a percent of adjusted quarterly average assets (leverage ratio) ***********************************************
Total risk-based capital ***************************************************************************************
As a percent of risk-weighted assets ************************************************************************

$11,873

$11,950

5.9%

6.4%

$15,145

$14,720

8.2%
7.6%

$23,056

12.5%

8.6%
7.9%

$22,352

13.1%

Bank Subsidiaries

U.S. Bank National Association

Tier 1 capital ******************************************************************************************
Total risk-based capital *********************************************************************************
Leverage *********************************************************************************************

U.S. Bank National Association ND

Bank Regulatory Capital Requirements

6.5%

10.7
5.9

12.9%
17.0
11.2

6.5%

10.9
5.9

12.7%
17.2
10.8

Minimum

Well-
Capitalized

4.0%
8.0
4.0

6.0%

10.0
5.0

next 24 months. This new authorization replaced the
December 16, 2003, authorization. During 2004, the
Company purchased 5 million shares of common stock
under the plan. The average price paid for the 94 million
shares repurchased during 2004 was $28.34 per share. In
2005, the Company purchased 62 million shares under the
2004 plan. The average price paid for the shares
repurchased in 2005 was $29.37 per share. For a complete
analysis of activities impacting shareholders’ equity and
capital management programs, refer to Note 16 of the
Notes to Consolidated Financial Statements.

The following table provides a detailed analysis of all

shares repurchased under this authorization during the
fourth quarter of 2005:

Time Period

October ********
November ******
December ******

Number of
Shares
Purchased (a)

2,188,324
1,581,814
4,860,184

Total ********

8,630,322

Average
Price Paid
Per Share

Remaining Shares
Available to be
Purchased

$28.16
29.93
30.65

$29.89

89,927,218
88,345,404
83,485,220

83,485,220

(a) All shares purchased during the fourth quarter of 2005 were purchased under the

publicly announced December 21, 2004, repurchase authorization.

Banking regulators deﬁne minimum capital
requirements for banks and ﬁnancial services holding
companies. These requirements are expressed in the form of
a minimum Tier 1 capital ratio, total risk-based capital
ratio, and Tier 1 leverage ratio. The minimum required level
for these ratios is 4.0 percent, 8.0 percent, and 4.0 percent,
respectively. The Company targets its regulatory capital
levels, at both the bank and bank holding company level, to

50 U.S. BANCORP

exceed the ‘‘well-capitalized’’ threshold for these ratios of
6.0 percent, 10.0 percent, and 5.0 percent, respectively. All
regulatory ratios, at both the bank and bank holding
company level, continue to be in excess of stated
‘‘well-capitalized’’ requirements.

Table 21 provides a summary of capital ratios as of
December 31, 2005 and 2004, including Tier 1 and total
risk-based capital ratios, as deﬁned by the regulatory
agencies. During 2006, the Company expects to target
capital level ratios of 8.5 percent Tier 1 capital and
12.0 percent total risk-based capital on a consolidated basis.

F O U RT H Q U A RT E R S U M M A RY

The Company reported net income of $1,143 million for
the fourth quarter of 2005, or $.62 per diluted share,
compared with $1,056 million, or $.56 per diluted share,
for the fourth quarter of 2004. Return on average assets
and return on average equity were 2.18 percent and
22.6 percent, respectively, for the fourth quarter of 2005,
compared with returns of 2.16 percent and 21.2 percent,
respectively, for the fourth quarter of 2004. The Company’s
results for the fourth quarter of 2005 improved over the
same period of 2004, as net income rose by $87 million
(8.2 percent), primarily due to growth in fee-based products
and services and a debt restructuring charge taken in the
fourth quarter of 2004, partially offset by a release of the
loan loss allowance in the fourth quarter of 2004. In
addition, income tax expense was lower in the fourth
quarter of 2005, driven by the timing of investments that
generate incremental tax credits. In addition, the Company’s

results reﬂect an $81 million favorable change in the
valuation of MSRs, due to changing longer-term interest
rates. These favorable changes were partially offset by
higher securities losses of $28 million compared with the
fourth quarter of 2004 and additional bankruptcy-related
credit losses of approximately $56 million in the fourth
quarter of 2005.

Total net revenue, on a taxable-equivalent basis for the
fourth quarter of 2005, was $96 million (3.0 percent) higher
than the fourth quarter of 2004, primarily reflecting a
7.7 percent increase in noninterest income due to 9.5 percent
growth in fee-based revenue across the majority of fee
categories and expansion in payment processing businesses.
This was partially offset by the increase in securities losses
compared with the fourth quarter of 2004 driven by asset/
liability risk management decisions given the flatter yield
curve and continued growth in fixed-rate loan products.

Fourth quarter net interest income, on a taxable-

equivalent basis was $1,785 million, compared with
$1,800 million in the fourth quarter of 2004. Average
earning assets increased by $12.2 billion (7.1 percent),
primarily driven by a $5.3 billion (35.1 percent) increase in
residential mortgages, a $3.6 billion (8.9 percent) increase
in total commercial loans and a $2.7 billion (6.3 percent)
increase in total retail loans. The positive impact to net
interest income from the growth in earning assets was offset
by a lower net interest margin. The net interest margin for
the fourth quarter of 2005 was 3.88 percent, compared
with 4.20 percent in the fourth quarter of 2004. The

Table 22

F O U RT H Q U A RT E R S U M M A RY

decline in net interest margin reﬂected the current lending
environment, asset/liability management decisions and the
impact of changes in the yield curve from a year ago. Since
the fourth quarter of 2004, credit spreads have tightened by
approximately 25 basis points across most lending products
due to competitive pricing, growth in noninterest-bearing
corporate payment card balances and a change in mix due
to growth in lower-spread, ﬁxed-rate credit products. The
net interest margin also declined due to funding incremental
asset growth with higher cost wholesale funding, share
repurchases and asset/liability decisions designed to
minimize the Company’s rate sensitivity position, including
an 18.3 percent reduction in the net receive ﬁxed swap
position since December 31, 2004. An increase in the
margin beneﬁt of net free funds and loan fees partially
offset these factors.

Noninterest income in the fourth quarter of 2005 was
$1,546 million, compared with $1,435 million in the same
period of 2004. The $111 million (7.7 percent) increase was
driven by favorable variances in the majority of fee income
categories, partially offset by a $28 million reduction in net
securities gains (losses). Credit and debit card revenue and
corporate payment products revenue were both higher in
the fourth quarter of 2005 than the fourth quarter of 2004
by $13 million and $25 million, or 7.1 percent and
24.8 percent, respectively. The growth in credit and debit
card revenue was primarily driven by higher transaction
volumes. The corporate payment products revenue growth
reﬂected growth in sales, card usage, rate changes and the

(In Millions, Except Per Share Data)

Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)*******************************************************************
Noninterest income ********************************************************************************************
Securities gains (losses), net ************************************************************************************
Total net revenue*******************************************************************************************
Noninterest expense *******************************************************************************************
Provision for credit losses **************************************************************************************
Income before taxes****************************************************************************************
Taxable-equivalent adjustment **********************************************************************************
Applicable income taxes ***************************************************************************************
Net income ***********************************************************************************************

Three Months Ended
December 31,

2005

2004

$1,785
1,595
(49)

3,331
1,464
205

1,662
10
509

$1,800
1,456
(21)

3,235
1,579
64

1,592
8
528

$1,143

$1,056

Per Common Share
Earnings per share ********************************************************************************************
Diluted earnings per share**************************************************************************************
Dividends declared per share ***********************************************************************************
Average common shares outstanding ****************************************************************************
Average diluted common shares outstanding**********************************************************************

$ .63
.62
.33
1,816
1,841

Financial Ratios
Return on average assets **************************************************************************************
Return on average equity***************************************************************************************
Net interest margin (taxable-equivalent basis)**********************************************************************
Efﬁciency ratio (b)**********************************************************************************************

2.18%
22.6
3.88
43.3

$ .57
.56
.30
1,865
1,894

2.16%
21.2
4.20
48.5

U.S. BANCORP 51

acquisition of a small aviation card business. ATM
processing services revenue was higher by $18 million
(41.9 percent) in the fourth quarter of 2005 than the same
quarter of the prior year, primarily due to the expansion of
the ATM business in May of 2005. Merchant processing
services revenue was higher in the fourth quarter of 2005
than the same quarter of 2004 by $13 million (7.2 percent),
reﬂecting an increase in sales volume and new business.
Trust and investment management fees increased
$17 million (7.1 percent) year-over-year, primarily due to
improved equity market conditions and account growth.
Deposit service charges increased year-over-year by
$26 million (12.3 percent) due to account growth and
transaction-related activities. Mortgage banking revenue was
higher in the fourth quarter of 2005 than the same quarter
of 2004 by $13 million (13.5 percent), due to higher
production volumes and increased servicing income. Other
income was higher by $27 million (18.9 percent), primarily
due to higher income from equity and other investments
relative to the same quarter of 2004. Partially offsetting
these positive variances, year-over-year, were reductions in
commercial products revenue and treasury management
fees, which declined by $7 million (6.5 percent) and
$6 million (5.5 percent), respectively. The decrease in
commercial products revenue was due to reductions in loan-
related fees and international product revenue. Treasury
management fees declined due to higher earnings credits on
customers’ compensating balances relative to a year ago,
reﬂecting rising interest rates, partially offset by growth in
treasury management-related activities.

Noninterest expense was $1,464 million in the fourth
quarter of 2005, a decrease of $115 million (7.3 percent)
from the fourth quarter of 2004. The decrease in expense
year-over-year included the $113 million charge related to
the prepayment of the Company’s long-term debt in the
prior year and the $81 million favorable change in the MSR
valuation. Compensation expense was higher year-over-year
by $22 million (3.8 percent), principally due to business
expansion, including in-store branches, the Company’s
payment processing businesses and other growth initiatives.
Employee beneﬁts increased year-over-year by $3 million
(3.1 percent), primarily as a result of higher payroll taxes,
401(k) costs and other beneﬁts. Marketing and business
development expense increased $15 million (30.6 percent)
due to the timing of payment processing business program
initiatives in 2005. Technology and communications
expense rose by $13 million (11.2 percent), reﬂecting
depreciation of technology investments, network costs
associated with expansion of the payment processing
businesses and higher outside data processing expense
principally associated with expanding a prepaid gift
program. Other expense increased in the fourth quarter of
2005 from the same quarter of 2004 by $20 million

52 U.S. BANCORP

(10.5 percent), primarily due to the $35 million incremental
impact from amortization of investments in tax-advantaged
projects.

The provision for credit losses for the fourth quarter of

2005 was $205 million, an increase of $141 million from the
fourth quarter of 2004. The increase in the provision for
credit losses year-over-year reflected a $56 million provision
in the fourth quarter of 2005 related to charge-offs related to
new bankruptcy legislation and a reduction in the allowance
for credit losses of $99 million in the fourth quarter of 2004.
Net charge-offs in the fourth quarter of 2005 were
$213 million, compared with net charge-offs of
$163 million during the fourth quarter of 2004.

The provision for income taxes for the fourth quarter

of 2005 declined to an effective tax rate of 30.8 percent
from an effective tax rate of 33.3 percent in the fourth
quarter of 2004. The decline primarily reﬂected the
Company’s decision to increase tax-advantaged investments
and the timing of making these investments. The Company
expects its effective tax rate to approximate 33 percent in
future periods.

L I N E O F B U S I N E S S F I N A N C I A L R E V I E W

Within the Company, ﬁnancial performance is measured by
major lines of business, which include Wholesale Banking,
Consumer Banking, Private Client, Trust and Asset
Management, Payment Services, and Treasury and
Corporate Support. These operating segments are
components of the Company about which ﬁnancial
information is available and is evaluated regularly in
deciding how to allocate resources and assess performance.

Basis of Presentation Business line results are derived from
the Company’s business unit proﬁtability reporting systems
by speciﬁcally attributing managed balance sheet assets,
deposits and other liabilities and their related income or
expense. Goodwill and other intangible assets are assigned
to the lines of business based on the mix of business of the
acquired entity. Within the Company, capital levels are
evaluated and managed centrally; however, capital is
allocated to the operating segments to support evaluation of
business performance. Capital allocations to the business
lines are based on the amount of goodwill and other
intangibles, the extent of off-balance sheet managed assets
and lending commitments and the ratio of on-balance sheet
assets relative to the total Company. Certain lines of
business, such as Private Client, Trust and Asset
Management, have no signiﬁcant balance sheet components.
For these business units, capital is allocated taking into
consideration ﬁduciary and operational risk, capital levels of
independent organizations operating similar businesses, and
regulatory requirements. Interest income and expense is
determined based on the assets and liabilities managed by

the business line. Because funding and asset liability
management is a central function, funds transfer-pricing
methodologies are utilized to allocate a cost of funds used
or credit for funds provided to all business line assets and
liabilities, respectively, using a matched funding concept.
Also, the business unit is allocated the taxable-equivalent
beneﬁt of tax-exempt products. Noninterest income and
expenses directly managed by each business line, including
fees, service charges, salaries and beneﬁts, and other direct
costs are accounted for within each segment’s ﬁnancial
results in a manner similar to the consolidated ﬁnancial
statements. Occupancy costs are allocated based on
utilization of facilities by the lines of business. Operating
losses are charged to the line of business when the loss
event is realized in a manner similar to a loan charge-off.
Noninterest expenses incurred by centrally managed
operations or business lines that directly support another
business line’s operations are charged to the applicable
business line based on its utilization of those services
primarily measured by the volume of customer activities,
number of employees or other relevant factors. These
allocated expenses are reported as net shared services
expense within noninterest expense. Certain activities that
do not directly support the operations of the lines of
business or for which the line of business is not considered
accountable are not charged to the lines of business. The
income or expenses associated with these corporate
activities is reported within the Treasury and Corporate
Support line of business. The provision for credit losses
within the Wholesale Banking, Consumer Banking, Private
Client, Trust and Asset Management and Payment Services
lines of business is based on net charge-offs, while Treasury
and Corporate Support reﬂects the residual component of
the Company’s total consolidated provision for credit losses
determined in accordance with accounting principles
generally accepted in the United States. Income taxes are
assessed to each line of business at a standard tax rate with
the residual tax expense or beneﬁt to arrive at the
consolidated effective tax rate included in Treasury and
Corporate Support.

Designations, assignments and allocations change from
time to time as management systems are enhanced, methods
of evaluating performance or product lines change or
business segments are realigned to better respond to our
diverse customer base. During 2005, certain organization
and methodology changes were made and, accordingly,
2004 results were restated and presented on a comparable
basis. Due to organizational and methodology changes, the
Company’s basis of ﬁnancial presentation differed in 2003.
The presentation of comparative business line results for
2003 is not practical and has not been provided.

Wholesale Banking offers lending, depository, treasury
management and other ﬁnancial services to middle market,
large corporate and public sector clients. Wholesale Banking
contributed $1,063 million of the Company’s net income in
2005, an increase of $79 million (8.0 percent), compared
with 2004. The increase was primarily driven by growth in
total net revenue and reductions in total noninterest expense
and the provision for credit losses.

Total net revenue increased $71 million (3.0 percent) in

2005, compared with 2004. Net interest income, on a
taxable-equivalent basis, increased $63 million (4.0 percent)
in 2005, compared with 2004, driven by growth in average
loan balances of approximately $2.6 billion and wider
spreads on deposits due to the funding beneﬁt associated
with the impact of rising interest rates, partially offset by
reduced loan spreads due to competitive pricing. The
increase in average loans was driven by stronger commercial
loan demand beginning in late 2004 and continuing
throughout 2005. Total deposits increased year-over-year,
driven by growth in time deposits, partially offset by
decreases in noninterest-bearing and interest checking
deposits. Average savings products balances in 2005 were
also lower than 2004. The shift in mix of deposits is
partially due to the result of deposit pricing by the
Company for money market products in relation to other
ﬁxed-rate deposits offered. The $8 million (1.0 percent)
increase in noninterest income in 2005, compared with
2004, was due to higher revenue from equity investments,
partially offset by reductions in treasury management fees
and other commercial loan fees. Treasury management fees
declined due to higher earnings credits on customers’
compensating balances, partially offset by growth in
treasury management-related activities.

Noninterest expense decreased $7 million (.8 percent)

in 2005 compared to 2004, due to reductions in net shared
services, fraud losses and other loan expenses, partially
offset by an increase in personnel expenses.

The provision for credit losses decreased $46 million in

2005, compared with 2004. The favorable change in the
provision for credit losses during 2005, was due to
improving credit quality in the commercial loan portfolio
resulting in net recoveries of $24 million in 2005, compared
with net charge-offs of $22 million in 2004. Nonperforming
assets within Wholesale Banking were $242 million at
December 31, 2005, compared with $387 million at
December 31, 2004. Nonperforming assets as a percentage
of end-of-period loans were .54 percent at December 31,
2005, compared with .91 percent at December 31, 2004.
Refer to the ‘‘Corporate Risk Proﬁle’’ section for further
information on factors impacting the credit quality of the
loan portfolios.

U.S. BANCORP 53

Consumer Banking delivers products and services through
banking ofﬁces, telephone servicing and sales, on-line
services, direct mail and ATMs. It encompasses community
banking, metropolitan banking, in-store banking, small
business banking, including lending guaranteed by the Small
Business Administration, small-ticket leasing, consumer
lending, mortgage banking, consumer ﬁnance, workplace
banking, student banking, 24-hour banking and investment
product and insurance sales. Consumer Banking contributed
$1,788 million of the Company’s net income in 2005, an
increase of $315 million (21.4 percent), compared with
2004. While the retail banking business grew net income
23.6 percent in 2005, the contribution of the mortgage
banking business declined 1.6 percent, compared with 2004.

Total net revenue increased $495 million (8.9 percent)

in 2005, compared with 2004. Net interest income, on a
taxable-equivalent basis, increased $332 million in 2005,
compared with 2004. The year-over-year increase in net
interest income was due to strong growth in average loans
and the funding beneﬁt of deposits due to rising interest

rates. Partially offsetting these increases were reduced
spreads on commercial and retail loans due to competitive
pricing. The increase in average loan balances reﬂected
growth in retail loans, residential mortgages, commercial
loans and commercial real estate loans. Included within the
retail loan category are second-lien home equity loans,
installment loans and retail leases which had a growth rate
of 6.6 percent, 10.1 percent and 10.4 percent, respectively,
in 2005, compared with the prior year. Residential
mortgages, including traditional residential mortgages and
ﬁrst-lien home equity loans, grew 26.2 percent in 2005,
compared with 2004, reﬂecting the Company’s decision to
retain adjustable-rate residential mortgages. The year-over-
year decrease in average deposits of .7 percent reﬂected a
reduction in noninterest-bearing deposits and savings
products, offset by growth in interest checking and time
deposits. The decline in noninterest-bearing deposits in
2005, compared with the prior year, was primarily due to
the Company’s decision to migrate $1.3 billion of certain
high-value customer accounts to interest checking as an

Table 23

L I N E O F B U S I N E S S F I N A N C I A L P E R F O R M A N C E

Year Ended December 31 (Dollars in Millions)

Condensed Income Statement
Net interest income (taxable-equivalent basis) ********************************
Noninterest income *******************************************************
Securities gains (losses), net ***********************************************

Total net revenue******************************************************
Noninterest expense ******************************************************
Other intangibles *********************************************************

Total noninterest expense **********************************************

Income before provision and income taxes ****************************
Provision for credit losses *************************************************

Income before income taxes ***********************************************
Income taxes and taxable-equivalent adjustment******************************

Wholesale
Banking

Consumer
Banking

2005

2004

Percent
Change

2005

2004

Percent
Change

$ 1,645
825
(4)

$ 1,582
811
2

4.0%
1.7
*

$ 4,005
2,056
—

$ 3,673
1,893
—

2,466
803
16

819

1,647
(24)

1,671
608

2,395
808
18

826

1,569
22

1,547
563

3.0
(.6)
(11.1)

(.8)

5.0
*

8.0
8.0

8.0

6,061
2,687
253

2,940

3,121
311

2,810
1,022

5,566
2,626
248

2,874

2,692
376

2,316
843

$ 1,788

$ 1,473

9.0%
8.6
—

8.9
2.3
2.0

2.3

15.9
(17.3)

21.3
21.2

21.4

Net income **************************************************************

$ 1,063

984

Average Balance Sheet Data
Commercial *************************************************************
Commercial real estate ****************************************************
Residential mortgages ****************************************************
Retail *******************************************************************

Total loans ***********************************************************
Goodwill ****************************************************************
Other intangible assets ****************************************************
Assets ******************************************************************
Noninterest-bearing deposits ***********************************************
Interest checking *********************************************************
Savings products*********************************************************
Time deposits ***********************************************************

Total deposits*********************************************************
Shareholders’ equity ******************************************************

$28,711
15,697
63
34

$26,271
15,538
67
49

9.3%
1.0
(6.0)
(30.6)

$ 8,652
11,549
17,569
34,106

$ 8,171
10,973
13,921
31,325

5.9%
5.2
26.2
8.9

44,505
1,225
70
50,391
12,189
3,085
5,290
12,681

33,245
5,085

41,925
1,225
88
48,192
12,473
3,380
6,078
7,429

29,360
5,034

6.2
—
(20.5)
4.6
(2.3)
(8.7)
(13.0)
70.7

13.2
1.0

71,876
2,243
1,189
80,404
13,232
17,301
24,255
17,259

72,047
6,531

64,390
2,243
1,073
72,408
14,213
15,087
27,162
16,099

72,561
6,272

11.6
—
10.8
11.0
(6.9)
14.7
(10.7)
7.2

(.7)
4.1

* Not meaningful

54 U.S. BANCORP

enhancement to its Silver Elite Checking product in late
2004. The year-over-year increase in interest checking
balances reﬂected this migration of the Silver Elite product
and strong branch-based new account deposit growth. On a
combined basis, the Consumer Banking line of business
generated growth of $1.2 billion (4.2 percent) in average
checking account balances in 2005, compared with 2004,
driven by 6.1 percent growth in net new checking accounts.
Offsetting this growth was a reduction in average savings
balances of $2.9 billion (10.7 percent) from 2004,
principally related to money market accounts. The decline
reﬂected deposit pricing by the Company for money market
products in relation to other ﬁxed-rate deposits offered.
Average time deposit balances grew $1.2 billion
(7.2 percent) in 2005, compared with the prior year, as a
portion of money market balances migrated to time deposit
products.

Fee-based noninterest income increased $163 million in
2005, compared with 2004, driven by strong deposit service
charges and mortgage banking revenue growth, partially
offset by lower treasury management fees. Deposit service

charges were higher due to new account growth and higher
transaction-related service activities. The growth in
mortgage banking revenue was due to strong loan
production generating origination fees and gains from
production volumes and increased servicing income.

Noninterest expense increased $66 million (2.3 percent)

in 2005, compared with the prior year. The increase was
primarily attributable to compensation and employee
beneﬁts expense, reﬂecting the impact of adding thirty-six
in-store and thirteen traditional branches during 2005 and
production-based incentives.

The provision for credit losses decreased $65 million in

2005, compared with 2004. The improvement was
primarily attributable to strong credit quality during the
year. As a percentage of average loans outstanding, net
charge-offs declined to .43 percent in 2005, compared with
.58 percent in 2004. The decline in net charge-offs included
both the commercial and retail loan portfolios. The
$44 million improvement in commercial loan net charge-
offs in 2005, compared with 2004, was broad-based across
most industry and geographical regions. Retail loan net

Private Client, Trust
and Asset Management

Payment
Services

Treasury and
Corporate Support

Consolidated
Company

2005

2004

Percent
Change

2005

2004

Percent
Change

2005

2004

Percent
Change

2005

2004

Percent
Change

25.1% $

2.1% $

454
1,040
—

1,494
668
60

728

766
5

761
277

363
1,001
—

1,364
673
62

735

629
10

619
225

484

394

3.9
—

9.5
(.7)
(3.2)

(1.0)

21.8
(50.0)

22.9
23.1

22.8

575
2,185
—

2,760
1,074
176

1,250

1,510
386

1,124
409

563
1,885
—

2,448
893
161

1,054

1,394
364

1,030
374

15.9
—

12.7
20.3
9.3

18.6

8.3
6.0

9.1
9.4

9.0

409
45
(102)

352
173
(47)

126

226
(12)

238
(201)

959
34
(107)

886
235
61

296

590
(103)

693
33

(57.4)% $ 7,088
6,151
32.4
(106)
4.7

$ 7,140
5,624
(105)

(60.3)
(26.4)
*

(57.4)

(61.7)
(88.3)

(65.7)
*

13,133
5,405
458

5,863

7,270
666

6,604
2,115

12,659
5,235
550

5,785

6,874
669

6,205
2,038

715

656

439

660

(33.5)

$ 4,489

$ 4,167

$ 1,594
632
398
2,334

$ 1,647
619
324
2,229

(3.2)% $ 3,526
—
2.1
—
22.8
7,941
4.7

4,958
846
310
6,719
3,600
2,394
5,554
1,482

4,819
818
352
6,587
3,264
2,459
5,454
590

13,030
2,120

11,767
2,077

2.9
3.4
(11.9)
2.0
10.3
(2.6)
1.8
*

10.7
2.1

11,467
2,030
960
15,278
171
—
16
3

190
3,587

$ 3,068
—
—
7,549

10,617
1,867
776
13,765
108
—
11
—

119
3,198

14.9% $

—
—
5.2

8.0
8.7
23.7
11.0
58.3
—
45.5
*

59.7
12.2

158
86
6
49

299
—
4
50,406
37
5
18
2,429

2,489
2,630

191
137
10
52

390
—
7
50,641
(242)
7
15
2,635

2,415
2,878

(17.3)% $ 42,641
27,964
(37.2)
18,036
(40.0)
44,464
(5.8)

(23.3)
—
(42.9)
(.5)
*
(28.6)
20.0
(7.8)

3.1
(8.6)

133,105
6,344
2,533
203,198
29,229
22,785
35,133
33,854

121,001
19,953

$ 39,348
27,267
14,322
41,204

122,141
6,153
2,296
191,593
29,816
20,933
38,720
26,753

116,222
19,459

(.7)%
9.4
(1.0)

3.7
3.2
(16.7)

1.3

5.8
(.4)

6.4
3.8

7.7

8.4%
2.6
25.9
7.9

9.0
3.1
10.3
6.1
(2.0)
8.8
(9.3)
26.5

4.1
2.5

U.S. BANCORP 55

charge-offs declined by $12 million in 2005, compared to
2004, primarily resulting from ongoing collection efforts
and risk management activities. Nonperforming assets
within Consumer Banking were $341 million at
December 31, 2005, and $353 million at December 31,
2004. Nonperforming assets as a percentage of end-of-
period loans were .47 percent at December 31, 2005, and
.56 percent at December 31, 2004. Refer to the ‘‘Corporate
Risk Proﬁle’’ section for further information on factors
impacting the credit quality of the loan portfolios.

Private Client, Trust and Asset Management provides trust,
private banking, ﬁnancial advisory, investment management
and mutual fund servicing through ﬁve businesses: Private
Client Group, Corporate Trust, Asset Management,
Institutional Trust and Custody and Fund Services. Private
Client, Trust and Asset Management contributed
$484 million of the Company’s net income in 2005, or an
increase of $90 million (22.8 percent), compared with 2004.
The growth was primarily attributable to strong revenue
growth in this business line.

Total net revenue increased $130 million (9.5 percent)

in 2005, compared with 2004. Net interest income, on a
taxable-equivalent basis, increased $91 million
(25.1 percent) in 2005, compared with the prior year, due
to 10.7 percent growth in average deposits and the
favorable impact of rising interest rates on the funding
beneﬁt of customer deposits. The increase in total deposits
was attributable to growth in noninterest-bearing deposits
and time deposits, principally in Corporate Trust.
Noninterest income increased $39 million (3.9 percent) in
2005, compared with 2004, driven by improved equity
market conditions and account growth.

Noninterest expense decreased $7 million (1.0 percent)
in 2005, compared with 2004, primarily due to reductions
in operating losses and net shared services, partially offset
by higher personnel-related costs.

The provision for credit losses decreased $5 million in

2005, compared with 2004. The decrease was due to a
reduction in net charge-offs. Net charge-offs as a percentage
of average loans outstanding were .10 percent in 2005,
compared with .21 percent in 2004.

Payment Services includes consumer and business credit
cards, stored-value cards, debit cards, corporate and
purchasing card services, consumer lines of credit, ATM
processing and merchant processing. Payment Services
contributed $715 million of the Company’s net income in
2005, or an increase of $59 million (9.0 percent), compared
with 2004. The increase was due to growth in total net
revenue, partially offset by increases in total noninterest
expense and the provision for loan losses.

Total net revenue increased $312 million (12.7 percent)
in 2005, compared 2004. The 2005 increase in net interest

56 U.S. BANCORP

income of $12 million, compared with the prior year, was
attributable to increases in retail and commercial credit card
balances and customer late fees, partially offset by
corporate card rebates and the margin impact of higher
non-earning assets. Noninterest income increased
$300 million (15.9 percent) in 2005, compared with 2004.
The increase in fee-based revenue was driven by strong
growth in credit and debit card revenue, corporate payment
products revenue, ATM processing services revenue and
merchant processing revenue. Credit and debit card revenue
increased primarily due to higher customer transaction
volumes and rate changes from a year ago. Corporate
payment products revenue increased primarily due to
growth in sales volume, card usage, rate changes and the
recent acquisition of a small aviation card business. ATM
processing services revenue increased primarily due to the
expansion of the business through the acquisition of a small
ATM processing company in the second quarter of 2005.
Merchant processing revenue increased due to increases in
merchant sales volume and business expansion in European
markets.

Noninterest expense increased $196 million

(18.6 percent) in 2005, compared with 2004, primarily due
to higher compensation and employee beneﬁt costs for
processing associated with increased credit and debit card
transaction volumes, higher corporate payment products
and merchant processing sales volumes, higher ATM
processing services volumes due to the ATM business
acquisition and higher merchant acquiring costs resulting
from the expansion of the merchant acquiring business and
increases in transaction volume year-over-year.

The provision for credit losses increased $22 million in

2005, compared with 2004, due to higher net charge-offs.
The unfavorable change in credit losses was primarily
driven by additional charge-offs related to new bankruptcy
legislation. As a percentage of average loans outstanding,
net charge-offs were 3.37 percent in 2005, compared with
3.42 percent in 2004.

Treasury and Corporate Support includes the Company’s
investment portfolios, funding, capital management and
asset securitization activities, interest rate risk management,
the net effect of transfer pricing related to average balances
and the residual aggregate of those expenses associated with
corporate activities that are managed on a consolidated
basis. Treasury and Corporate Support recorded net income
of $439 million in 2005, or a decrease of $221 million,
compared with 2004.

Total net revenue decreased $534 million (60.3 percent)

in 2005, compared with 2004, primarily due to a decrease
in net interest income. Net interest income was
$409 million, or 5.8 percent of consolidated net interest
income, in 2005 compared with $959 million, or

13.4 percent of consolidated net interest income, in 2004.
The decline of $550 million reﬂected asset/liability
management decisions to borrow more in the capital
markets, a higher interest rate environment and the
reduction of net receive ﬁxed swap positions as short-term
rates have risen over the past eighteen months.

Noninterest expense decreased $170 million

(57.4 percent) in 2005, compared with 2004. The year-
over-year decrease reﬂected a favorable change in the MSR
valuation and lower debt prepayment charges, partially
offset by higher personnel expenses. Noninterest expense in
2005 included MSR reparation of $53 million, compared
with MSR impairment of $57 million in 2004. The change
in MSR valuations was driven by higher interest rates and
declining prepayment speeds in 2005, compared with 2004.
Debt prepayment charges were $54 million in 2005,
compared with $155 million in 2004.

The provision for credit losses for this business unit
represents the residual aggregate of the net credit losses
allocated to the reportable business units and the
Company’s recorded provision determined in accordance
with accounting principles generally accepted in the United
States. The provision for credit losses was a net recovery of
$12 million in 2005, compared with $103 million in 2004.
Refer to the ‘‘Corporate Risk Proﬁle’’ section for further
information on the provision for credit losses,
nonperforming assets and factors considered by the
Company in assessing the credit quality of the loan
portfolio and establishing the allowance for credit losses.

Income taxes are assessed to each line of business at a

managerial tax rate of 36.4 percent with the residual tax
expense or beneﬁt to arrive at the consolidated effective tax
rate included in Treasury and Corporate Support. The
$234 million favorable change in income tax expense
reﬂected a consolidated effective tax rate of 31.7 percent in
2005, compared with 32.5 percent in 2004. The decrease in
the effective tax rate from 2004 primarily reﬂected higher
tax exempt income from investment securities and insurance
products and incremental tax credits generated from
investments in affordable housing and similar tax-
advantaged projects.

A C C O U N T I N G C H A N G E S

Note 2 of the Notes to Consolidated Financial Statements
discusses accounting standards recently issued but not yet
required to be adopted and the expected impact of the
changes in accounting standards. To the extent the adoption
of new accounting standards affects the Company’s
ﬁnancial condition, results of operations or liquidity, the
impacts are discussed in the applicable section(s) of the
Management’s Discussion and Analysis and the Notes to
Consolidated Financial Statements.

C R I T I C A L A C C O U N T I N G P O L I C I E S

The accounting and reporting policies of the Company
comply with accounting principles generally accepted in the
United States and conform to general practices within the
banking industry. The preparation of ﬁnancial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions.
The ﬁnancial position and results of operations can be
affected by these estimates and assumptions, which are
integral to understanding the Company’s ﬁnancial
statements. Critical accounting policies are those policies
that management believes are the most important to the
portrayal of the Company’s ﬁnancial condition and results,
and require management to make estimates that are
difﬁcult, subjective or complex. Most accounting policies
are not considered by management to be critical accounting
policies. Several factors are considered in determining
whether or not a policy is critical in the preparation of
ﬁnancial statements. These factors include, among other
things, whether the estimates are signiﬁcant to the ﬁnancial
statements, the nature of the estimates, the ability to readily
validate the estimates with other information including
third-parties or available prices, and sensitivity of the
estimates to changes in economic conditions and whether
alternative accounting methods may be utilized under
generally accepted accounting principles. Management has
discussed the development and the selection of critical
accounting policies with the Company’s Audit Committee.
Signiﬁcant accounting policies are discussed in Note 1
of the Notes to Consolidated Financial Statements. Those
policies considered to be critical accounting policies are
described below.

Allowance for Credit Losses The allowance for credit losses
is established to provide for probable losses inherent in the
Company’s credit portfolio. The methods utilized to
estimate the allowance for credit losses, key assumptions
and quantitative and qualitative information considered by
management in determining the adequacy of the allowance
for credit losses are discussed in the ‘‘Credit Risk
Management’’ section.

Management’s evaluation of the adequacy of the
allowance for credit losses is often the most critical of
accounting estimates for a banking institution. It is an
inherently subjective process impacted by many factors as
discussed throughout the Management’s Discussion and
Analysis section of the Annual Report. Although risk
management practices, methodologies and other tools are
utilized to determine each element of the allowance, degrees
of imprecision exist in these measurement tools due in part
to subjective judgments involved and an inherent lagging of
credit quality measurements relative to the stage of the
business cycle. Even determining the stage of the business

U.S. BANCORP 57

cycle is highly subjective. As discussed in the ‘‘Analysis and
Determination of Allowance for Credit Losses’’ section,
management considers the effect of imprecision and many
other factors in determining the allowance for credit losses
by establishing an ‘‘allowance for other factors’’ that is not
speciﬁcally allocated to a category of loans. If not
considered, inherent losses in the portfolio related to
imprecision and other subjective factors could have a
dramatic adverse impact on the liquidity and ﬁnancial
viability of a bank.

Given the many subjective factors affecting the credit
portfolio, changes in the allowance for credit losses may not
directly coincide with changes in the risk ratings of the
credit portfolio reﬂected in the risk rating process. This is in
part due to the timing of the risk rating process in relation
to changes in the business cycle, the exposure and mix of
loans within risk rating categories, levels of nonperforming
loans and the timing of charge-offs and recoveries. For
example, the amount of loans within speciﬁc risk ratings
may change, providing a leading indicator of improving
credit quality, while nonperforming loans and net charge-
offs continue at elevated levels. Also, inherent loss ratios,
determined through migration analysis and historical loss
performance over the estimated business cycle of a loan,
may not change to the same degree as net charge-offs.
Because risk ratings and inherent loss ratios primarily drive
the allowance speciﬁcally allocated to commercial loans, the
amount of the allowance for commercial and commercial
real estate loans might decline; however, the degree of
change differs somewhat from the level of changes in
nonperforming loans and net charge-offs. Also, management
would maintain an adequate allowance for credit losses by
increasing the allowance for other factors during periods of
economic uncertainty or changes in the business cycle.

Some factors considered in determining the adequacy of

the allowance for credit losses are quantifiable while other
factors require qualitative judgment. Management conducts
analysis with respect to the accuracy of risk ratings and the
volatility of inherent losses, and utilizes this analysis along
with qualitative factors including uncertainty in the economy
from changes in unemployment rates, the level of
bankruptcies, concentration risks, including risks associated
with the airline industry sector and highly leveraged
enterprise-value credits, in determining the overall level of the
allowance for credit losses. The Company’s determination of
the allowance for commercial and commercial real estate
loans is sensitive to the assigned credit risk ratings and
inherent loss rates at December 31, 2005. In the event that
10 percent of loans within these portfolios experienced
downgrades of two risk categories, the allowance for
commercial and commercial real estate would increase by
approximately $264 million at December 31, 2005. In the
event that inherent loss or estimated loss rates for these

58 U.S. BANCORP

portfolios increased by 10 percent, the allowance determined
for commercial and commercial real estate would increase by
approximately $92 million at December 31, 2005. The
Company’s determination of the allowance for residential
and retail loans is sensitive to changes in estimated loss rates.
In the event that estimated loss rates increased by 10%, the
allowance for residential mortgages and retail loans would
increase by approximately $60 million at December 31,
2005. Because several quantitative and qualitative factors are
considered in determining the allowance for credit losses,
these sensitivity analyses do not necessarily reflect the nature
and extent of future changes in the allowance for credit
losses. They are intended to provide insights into the impact
of adverse changes in risk rating and inherent losses and do
not imply any expectation of future deterioration in the risk
rating or loss rates. Given current processes employed by the
Company, management believes the risk ratings and inherent
loss rates currently assigned are appropriate. It is possible
that others, given the same information, may at any point in
time reach different reasonable conclusions that could be
significant to the Company’s financial statements. Refer to
the ‘‘Analysis and Determination of the Allowance for Credit
Losses’’ section for further information.

Mortgage Servicing Rights MSRs are capitalized as separate
assets when loans are sold and servicing is retained. The total
cost of loans sold is allocated between the loans sold and the
servicing assets retained based on their relative fair values.
MSRs that are purchased from others are initially recorded at
cost. The carrying value of the MSRs is amortized in
proportion to and over the period of estimated net servicing
revenue and recorded in noninterest expense as amortization
of intangible assets. The carrying value of these assets is
periodically reviewed for impairment using a lower of
carrying value or fair value methodology. For purposes of
measuring impairment, the servicing rights are stratified
based on the underlying loan type and note rate and the
carrying value for each stratum is compared to fair value
based on a discounted cash flow analysis, utilizing current
prepayment speeds and discount rates. Events that may
significantly affect the estimates used are changes in interest
rates and the related impact on mortgage loan prepayment
speeds and the payment performance of the underlying loans.
If the carrying value is greater than fair value, impairment is
recognized through a valuation allowance for each impaired
stratum and recorded as amortization of intangible assets.
The reduction in the fair value of MSRs at December 31,
2005, to immediate 25 and 50 basis point adverse changes in
interest rates would be approximately $47 million and
$109 million, respectively. An upward movement in interest
rates at December 31, 2005, of 25 and 50 basis points would
increase the value of the MSRs by approximately $32 million
and $58 million, respectively. Refer to Note 11 of the Notes

to Consolidated Financial Statements for additional
information regarding MSRs.

Goodwill and Other Intangibles The Company records all
assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value as
required by Statement of Financial Accounting Standards
No. 141, ‘‘Goodwill and Other Intangible Assets.’’
Goodwill and indeﬁnite-lived assets are no longer amortized
but are subject, at a minimum, to annual tests for
impairment. Under certain situations, interim impairment
tests may be required if events occur or circumstances
change that would more likely than not reduce the fair
value of a reporting segment below its carrying amount.
Other intangible assets are amortized over their estimated
useful lives using straight-line and accelerated methods and
are subject to impairment if events or circumstances indicate
a possible inability to realize the carrying amount.

The initial recognition of goodwill and other intangible

assets and subsequent impairment analysis require
management to make subjective judgments concerning
estimates of how the acquired assets will perform in the
future using valuation methods including discounted cash
flow analysis. Additionally, estimated cash flows may extend
beyond ten years and, by their nature, are difficult to
determine over an extended timeframe. Events and factors
that may significantly affect the estimates include, among
others, competitive forces, customer behaviors and attrition,
changes in revenue growth trends, cost structures,
technology, changes in discount rates and specific industry
and market conditions. In determining the reasonableness of
cash flow estimates, the Company reviews historical
performance of the underlying assets or similar assets in an
effort to assess and validate assumptions utilized in its
estimates.

In assessing the fair value of reporting units, the
Company may consider the stage of the current business
cycle and potential changes in market conditions in
estimating the timing and extent of future cash ﬂows. Also,
management often utilizes other information to validate the
reasonableness of its valuations including public market
comparables, and multiples of recent mergers and
acquisitions of similar businesses. Valuation multiples may
be based on revenue, price-to-earnings and tangible capital
ratios of comparable public companies and business
segments. These multiples may be adjusted to consider
competitive differences including size, operating leverage
and other factors. The carrying amount of a reporting unit
is determined based on the capital required to support the
reporting unit’s activities including its tangible and
intangible assets. The determination of a reporting unit’s
capital allocation requires management judgment and
considers many factors including the regulatory capital

regulations and capital characteristics of comparable public
companies in relevant industry sectors. In certain
circumstances, management will engage a third-party to
independently validate its assessment of the fair value of its
business segments.

The Company’s annual assessment of potential
goodwill impairment was completed during the second
quarter of 2005. Based on the results of this assessment, no
goodwill impairment was recognized.

Income Taxes The Company estimates income tax expense
based on amounts expected to be owed to various tax
jurisdictions. Currently, the Company ﬁles tax returns in
approximately 140 federal, state and local domestic
jurisdictions and 10 foreign jurisdictions. The estimated
income tax expense is reported in the Consolidated
Statement of Income. Accrued taxes represent the net
estimated amount due or to be received from taxing
jurisdictions either currently or in the future and are
reported in other assets or other liabilities on the
Consolidated Balance Sheet. In estimating accrued taxes, the
Company assesses the relative merits and risks of the
appropriate tax treatment considering statutory, judicial and
regulatory guidance in the context of the tax position.
Because of the complexity of tax laws and regulations,
interpretation can be difﬁcult and subject to legal judgment
given speciﬁc facts and circumstances. It is possible that
others, given the same information, may at any point in
time reach different reasonable conclusions regarding the
estimated amounts of accrued taxes.

Changes in the estimate of accrued taxes occur
periodically due to changes in tax rates, interpretations of
tax laws, the status of examinations being conducted by
various taxing authorities, and newly enacted statutory,
judicial and regulatory guidance that impact the relative
merits and risks of tax positions. These changes, when they
occur, affect accrued taxes and can be signiﬁcant to the
operating results of the Company. Refer to Note 20 of the
Notes to Consolidated Financial Statements for additional
information regarding income taxes.

C O N T R O L S A N D P R O C E D U R E S

Under the supervision and with the participation of the
Company’s management, including its principal executive
ofﬁcer and principal ﬁnancial ofﬁcer, the Company has
evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as deﬁned in Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the ‘‘Exchange Act’’)). Based upon this evaluation,
the principal executive ofﬁcer and principal ﬁnancial ofﬁcer
have concluded that, as of the end of the period covered by
this report, the Company’s disclosure controls and
procedures were effective.

U.S. BANCORP 59

During the most recently completed ﬁscal quarter, there

The annual report of the Company’s management on

was no change made in the Company’s internal controls
over ﬁnancial reporting (as deﬁned in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that has materially
affected, or is reasonably likely to materially affect, the
Company’s internal control over ﬁnancial reporting.

internal control over ﬁnancial reporting is provided on page
101. The attestation report of Ernst & Young LLP, the
Company’s independent accountants, regarding the
Company’s internal control over ﬁnancial reporting is
provided on page 103.

60 U.S. BANCORP

(This page intentionally left blank)

U.S. BANCORP 61

U.S. BANCORP
CONSOLIDATED BALANCE SHEET

At December 31 (Dollars in Millions)

Assets
Cash and due from banks ***********************************************************************************
Investment securities

Held-to-maturity (fair value $113 and $132, respectively) ******************************************************
Available-for-sale*****************************************************************************************
Loans held for sale ******************************************************************************************
Loans

Commercial *********************************************************************************************
Commercial real estate ***********************************************************************************
Residential mortgages ************************************************************************************
Retail **************************************************************************************************

Total loans *******************************************************************************************
Less allowance for loan losses **********************************************************************

Net loans ****************************************************************************************
Premises and equipment*************************************************************************************
Customers’ liability on acceptances ***************************************************************************
Goodwill ***************************************************************************************************
Other intangible assets **************************************************************************************
Other assets ***********************************************************************************************

2005

2004

$ 8,004

$ 6,336

109
39,659
1,686

42,942
28,463
20,730
45,671

137,806
(2,041)

135,765
1,841
61
7,005
2,874
12,461

127
41,354
1,439

40,173
27,585
15,367
43,190

126,315
(2,080)

124,235
1,890
95
6,241
2,387
11,000

Total assets ******************************************************************************************

$209,465

$195,104

Liabilities and Shareholders’ Equity
Deposits

Noninterest-bearing **************************************************************************************
Interest-bearing******************************************************************************************
Time deposits greater than $100,000***********************************************************************

$ 32,214
70,024
22,471

Total deposits ****************************************************************************************
Short-term borrowings ***************************************************************************************
Long-term debt *********************************************************************************************
Acceptances outstanding ************************************************************************************
Other liabilities **********************************************************************************************

124,709
20,200
37,069
61
7,340

Total liabilities ****************************************************************************************

189,379

Shareholders’ equity

Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares issued: 2005 and 2004 —

1,972,643,007 shares *********************************************************************************
Capital surplus ******************************************************************************************
Retained earnings ***************************************************************************************
Less cost of common stock in treasury: 2005 — 157,689,004 shares; 2004 — 115,020,064 shares*****************
Other comprehensive income******************************************************************************

Total shareholders’ equity ******************************************************************************

20
5,907
19,001
(4,413)
(429)

20,086

$ 30,756
71,936
18,049

120,741
13,084
34,739
95
6,906

175,565

20
5,902
16,758
(3,125)
(16)

19,539

Total liabilities and shareholders’ equity ******************************************************************

$209,465

$195,104

See Notes to Consolidated Financial Statements.

62 U.S. BANCORP

U.S. BANCORP
CONSOLIDATED STATEMENT OF INCOME

Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)

2005

2004

2003

Interest Income
Loans **************************************************************************************
Loans held for sale ***************************************************************************
Investment securities *************************************************************************
Other interest income *************************************************************************
Total interest income *******************************************************************

$ 8,381
106
1,954
110

10,551

Interest Expense
Deposits ************************************************************************************
Short-term borrowings ************************************************************************
Long-term debt ******************************************************************************
Total interest expense ******************************************************************
Net interest income **************************************************************************
Provision for credit losses *********************************************************************
Net interest income after provision for credit losses ***********************************************

Noninterest Income
Credit and debit card revenue *****************************************************************
Corporate payment products revenue ***********************************************************
ATM processing services **********************************************************************
Merchant processing services******************************************************************
Trust and investment management fees *********************************************************
Deposit service charges***********************************************************************
Treasury management fees ********************************************************************
Commercial products revenue *****************************************************************
Mortgage banking revenue ********************************************************************
Investment products fees and commissions *****************************************************
Securities gains (losses), net *******************************************************************
Other***************************************************************************************
Total noninterest income ****************************************************************

Noninterest Expense
Compensation *******************************************************************************
Employee beneﬁts****************************************************************************
Net occupancy and equipment ****************************************************************
Professional services *************************************************************************
Marketing and business development ***********************************************************
Technology and communications ***************************************************************
Postage, printing and supplies *****************************************************************
Other intangibles *****************************************************************************
Debt prepayment ****************************************************************************
Other***************************************************************************************
Total noninterest expense ***************************************************************
Income from continuing operations before income taxes *******************************************
Applicable income taxes **********************************************************************
Income from continuing operations *************************************************************
Income from discontinued operations (after-tax) **************************************************
Net income *********************************************************************************

1,559
690
1,247

3,496

7,055
666

6,389

713
488
229
770
1,009
928
437
400
432
152
(106)
593

6,045

2,383
431
641
166
235
466
255
458
54
774

5,863

6,571
2,082

4,489
—

$7,168
91
1,827
100

9,186

904
263
908

2,075

7,111
669

6,442

649
407
175
675
981
807
467
432
397
156
(105)
478

5,519

2,252
389
631
149
194
430
248
550
155
787

5,785

6,176
2,009

4,167
—

$7,272
202
1,684
100

9,258

1,097
167
805

2,069

7,189
1,254

5,935

561
361
166
561
954
716
466
401
367
145
245
370

5,313

2,177
328
644
143
180
418
246
682
—
779

5,597

5,651
1,941

3,710
23

$ 4,489

$4,167

$3,733

Earnings Per Share

Diluted Earnings Per Share

Income from continuing operations **********************************************************
Discontinued operations *******************************************************************
Net income ******************************************************************************
Dividends declared per share ******************************************************************
Average common shares outstanding ***********************************************************
Average diluted common shares outstanding ****************************************************

2.45
—

2.45

2.42
—

2.42

1.230

1,831
1,857

See Notes to Consolidated Financial Statements.

$ 2.21
—

$ 2.21

$ 2.18
—

$ 2.18

1.020

1,887
1,913

$ 1.93
.01

$ 1.94

$ 1.92
.01

$ 1.93

.855

1,924
1,936

U.S. BANCORP 63

U.S. BANCORP
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Dollars and Shares in Millions)

Balance December 31, 2002 *****************
Net income **************************************
Unrealized loss on securities available for sale ********
Unrealized loss on derivatives **********************
Foreign currency translation adjustment **************
Realized gain on derivatives ************************
Reclassiﬁcation adjustment for gains realized in net

income **************************************
Income taxes ************************************
Total comprehensive income *****************
Cash dividends declared on common stock **********
Special dividends declared on common stock ********
Issuance of common and treasury stock *************
Purchase of treasury stock*************************
Stock option and restricted stock grants *************
Shares reserved to meet deferred compensation

obligations************************************

Common
Shares
Outstanding

Common
Stock

Capital
Surplus

Retained
Earnings

Treasury
Stock

Other
Comprehensive
Income

Total
Shareholders’
Equity

1,917

$20

$5,799

$13,105
3,733

$(1,272)

$ 784

(716)
(373)
23
199

(288)
439

22
(15)

(1)

(1,645)
(685)

(51)

111

(8)

502
(417)

(18)

$18,436
3,733
(716)
(373)
23
199

(288)
439

3,017
(1,645)
(685)
451
(417)
111

(26)

Balance December 31, 2003 *****************

1,923

$20

$5,851

$14,508

$(1,205)

$ 68

$19,242

Net income **************************************
Unrealized loss on securities available for sale ********
Unrealized loss on derivatives **********************
Foreign currency translation adjustment **************
Realized gain on derivatives ************************
Reclassiﬁcation adjustment for losses realized in net

income **************************************
Income taxes ************************************
Total comprehensive income *****************
Cash dividends declared on common stock **********
Issuance of common and treasury stock *************
Purchase of treasury stock*************************
Stock option and restricted stock grants *************
Shares reserved to meet deferred compensation

obligations************************************

4,167

(1,917)

30
(94)

(1)

(96)

116

772
(2,656)

(36)

(123)
(43)
(17)
16

32
51

4,167
(123)
(43)
(17)
16

32
51

4,083
(1,917)
676
(2,656)
116

(5)

Balance December 31, 2004 *****************

1,858

$20

$5,902

$16,758

$(3,125)

$ (16)

$19,539

Net income **************************************
Unrealized loss on securities available for sale ********
Unrealized loss on derivatives **********************
Foreign currency translation adjustment **************
Realized loss on derivatives ************************
Reclassiﬁcation adjustment for losses realized in net

income **************************************
Minimum pension liability adjustment ****************
Income taxes ************************************
Total comprehensive income *****************
Cash dividends declared on common stock **********
Issuance of common and treasury stock *************
Purchase of treasury stock*************************
Stock option and restricted stock grants *************
Shares reserved to meet deferred compensation

obligations************************************

4,489

(2,246)

19
(62)

(81)

525
(1,807)

(6)

(539)
(58)
3
(74)

39
(38)
254

4,489
(539)
(58)
3
(74)

39
(38)
254

4,076
(2,246)
444
(1,807)
84

(4)

Balance December 31, 2005 *****************

1,815

$20

$5,907

$19,001

$(4,413)

$ (429)

$20,086

See Notes to Consolidated Financial Statements.

64 U.S. BANCORP

U.S. BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS

Year Ended December 31 (Dollars in Millions)

2005

2004

2003

Operating Activities
Net income***************************************************************************
Adjustments to reconcile net income to net cash provided by operating activities

$ 4,489

$ 4,167

$ 3,733

Provision for credit losses ***********************************************************
Depreciation and amortization of premises and equipment *******************************
Amortization of intangibles **********************************************************
Provision for deferred income taxes***************************************************
(Gain) loss on sales of securities and other assets, net **********************************
Mortgage loans originated for sale in the secondary market, net of repayments*************
Proceeds from sales of mortgage loans ***********************************************
Stock-based compensation *********************************************************
Other, net*************************************************************************

666
231
458
(301)
(316)
(19,245)
18,616
83
(1,269)

Net cash provided by operating activities*******************************************

3,412

Investing Activities
Proceeds from sales of available-for-sale investment securities ******************************
Proceeds from maturities of investment securities******************************************
Purchases of investment securities ******************************************************
Net (increase) decrease in loans outstanding **********************************************
Proceeds from sales of loans ***********************************************************
Purchases of loans ********************************************************************
Acquisitions, net of cash acquired *******************************************************
Divestitures ***************************************************************************
Other, net ****************************************************************************

5,039
10,264
(13,148)
(9,904)
1,711
(3,568)
(1,008)
—
(1,159)

Net cash used in investing activities ***********************************************

(11,773)

Financing Activities
Net increase (decrease) in deposits ******************************************************
Net increase (decrease) in short-term borrowings ******************************************
Principal payments or redemption of long-term debt ***************************************
Proceeds from issuance of long-term debt************************************************
Proceeds from issuance of common stock ***********************************************
Repurchase of common stock **********************************************************
Cash dividends paid *******************************************************************

3,968
7,116
(12,848)
15,519
371
(1,855)
(2,245)

Net cash provided by ﬁnancing activities *******************************************

10,026

Change in cash and cash equivalents *********************************************
Cash and cash equivalents at beginning of year *******************************************

1,665
6,537

669
244
550
281
(104)
(16,007)
15,778
139
(492)

5,225

8,216
12,261
(19,624)
(7,680)
1,804
(2,719)
(322)
—
(451)

(8,515)

1,689
2,234
(12,683)
13,704
581
(2,660)
(1,820)

1,045

(2,245)
8,782

1,254
275
682
273
(300)
(27,666)
30,228
123
80

8,682

17,383
18,140
(51,127)
(4,193)
2,204
(944)
—
(382)
(506)

(19,425)

3,449
3,869
(8,968)
11,468
398
(326)
(1,557)

8,333

(2,410)
11,192

Cash and cash equivalents at end of year******************************************

$ 8,202

$ 6,537

$ 8,782

Supplemental Cash Flow Disclosures
Cash paid for income taxes ************************************************************
Cash paid for interest ******************************************************************
Net noncash transfers to foreclosed property *********************************************
Acquisitions

$ 2,131
3,365
98

Assets acquired *******************************************************************
Liabilities assumed *****************************************************************

$ 1,545
(393)

Net ***************************************************************************

$ 1,152

See Notes to Consolidated Financial Statements.

$ 1,768
2,030
104

437
(114)

323

$ 1,258
2,077
110

—
—

—

U.S. BANCORP 65

Notes to Consolidated Financial Statements

Note 1

S I G N I F I C A N T A C C O U N T I N G P O L I C I E S

U.S. Bancorp and its subsidiaries (the ‘‘Company’’) is a
multi-state ﬁnancial services holding company
headquartered in Minneapolis, Minnesota. The Company
provides a full range of ﬁnancial services including lending
and depository services through banking ofﬁces principally
in 24 states. The Company also engages in credit card,
merchant, and ATM processing, mortgage banking,
insurance, trust and investment management, brokerage,
and leasing activities principally in domestic markets.

Basis of Presentation The consolidated ﬁnancial statements
include the accounts of the Company and its subsidiaries.
The consolidation eliminates all signiﬁcant intercompany
accounts and transactions. Certain items in prior periods
have been reclassiﬁed to conform to the current
presentation.

Uses of Estimates The preparation of ﬁnancial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the amounts reported in the ﬁnancial statements
and accompanying notes. Actual experience could differ
from those estimates.

B U S I N E S S S E G M E N T S

Within the Company, ﬁnancial performance is measured by
major lines of business based on the products and services
provided to customers through its distribution channels.
The Company has ﬁve reportable operating segments:

Payment Services includes consumer and business credit
cards, debit cards, corporate and purchasing card services,
consumer lines of credit, ATM processing and merchant
processing. Customized products and services, coupled with
cutting-edge technology are provided to consumer and
business customers, government clients, correspondent
ﬁnancial institutions, merchants and co-brand partners.

Treasury and Corporate Support includes the Company’s
investment portfolios, funding, capital management and
asset securitization activities, interest rate risk management,
the net effect of transfer pricing related to average balances
and the residual aggregate of expenses associated with
corporate activities managed on a consolidated basis,
including enterprise-wide operations and administrative
support functions.

Segment Results Accounting policies for the lines of
business are the same as those used in preparation of the
consolidated ﬁnancial statements with respect to activities
speciﬁcally attributable to each business line. However, the
preparation of business line results requires management to
establish methodologies to allocate funding costs and
beneﬁts, expenses and other ﬁnancial elements to each line
of business. For details of these methodologies and segment
results, see ‘‘Basis of Presentation’’ and Table 23 ‘‘Line of
Business Financial Performance’’ included in Management’s
Discussion and Analysis which is incorporated by reference
into these Notes to Consolidated Financial Statements.

S E C U R I T I E S

Wholesale Banking offers lending, depository, treasury
management and other ﬁnancial services to middle market,
large corporate and public sector clients.

Realized gains or losses on securities are determined on a
trade date basis based on the speciﬁc carrying value of the
investments being sold.

Consumer Banking delivers products and services through
banking ofﬁces, telephone servicing and sales, on-line
services, direct mail and automated teller machines
(‘‘ATMs’’). It encompasses community banking,
metropolitan banking, in-store banking, small business
banking, including lending guaranteed by the Small Business
Administration, small-ticket leasing, consumer lending,
mortgage banking, consumer ﬁnance, workplace banking,
student banking, 24-hour banking and investment product
and insurance sales.

Private Client, Trust and Asset Management provides trust,
private banking, ﬁnancial advisory, investment management
and mutual fund servicing to afﬂuent individuals,
businesses, institutions and mutual funds.

66 U.S. BANCORP

Trading Securities Debt and equity securities held for resale
are classiﬁed as trading securities and reported at fair value.
Realized gains or losses are reported in noninterest income.

Available-for-sale Securities These securities are not
trading securities but may be sold before maturity in
response to changes in the Company’s interest rate risk
proﬁle, funding needs or demand for collateralized deposits
by public entities. Available-for-sale securities are carried at
fair value with unrealized net gains or losses reported
within other comprehensive income in shareholders’ equity.
When sold, the amortized cost of the speciﬁc securities is
used to compute the gain or loss. Declines in fair value that
are deemed other-than-temporary, if any, are reported in
noninterest income.

Held-to-maturity Securities Debt securities for which the
Company has the positive intent and ability to hold to
maturity are reported at historical cost adjusted for
amortization of premiums and accretion of discounts.
Declines in fair value that are deemed other than
temporary, if any, are reported in noninterest income.

Securities Purchased Under Agreements to Resell and

Securities Sold Under Agreements to Repurchase

Securities purchased under agreements to resell and
securities sold under agreements to repurchase are generally
accounted for as collateralized ﬁnancing transactions and
are recorded at the amounts at which the securities were
acquired or sold, plus accrued interest. The fair value of
collateral received is continually monitored and additional
collateral obtained or requested to be returned to the
Company as deemed appropriate.

EQUITY INVESTMENTS IN OPERATING ENTITIES

Equity investments in public entities in which ownership is
less than 20 percent are accounted for as available-for-sale
securities and carried at fair value. Similar investments in
private entities are accounted for using the cost method.
Investments in entities where ownership interest is between
20 percent and 50 percent are accounted for using the
equity method with the exception of limited partnerships
and limited liability companies where an ownership interest
of greater than 5 percent requires the use of the equity
method. If the Company has a voting interest greater than
50 percent, the consolidation method is used. All equity
investments are evaluated for impairment at least annually
and more frequently if certain criteria are met.

L O A N S

Loans are reported net of unearned income. Interest income
is accrued on the unpaid principal balances as earned. Loan
and commitment fees and certain direct loan origination
costs are deferred and recognized over the life of the loan
and/or commitment period as yield adjustments.

Commitments to Extend Credit Unfunded residential
mortgage loan commitments entered into in connection with
mortgage banking activities are considered derivatives and
recorded on the balance sheet at fair value with changes in
fair value recorded in income. All other unfunded loan
commitments are generally related to providing credit
facilities to customers of the bank and are not actively
traded ﬁnancial instruments. These unfunded commitments
are disclosed as off-balance sheet ﬁnancial instruments in
Note 23 in the Notes to Consolidated Financial Statements.

Allowance for Credit Losses Management determines the
adequacy of the allowance based on evaluations of credit
relationships, the loan portfolio, recent loss experience, and

other pertinent factors, including economic conditions. This
evaluation is inherently subjective as it requires estimates,
including amounts of future cash collections expected on
nonaccrual loans, which may be susceptible to signiﬁcant
change. The allowance for credit losses relating to impaired
loans is based on the loan’s observable market price, the
collateral for certain collateral-dependent loans, or the
discounted cash ﬂows using the loan’s effective interest rate.
The Company determines the amount of the allowance

required for certain sectors based on relative risk
characteristics of the loan portfolio. The allowance recorded
for commercial loans is based on quarterly reviews of
individual credit relationships and an analysis of the
migration of commercial loans and actual loss experience.
The allowance recorded for homogeneous consumer loans is
based on an analysis of product mix, risk characteristics of
the portfolio, bankruptcy experiences, and historical losses,
adjusted for current trends, for each homogenous category
or group of loans. The allowance is increased through
provisions charged to operating earnings and reduced by net
charge-offs.

The Company also assesses the credit risk associated
with off-balance sheet loan commitments, letters of credit,
and derivatives and determines the appropriate amount of
credit loss liability that should be recorded. The liability for
off-balance sheet credit exposure related to loan
commitments and other ﬁnancial instruments is included in
other liabilities.

Nonaccrual Loans Generally commercial loans (including
impaired loans) are placed on nonaccrual status when the
collection of interest or principal has become 90 days past
due or is otherwise considered doubtful. When a loan is
placed on nonaccrual status, unpaid accrued interest is
reversed. Future interest payments are generally applied
against principal. Revolving consumer lines and credit cards
are charged off by 180 days past due and closed-end
consumer loans other than loans secured by 1-4 family
properties are charged off at 120 days past due and are,
therefore, generally not placed on nonaccrual status. Certain
retail customers having ﬁnancial difﬁculties may have the
terms of their credit card and other loan agreements
modiﬁed to require only principal payments and, as such,
are reported as nonaccrual.

Impaired Loans A loan is considered to be impaired when,
based on current information and events, it is probable that
the Company will be unable to collect all amounts due
(both interest and principal) according to the contractual
terms of the loan agreement.

Restructured Loans In cases where a borrower experiences
ﬁnancial difﬁculties and the Company makes certain
concessionary modiﬁcations to contractual terms, the loan is
classiﬁed as a restructured loan. Loans restructured at a rate

U.S. BANCORP 67

equal to or greater than that of a new loan with
comparable risk at the time the contract is modiﬁed may be
excluded from restructured loans in the calendar years
subsequent to the restructuring if they are in compliance
with the modiﬁed terms.

Generally, a nonaccrual loan that is restructured
remains on nonaccrual for a period of six months to
demonstrate that the borrower can meet the restructured
terms. However, performance prior to the restructuring, or
signiﬁcant events that coincide with the restructuring, are
considered in assessing whether the borrower can meet the
new terms and may result in the loan being returned to
accrual status at the time of restructuring or after a shorter
performance period. If the borrower’s ability to meet the
revised payment schedule is not reasonably assured, the
loan remains classiﬁed as a nonaccrual loan.

Leases The Company engages in both direct and leveraged
lease ﬁnancing. The net investment in direct ﬁnancing leases
is the sum of all minimum lease payments and estimated
residual values, less unearned income. Unearned income is
added to interest income over the terms of the leases to
produce a level yield.

The investment in leveraged leases is the sum of all

lease payments (less nonrecourse debt payments) plus
estimated residual values, less unearned income. Income
from leveraged leases is recognized over the term of the
leases based on the unrecovered equity investment.

Residual values on leased assets are reviewed regularly
for other-than-temporary impairment. Residual valuations
for retail automobile leases are based on independent
assessments of expected used car sale prices at the end-of-
term. Impairment tests are conducted based on these
valuations considering the probability of the lessee returning
the asset to the Company, re-marketing efforts, insurance
coverage and ancillary fees and costs. Valuations for
commercial leases are based upon external or internal
management appraisals. When there is other than
temporary impairment in the estimated fair value of the
Company’s interest in the residual value of a leased asset,
the carrying value is reduced to the estimated fair value
with the writedown recognized in the current period.

Loans Held for Sale Loans held for sale (‘‘LHFS’’) represent
mortgage loan originations intended to be sold in the
secondary market and other loans that management has an
active plan to sell. LHFS are carried at the lower of cost or
market value as determined on an aggregate basis by type
of loan. In the event management decides to sell loans
receivable, the loans are transferred at the lower of cost or
fair value. Loans transferred to LHFS are marked-to-market
(‘‘MTM’’) at the time of transfer. MTM losses related to
the sale/transfer of non-homogeneous loans that are
predominantly credit-related are reﬂected in charge-offs.

68 U.S. BANCORP

With respect to homogeneous loans, the amount of
‘‘probable’’ credit loss determined in accordance with
Statement of Financial Accounting Standards No. 5,
‘‘Accounting for Contingencies,’’ methodologies utilized to
determine the speciﬁc allowance allocation for the portfolio
is also included in charge-offs. Any incremental loss
determined in accordance with MTM accounting, that
includes consideration of other factors such as estimates of
inherent losses, is reported separately from charge-offs as a
reduction to the allowance for credit losses. Subsequent
decreases in fair value are recognized in noninterest income.

Other Real Estate Other real estate (‘‘ORE’’), which is
included in other assets, is property acquired through
foreclosure or other proceedings. ORE is carried at fair
value, less estimated selling costs. The property is evaluated
regularly and any decreases in the carrying amount are
included in noninterest expense.

D E R I VAT I V E F I N A N C I A L I N S T R U M E N T S

In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate, foreign
currency and prepayment risk and to accommodate the
business requirements of its customers. All derivative
instruments are recorded as either other assets, other
liabilities or short-term borrowings at fair value. Subsequent
changes in a derivative’s fair value are recognized currently
in earnings unless speciﬁc hedge accounting criteria are met.

All derivative instruments that qualify for hedge

accounting are recorded at fair value and classiﬁed either as
a hedge of the fair value of a recognized asset or liability
(‘‘fair value’’ hedge) or as a hedge of the variability of cash
ﬂows to be received or paid related to a recognized asset or
liability or a forecasted transaction (‘‘cash ﬂow’’ hedge).
Changes in the fair value of a derivative that is highly
effective and designated as a fair value hedge and the
offsetting changes in the fair value of the hedged item are
recorded in income. Changes in the fair value of a
derivative that is highly effective and designated as a cash
ﬂow hedge are recognized in other comprehensive income
until income from the cash ﬂows of the hedged item is
recognized. The Company performs an assessment, both at
the inception of the hedge and on a quarterly basis
thereafter, when required, to determine whether these
derivatives are highly effective in offsetting changes in the
value of the hedged items. Any change in fair value
resulting from hedge ineffectiveness is immediately recorded
in noninterest income.

If a derivative designated as a hedge is terminated or
ceases to be highly effective, the gain or loss is amortized to
earnings over the remaining life of the hedged asset or
liability (fair value hedge) or over the same period(s) that
the forecasted hedged transactions impact earnings (cash

ﬂow hedge). If the hedged item is disposed of, or the
forecasted transaction is no longer probable, the derivative
is recorded at fair value with any resulting gain or loss
included in the gain or loss from the disposition of the
hedged item or, in the case of a forecasted transaction that
is no longer probable, included in earnings immediately.

O T H E R S I G N I F I C A N T P O L I C I E S

Intangible Assets The price paid over the net fair value of
acquired businesses (‘‘goodwill’’) is not amortized. Other
intangible assets are amortized over their estimated useful
lives, using straight-line and accelerated methods. The
recoverability of goodwill and other intangible assets is
evaluated annually, at a minimum, or on an interim basis if
events or circumstances indicate a possible inability to
realize the carrying amount. The evaluation includes
assessing the estimated fair value of the intangible asset
based on market prices for similar assets, where available,
and the present value of the estimated future cash ﬂows
associated with the intangible asset.

Income Taxes Deferred taxes are recorded to reﬂect the tax
consequences on future years of differences between the tax
basis of assets and liabilities and the ﬁnancial reporting
amounts at each year-end.

Mortgage Servicing Rights Mortgage servicing rights
(‘‘MSRs’’) are capitalized as separate assets when loans are
sold and servicing is retained. The total cost of loans sold is
allocated between the loans sold and the servicing assets
retained based on their relative fair values. MSRs that are
purchased from others are initially recorded at cost. The
carrying value of the MSRs is amortized in proportion to,
and over the period of, estimated net servicing revenue and
recorded in noninterest expense as amortization of
intangible assets. The carrying value of these assets is
periodically reviewed for impairment using a lower of
carrying value or fair value methodology. For purposes of
measuring impairment, the servicing rights are stratiﬁed
based on the underlying loan type and note rate and the
carrying value of each stratum is compared to fair value
based on a discounted cash ﬂow analysis, utilizing current
prepayment speeds and discount rates. Events that may
signiﬁcantly affect the estimates used are changes in interest
rates and the related impact on mortgage loan prepayment
speeds and the payment performance of the underlying
loans. If the carrying value is greater than fair value,
impairment is recognized through a valuation allowance for
each impaired stratum and recorded as amortization of
intangible assets. The valuation allowance is adjusted each
subsequent period to reﬂect any increase or decrease in the
indicated impairment. The Company reviews mortgage
servicing rights for other-than-temporary impairment each
quarter and recognizes a direct write-down when the

recoverability of a recorded valuation allowance is
determined to be remote. In determining whether other-
than-temporary impairment has taken place, the Company
considers historical trends in pay off activity and the
potential for impairment recovery. Unlike a valuation
allowance, a direct write-down permanently reduces the
carrying value of the mortgage servicing rights, precluding
subsequent reversals.

Pensions For purposes of its retirement plans, the Company
utilizes a measurement date of September 30. At the
measurement date, plan assets are determined based on fair
value, generally representing observable market prices. The
actuarial cost method used to compute the pension
liabilities and related expense is the projected unit credit
method. The projected beneﬁt obligation is principally
determined based on the present value of projected beneﬁt
distributions at an assumed discount rate. The discount rate
utilized is based on match-funding maturities and interest
payments of high quality corporate bonds available in the
market place to projected cash ﬂows as of the measurement
date for future beneﬁt payments. Periodic pension expense
(or credits) includes service costs, interest costs based on the
assumed discount rate, the expected return on plan assets
based on an actuarially derived market-related value and
amortization of actuarial gains and losses. Pension
accounting reﬂects the long-term nature of beneﬁt
obligations and the investment horizon of plan assets and
can have the effect of reducing earnings volatility related to
short-term changes in interest rates and market valuations.
Actuarial gains and losses include the impact of plan
amendments and various unrecognized gains and losses
which are deferred and amortized over the future service
periods of active employees. The market-related value
utilized to determine the expected return on plan assets is
based on fair value adjusted for the difference between
expected returns and actual performance of plan assets. The
unrealized difference between actual experience and
expected returns is included in the market-related value
ratably over a ﬁve-year period.

Premises and Equipment Premises and equipment are
stated at cost less accumulated depreciation and depreciated
primarily on a straight-line basis over the estimated life of
the assets. Estimated useful lives range up to 40 years for
newly constructed buildings and from 3 to 20 years for
furniture and equipment.

Capitalized leases, less accumulated amortization, are
included in premises and equipment. The lease obligations
are included in long-term debt. Capitalized leases are
amortized on a straight-line basis over the lease term and
the amortization is included in depreciation expense.

Statement of Cash Flows For purposes of reporting cash
ﬂows, cash and cash equivalents include cash and money

U.S. BANCORP 69

market investments, deﬁned as interest-bearing amounts due
from banks, federal funds sold and securities purchased
under agreements to resell.

Stock-Based Compensation The Company grants stock-
based awards including restricted stock and options to
purchase common stock of the Company. Stock option
grants are for a ﬁxed number of shares to employees and
directors with an exercise price equal to the fair value of
the shares at the date of grant. The Company recognizes
stock-based compensation in its results of operations
utilizing the fair value method under Statement of Financial
Accounting Standard No. 123, ‘‘Accounting for Stock-based
Compensation’’ (‘‘SFAS 123’’). Stock-based compensation is
recognized using an accelerated method of amortization for
awards with graded vesting features and on a straight-line
basis for awards with cliff vesting. The Company recognizes
compensation cost over the normal vesting period for
awards subject to continued vesting upon the employee’s
retirement. The amortization of stock-based compensation
reﬂects estimated forfeitures adjusted for actual forfeiture
experience. As compensation expense is recognized, a
deferred tax asset is recorded that represents an estimate of
the future tax deduction from exercise or release of
restrictions. At the time stock-based awards are exercised,
cancelled, expire, or restrictions are released, the Company
may be required to recognize an adjustment to tax expense.

Per Share Calculations Earnings per share is calculated by
dividing net income by the weighted average number of
common shares outstanding during the year. Diluted
earnings per share is calculated by adjusting income and
outstanding shares, assuming conversion of all potentially
dilutive securities, using the treasury stock method. All per
share amounts have been restated for stock splits.

Note 2

A C C O U N T I N G C H A N G E S

Stock-Based Compensation In December 2004, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised 2004)
(‘‘SFAS 123R’’), ‘‘Share-Based Payment’’, a revision of
Statement of Financial Accounting Standards No. 123
(‘‘SFAS 123’’), ‘‘Accounting for Stock-Based
Compensation.’’ SFAS 123R requires companies to measure
the cost of employee services in exchange for an award of
equity instruments based on the grant-date fair value of the
award. This statement eliminates the use of the alternative
intrinsic value method of accounting that was allowed when
SFAS 123 was originally issued. The provisions of this

statement are effective for the Company on January 1,
2006. Because the Company retroactively adopted the fair
value method in 2003, the impact of expensing stock-based
awards is already recorded in the Company’s Consolidated
Statement of Income. In conjunction with the adoption of
SFAS 123R, the Company plans to change from an
accelerated to a straight-line method of expense attribution
effective January 1, 2006, for new stock-based awards. The
impact of changing from accelerated to straight-line
amortization for new awards will reduce expenses by
approximately $33 million ($20 million after tax) in 2006.

Loan Commitments On March 9, 2004, the Securities and
Exchange Commission staff issued Staff Accounting
Bulletin No. 105 (‘‘SAB 105’’), ‘‘Application of Accounting
Principles to Loan Commitments,’’ which provides guidance
regarding loan commitments accounted for as derivative
instruments and is effective for commitments entered into
after March 31, 2004. The guidance clariﬁes that expected
future cash ﬂows related to the servicing of the loan may be
recognized only when the servicing asset has been
contractually separated from the underlying loan by sale
with servicing retained. The adoption of SAB 105 did not
have a material impact on the Company’s ﬁnancial
statements.

Note 3

B U S I N E S S C O M B I N AT I O N S

On December 30, 2005, the Company acquired the
corporate trust and institutional custody businesses of
Wachovia Corporation in a cash transaction valued at
$720 million initially with an additional $80 million
payable in one year based on business retention levels. As a
result of this transaction, the Company acquired
approximately 14,100 new Corporate Trust client issuances
with $410 billion in assets under administration and
approximately 1,700 new Institutional Trust and Custody
clients with $570 billion in assets under administration. The
transaction represented total assets acquired of $730 million
and liabilities assumed of $10 million at the closing date.
Included in total assets were contract and other intangibles
with an estimated fair value of $227 million and goodwill
of $500 million. The goodwill reﬂected the strategic value
of the combined organization’s leadership position in the
corporate trust and institutional custody businesses and
economies of scale resulting from the transaction.

In addition to this acquisition the Company completed
other smaller acquisitions to enhance its presence in certain
markets and businesses.

70 U.S. BANCORP

Note 4

D I S C O N T I N U E D O P E R AT I O N S

On December 31, 2003, the Company completed the
distribution of all the outstanding shares of common stock
of Piper Jaffray Companies to its shareholders. This non-
cash distribution was tax-free to the Company, its
shareholders and Piper Jaffray Companies. In connection

with the December 31, 2003, distribution, the results of
Piper Jaffray Companies are reported in the Company’s
Consolidated Statement of Income separately as
discontinued operations.

The following table represents the condensed results of operations for discontinued operations:

Year Ended December 31 (Dollars in Millions)

Revenue *********************************************************************************************************************
Noninterest expense ***********************************************************************************************************

Income from discontinued operations ********************************************************************************************
Costs of disposal (a) ***********************************************************************************************************
Income taxes *****************************************************************************************************************

Discontinued operations, net of tax *******************************************************************************************

(a) The $27 million of disposal costs related to discontinued operations primarily represents legal, investment banking and other costs directly related to the distribution.

2003

$ 783
716

67
27
17

The distribution was treated as a dividend to

shareholders for accounting purposes and, as such, reduced
the Company’s retained earnings by $685 million.
Following the distribution, the Company’s wholly-owned
subsidiary, USB Holdings, Inc. holds a $180 million
subordinated debt facility with Piper Jaffray & Co., a
broker-dealer subsidiary of Piper Jaffray Companies. In
addition, the Company provides an indemniﬁcation in an

amount up to $18 million with respect to certain speciﬁed
liabilities resulting from third-party claims relating to
research analyst independence and from certain regulatory
investigations, as deﬁned in the separation and distribution
agreement entered into with Piper Jaffray Companies at the
time of the distribution. Through December 31, 2005, the
Company has paid approximately $4 million to Piper
Jaffray Companies under this indemniﬁcation agreement.

Note 5

R E S T R I C T I O N S O N C A S H A N D D U E F R O M B A N K S

Bank subsidiaries are required to maintain minimum
average reserve balances with the Federal Reserve Bank.

The amount of those reserve balances was approximately
$164 million at December 31, 2005.

Note 6

I N V E S T M E N T S E C U R I T I E S

The detail of the amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and
available-for-sale securities at December 31 was as follows:

(Dollars in Millions)

Held-to-maturity (a)

2005

2004

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value

Mortgage-backed securities *******************
Obligations of state and political subdivisions ****
Other debt securities *************************

8
84
17

Total held-to-maturity securities *************

109

Available-for-sale (b)

U.S. Treasury and agencies********************
Mortgage-backed securities *******************
Asset-backed securities ***********************
Obligations of state and political subdivisions ****
Other securities and investments ***************

496
38,161
12
640
1,012

Total available-for-sale securities ************

$40,321

$ —
5
—

$ 5

$ 2
86
—
3
2

$93

$ — $
(1)
—

8
88
17

11
98
18

(1)

113

127

(9)
(733)
—
(6)
(7)

489
37,514
12
637
1,007

684
39,809
64
205
863

$(755)

$39,659

$41,625

$ —
7
—

$ 7

$ 3
65
—
6
11

$85

(a) Held-to-maturity securities are carried at historical cost adjusted for amortization of premiums and accretion of discounts.
(b) Available-for-sale securities are carried at fair value with unrealized net gains or losses reported within other comprehensive income in shareholders’ equity.

$ — $
(2)
—

11
103
18

(2)

132

(8)
(337)
—
—
(11)

679
39,537
64
211
863

$(356)

$41,354

U.S. BANCORP 71

The fair value of available-for-sale securities shown

above includes securities totaling $11.3 billion with
unrealized losses of $380 million which had been in an
unrealized loss position for greater than 12 months at
December 31, 2005, compared with securities totaling
$4.8 billion with unrealized losses of $149 million which
had been in a loss position of greater than 12 months at
December 31, 2004. All other available-for-sale securities
with unrealized losses have an aggregate fair value of
$21.7 billion and have been in an unrealized loss position
for less than 12 months and represent both ﬁxed-rate
securities and adjustable-rate securities with temporary
impairment resulting from increases in interest rates since
the purchase of the securities. All principal and interest
payments on available-for-sale debt securities are expected
to be collected given the high credit quality of the
U.S. government agency debt securities and bank holding
company issuers.

As of December 31, 2005, the Company has the ability

and intent to hold investment securities until their
anticipated recovery in value or maturity.

The weighted-average maturity of the available-for-sale
investment securities was 6.10 years at December 31, 2005,
compared with 4.45 years at December 31, 2004. The
corresponding weighted-average yields were 4.89 percent
and 4.43 percent, respectively. The weighted-average
maturity of the held-to-maturity investment securities was
7.21 years at December 31, 2005, compared with
6.19 years at December 31, 2004. The corresponding
weighted-average yields were 6.44 percent and 6.28 percent,
respectively.

Securities carried at $36.9 billion at December 31,

2005, and $28.0 billion at December 31, 2004, were
pledged to secure public, private and trust deposits,
securities sold under agreements to repurchase and for other
purposes required by law. Securities sold under agreements
to repurchase where the buyer/lender has the right to sell or
pledge the securities, were $10.9 billion at December 31,
2005, and $4.8 billion at December 31, 2004, respectively.

The following table provides information as to the amount of interest income from taxable and non-taxable investment
securities:

(Dollars in Millions)

Taxable **************************************************************************************
Non-taxable **********************************************************************************

2005

$1,938
16

Total interest income from investment securities ************************************************

$1,954

2004

$1,809
18

$1,827

2003

$1,655
29

$1,684

The following table provides information as to the amount of gross gains and losses realized through the sales of available-for-
sale investment securities:

(Dollars in Millions)

Realized gains *********************************************************************************
Realized losses ********************************************************************************

2005

$ 13
(119)

Net realized gains (losses) ********************************************************************

$(106)

Income tax (beneﬁt) on realized gains (losses) ******************************************************

$ (40)

2004

$ 104
(209)

$(105)

$ (40)

2003

$364
(119)

$245

$ 93

For amortized cost, fair value and yield by maturity
date of held-to-maturity and available-for-sale securities
outstanding at December 31, 2005, refer to Table 11

included in Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements.

72 U.S. BANCORP

Note 7

L O A N S A N D A L L O WA N C E F O R C R E D I T L O S S E S

The composition of the loan portfolio at December 31 was as follows:

(Dollars in millions)

Commercial

2005

2004

Commercial *********************************************************************************************
Lease ﬁnancing******************************************************************************************

$ 37,844
5,098

Total commercial *************************************************************************************

42,942

Commercial real estate

Commercial mortgages ***********************************************************************************
Construction and development ****************************************************************************

Total commercial real estate****************************************************************************

Residential mortgages **********************************************************************************

Retail

Credit card**********************************************************************************************
Retail leasing ********************************************************************************************
Home equity and second mortgages ***********************************************************************
Other retail

Revolving credit **************************************************************************************
Installment *******************************************************************************************
Automobile ******************************************************************************************
Student *********************************************************************************************

Total other retail ***********************************************************************************

Total retail *******************************************************************************************

20,272
8,191

28,463

20,730

7,137
7,338
14,979

2,504
3,582
8,112
2,019

16,217

45,671

$ 35,210
4,963

40,173

20,315
7,270

27,585

15,367

6,603
7,166
14,851

2,541
2,767
7,419
1,843

14,570

43,190

Total loans****************************************************************************************

$137,806

$126,315

Loans are presented net of unearned interest and
deferred fees and costs, which amounted to $1.3 billion and
$1.4 billion at December 31, 2005 and 2004, respectively.
The Company had loans of $44.1 billion at December 31,
2005, and $38.3 billion at December 31, 2004, pledged at
the Federal Home Loan Bank. Loans of $18.1 billion at
December 31, 2005, and $10.3 billion at December 31,
2004, were pledged at the Federal Reserve Bank.

The Company primarily lends to borrowers in the
24 states in which it has banking ofﬁces. Collateral for
commercial loans may include marketable securities,
accounts receivable, inventory and equipment. For details of
the Company’s commercial portfolio by industry group and
geography as of December 31, 2005 and 2004, see Table 7
included in Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements.

For detail of the Company’s commercial real estate

portfolio by property type and geography as of
December 31, 2005 and 2004, see Table 8 included in
Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements. Such loans are collateralized by the
related property.

Nonperforming assets include nonaccrual loans,
restructured loans not performing in accordance with
modiﬁed terms, other real estate and other nonperforming
assets owned by the Company. For details of the
Company’s nonperforming assets as of December 31, 2005
and 2004, see Table 14 included in Management’s
Discussion and Analysis which is incorporated by reference
into these Notes to Consolidated Financial Statements.

The following table lists information related to nonperforming loans as of December 31:

(Dollars in Millions)

Loans on nonaccrual status *****************************************************************************************
Restructured loans *************************************************************************************************

Total nonperforming loans *******************************************************************************************

Interest income that would have been recognized at original contractual terms *********************************************
Amount recognized as interest income ********************************************************************************

Forgone revenue ***************************************************************************************************

2005

$469
75

$544

$ 48
18

$ 30

2004

$582
58

$640

$ 64
22

$ 42

U.S. BANCORP 73

Activity in the allowance for credit losses was as follows:

(Dollars in Millions)

Balance at beginning of year********************************************************************
Add

Provision charged to operating expense*******************************************************

Deduct

Loans charged off**************************************************************************
Less recoveries of loans charged off **********************************************************

Net loans charged off***********************************************************************
Acquisitions and other changes *****************************************************************

2005

$2,269

666

949
264

685
1

2004

$2,369

669

1,074
307

767
(2)

2003

$2,422

1,254

1,494
242

1,252
(55)

Balance at end of year (a) **********************************************************************

$2,251

$2,269

$2,369

Components

Allowance for loan losses *******************************************************************
Liability for unfunded credit commitments *****************************************************

$2,041
210

Total allowance for credit losses **********************************************************

$2,251

$2,080
189

$2,269

$2,184
185

$2,369

(a) Included in this analysis is activity related to the Company’s liability for unfunded commitments, which is separately recorded in other liabilities in the Consolidated Balance Sheet.

A portion of the allowance for credit losses is allocated to commercial and commercial real estate loans deemed impaired.

These impaired loans are included in nonperforming assets. A summary of impaired loans and their related allowance for
credit losses is as follows:

(Dollars in Millions)

Impaired loans

2005

2004

2003

Recorded
Investment

Valuation
Allowance

Recorded
Investment

Valuation
Allowance

Recorded
Investment

Valuation
Allowance

Valuation allowance required***************
No valuation allowance required************

Total impaired loans *************************

$388
—

$388

Average balance of impaired loans during the

year ************************************

$412

Interest income recognized on impaired loans

during the year **************************

$37
—

$37

$489
—

$489

$600

$64
—

$64

$841
—

$841

$970

—

$108
—

$108

Commitments to lend additional funds to customers
whose commercial or commercial real estate loans were
classiﬁed as nonaccrual or restructured at December 31,
2005, totaled $35 million. At December 31, 2005, there
were $1 million of these loans that were restructured at
market interest rates and returned to an accruing status.
In addition to impaired commercial and commercial

real estate loans, the Company had smaller balance
homogenous loans that are accruing interest at rates
considered to be below market rate. At December 31, 2005
and 2004, the recorded investment in these other

Note 8

L E A S E S

restructured loans was $315 million and $227 million,
respectively, with average balances of $278 million during
2005 and $229 million during 2004. The Company
recognized estimated interest income on these loans of
$20 million $17 million during 2005 and 2004 respectively.

Included in noninterest income, primarily in mortgage
banking revenue, for the years ended December 31, 2005,
2004 and 2003, the Company had net gains on the sale of
loans of $175 million, $171 million and $163 million,
respectively.

The components of the net investment in sales-type and direct ﬁnancing leases at December 31 were as follows:

(Dollars in Millions)

2005

2004

Aggregate future minimum lease payments to be received *********************************************************
Unguaranteed residual values accruing to the lessor’s beneﬁt ******************************************************
Unearned income ********************************************************************************************
Initial direct costs ********************************************************************************************

$13,023
392
(1,556)
268

Total net investment in sales-type and direct ﬁnancing leases(a) *************************************************

$12,127

$12,436
615
(1,560)
264

$11,755

(a) The accumulated allowance for uncollectible minimum lease payments was $112 million and $141 million at December 31, 2005 and 2004, respectively.

74 U.S. BANCORP

The minimum future lease payments to be received from sales-type and direct ﬁnancing leases were as follows at
December 31, 2005:

(Dollars in Millions)

2006 ************************************************************************************************************************
2007 ************************************************************************************************************************
2008 ************************************************************************************************************************
2009 ************************************************************************************************************************
2010 ************************************************************************************************************************
Thereafter ********************************************************************************************************************

$2,489
3,084
3,844
2,319
1,067
220

Note 9

A C C O U N T I N G F O R T R A N S F E R S A N D
S E RV I C I N G O F F I N A N C I A L A S S E T S
A N D E X T I N G U I S H M E N T S O F
L I A B I L I T I E S

F i n a n c i a l A s s e t S a l e s

When the Company sells ﬁnancial assets, it may retain
interest-only strips, servicing rights, residual rights to a cash
reserve account, and/or other retained interests in the sold
ﬁnancial assets. The gain or loss on sale depends in part on
the previous carrying amount of the ﬁnancial assets
involved in the transfer and is allocated between the assets
sold and the retained interests based on their relative fair
values at the date of transfer. Quoted market prices are
used to determine retained interest fair values when readily
available. Since quotes are generally not available for
retained interests, the Company estimates fair value based
on the present value of future expected cash ﬂows using
management’s best estimates of the key assumptions
including credit losses, prepayment speeds, forward yield
curves, and discount rates commensurate with the risks
involved. Retained interests and liabilities are recorded at
fair value using a discounted cash ﬂow methodology at
inception and are evaluated at least quarterly thereafter.

Conduits and Securitization The Company sponsors an off-
balance sheet conduit, a qualiﬁed special purpose entity
(‘‘QSPE’’), to which it transferred high-grade investment
securities, funded by the issuance of commercial paper.
Because QSPE’s are exempt from consolidation under the
provisions of Financial Interpretation No. 46,
‘‘Consolidation of Variable Interest Entities (‘‘FIN 46’’), the
Company does not consolidate the conduit structure in its

ﬁnancial statements. The conduit held assets of $3.8 billion
at December 31, 2005, and $5.7 billion at December 31,
2004. These investment securities include primarily
(i) private label asset-backed securities, which are insurance
‘‘wrapped’’ by AAA/Aaa-rated monoline insurance
companies and (ii) government agency mortgage-backed
securities and collateralized mortgage obligations. The
conduit had commercial paper liabilities of $3.8 billion at
December 31, 2005, and $5.7 billion at December 31,
2004. The Company beneﬁts by transferring the investment
securities into a conduit that provides diversiﬁcation of
funding sources in a capital-efﬁcient manner and the
generation of income.

The Company provides a liquidity facility to the
conduit. Utilization of the liquidity facility would be
triggered if the conduit is unable to, or does not, issue
commercial paper to fund its assets. A liability for the
estimate of the potential risk of loss the Company has as
the liquidity facility provider is recorded on the balance
sheet in other liabilities. The liability is adjusted downward
over time as the underlying assets pay down with the offset
recognized as other noninterest income. The liability for the
liquidity facility was $20 million at December 31, 2005,
and $32 million at December 31, 2004. In addition, the
Company recorded at fair value its retained residual interest
in the investment securities conduit of $28 million at
December 31, 2005, and $57 million at December 31,
2004. The Company recorded $17 million from the conduit
during 2005 and $25 million during 2004, for revenues
related to the conduit including fees for servicing,
management, administration and accretion income from
retained interests.

U.S. BANCORP 75

Sensitivity Analysis At December 31, 2005, key economic assumptions and the sensitivity of the current fair value of residual
cash ﬂows to immediate 10 percent and 20 percent adverse changes in those assumptions for the investment securities conduit
were as follows:

December 31, 2005 (Dollars in Millions)

Current economic assumptions sensitivity analysis

Carrying value (fair value) of residual interest *********************************************************************************
Weighted average life (in years) ********************************************************************************************

Expected remaining life (in years)***************************************************************************************
Impact of 10% adverse change ********************************************************************************************
Impact of 20% adverse change ********************************************************************************************

Expected credit losses (annual) (a) **************************************************************************************
Impact of 10% adverse change ********************************************************************************************
Impact of 20% adverse change ********************************************************************************************

Residual cash ﬂow discount rate ***************************************************************************************
Impact of 10% adverse change ********************************************************************************************
Impact of 20% adverse change ********************************************************************************************

Interest rate on variable rate bonds (b) *********************************************************************************
Impact of 10% adverse change ********************************************************************************************
Impact of 20% adverse change ********************************************************************************************

$27.9
1.6

2.7
$ (2.8)
(5.1)

NA
$ —
—

6.2%

$ (.2)
(.4)

NA
$ —
—

(a) Credit losses are zero as the investments are all AAA/Aaa rated or insured investments.
(b) The investment securities conduit is mostly match funded. Therefore, interest rate movements create no material impact to the value of the residual interest.

These sensitivities are hypothetical and should be used
with caution. As the figures indicate, changes in fair value
based on a 10 percent variation in assumptions generally
cannot be extrapolated because the relationship of the change
in the assumptions to the change in fair value may not be
linear. Also, in this table the effect of a variation in a

particular assumption on the fair value of the retained
interest is calculated without changing any other
assumptions; in reality, changes in one factor may result in
changes in another (for example, increases in market interest
rates may result in lower prepayments and increased credit
losses), which might magnify or counteract the sensitivities.

Cash Flow Information The table below summarizes certain cash ﬂows received from and paid to conduit or structured
entities:

Year Ended December 31 (Dollars in Millions)

2005

Proceeds from

Collections used by trust to purchase new receivables in revolving securitizations **************************
Servicing and other fees received and cash ﬂows on retained interests***************************************

2004

Proceeds from

(a) The small business credit securitization was a revolving transaction where proceeds were reinvested until their legal terminations.

Unsecured
Small Business
Receivables (a)

Investment
Securities

$ 50
62

$329
74

$ —
22

$ —
35

76 U.S. BANCORP

Other Information Quantitative information related to managed assets and loan sales was as follows:

Asset Type (Dollars in Millions)

2005

2004

2005

2004

2005

2004

2005

2004

At December 31

Year Ended December 31

Total Principal
Balance

Principal Amount
90 Days or More Past Due (a)

Average Balance

Net Credit Losses

Commercial

Commercial *************************
Lease ﬁnancing **********************

$ 38,075
5,098

$ 35,891
4,963

Total commercial *****************

43,173

40,854

Commercial real estate

Commercial mortgages ***************
Construction and development ********

20,272
8,191

20,315
7,270

Total commercial real estate ********

28,463

27,585

Residential mortgages **************

20,730

15,367

Retail

Credit card**************************
Retail leasing ************************
Other retail **************************

7,137
7,338
31,196

6,603
7,166
29,421

Total retail ***********************

45,671

43,190

Total managed loans ***********

138,037

126,996

Investment securities ***************

43,517

47,191

$254
42

296

134
23

157

115

139
3
87

229

797

—

$311
92

403

$ 38,207
4,923

$ 35,274
4,866

43,130

40,140

$ 58
42

100

$129
69

198

175
26

201

114

115
6
101

222

940

—

20,268
7,696

20,386
6,881

27,964

27,267

18,036

14,322

6,615
7,346
30,503

6,090
6,653
28,461

44,464

41,204

133,594

122,933

46,740

49,452

6
(3)

278
26
255

559

698

—

18
9

252
39
251

542

796

—

Total managed assets ****************

$181,554

$174,187

$797

$940

$180,334

$172,385

$698

$796

Less

Assets sold or securitized *************

3,980

6,391

Total assets held **************

$177,574

$167,796

Sold or securitized assets

5,126

7,235

$175,208

$165,150

Guaranteed SBA loans (b) ************
Small business credit lines (b) *********
Investment securities *****************

231
—
3,749

315
366
5,710

Total securitized assets ************

$ 3,980

$ 6,391

$ —
—
—

$ —

$ —
4
—

274
215
4,637

364
428
6,443

$ 5,126

$ 7,235

$ —
13
—

$ 13

$ —
29
—

$ 29

(a) Includes nonaccrual
(b) Reported in ‘‘commercial’’ loans

Note 10

P R E M I S E S A N D E Q U I P M E N T

Premises and equipment at December 31 consisted of the following:

(Dollars in Millions)

Land*****************************************************************************************************
Buildings and improvements ********************************************************************************
Furniture, ﬁxtures and equipment ****************************************************************************
Capitalized building and equipment leases ********************************************************************
Construction in progress************************************************************************************

Less accumulated depreciation and amortization***************************************************************

2005

$ 315
2,313
2,239
136
4

5,007
(3,166)

Total**************************************************************************************************

$ 1,841

2004

$ 311
2,288
2,105
138
5

4,847
(2,957)

$ 1,890

U.S. BANCORP 77

Note 11

M O RT G A G E S E RV I C I N G R I G H T S

The Company’s portfolio of residential mortgages serviced for others was $69.0 billion, $63.2 billion and $53.9 billion at
December 31, 2005, 2004 and 2003 respectively.

Changes in the valuation allowance for capitalized mortgage servicing rights are summarized as follows:

Year Ended December 31 (Dollars in Millions)

Balance at beginning of year ******************************************************************
Additions charged (reductions credited) to operations******************************************
Direct write-downs charged against the allowance ********************************************

Balance at end of year ***********************************************************************

2005

$172
(53)
(49)

$ 70

Changes in net carrying value of capitalized mortgage servicing rights are summarized as follows:

Year Ended December 31 (Dollars in Millions)

Balance at beginning of year ****************************************************************
Rights purchased ***********************************************************************
Rights capitalized ***********************************************************************
Amortization ***************************************************************************
Reparation (impairment)******************************************************************

Balance at end of year**********************************************************************
Impairment valuation allowance ***********************************************************

2005

$ 866
27
369
(197)
53

1,118
70

2004

$160
57
(45)

$172

2004

$ 670
139
300
(186)
(57)

866
172

Initial carrying value, net of amortization *******************************************************

$1,188

$1,038

2003

$ 207
209
(256)

$ 160

2003

$642
55
338
(156)
(209)

670
160

$830

The key economic assumptions used to estimate the value of the mortgage servicing rights portfolio were as follows:

December 31 (Dollars in Millions)

Fair value *********************************************************************************
Expected weighted-average life (in years) ******************************************************
Discount rate ******************************************************************************

2005

$1,123
6.8
10.2%

2004

$872
5.5
9.9%

2003

$670
5.2
9.9%

The estimated sensitivity of the fair value of the mortgage servicing rights portfolio to changes in interest rates at
December 31, 2005, was as follows:

(Dollars in Millions)

Down Scenario

Up Scenario

50 bps

25 bps

50 bps

Fair value**************************************************************************************

$(109)

$ (47)

$ 32

$ 58

The fair value of mortgage servicing rights and its
sensitivity to changes in interest rates is inﬂuenced by the
mix of the servicing portfolio and characteristics of each
segment of the portfolio. The Company’s servicing portfolio
consists of the distinct portfolios of Mortgage Revenue
Bond Programs (‘‘MRBP’’), government-insured mortgages
and conventional mortgages. The MRBP division specializes
in servicing loans made under state and local housing
authority programs. These programs provide mortgages to
low- and moderate-income borrowers and are generally

government-insured programs with a favorable rate subsidy,
down payment and/or closing cost assistance. Mortgage
loans originated as part of government agency and state
loan programs tend to experience slower prepayment speeds
and better cash ﬂows than conventional mortgage loans.
The servicing portfolios are predominantly comprised of
ﬁxed-rate agency loans (FNMA, FHLMC, GNMA, FHLB
and various housing agencies) with limited adjustable-rate
or jumbo mortgage loans.

78 U.S. BANCORP

A summary of the Company’s mortgage servicing rights and related characteristics by portfolio as of December 31, 2005, was
as follows:

(Dollars in Millions)

MRBP

Government

Conventional

Total

Servicing portfolio *************************************************************************
Fair market value**************************************************************************
Value (bps) *******************************************************************************
Weighted-average servicing fees (bps) *******************************************************
Multiple (value/servicing fees) ***************************************************************
Weighted-average note rate ****************************************************************
Age (in years) *****************************************************************************
Expected life (in years) *********************************************************************
Discount rate *****************************************************************************

$7,206
$ 118
164
42
3.90
6.03%
3.7
6.1
10.5%

$9,063
$ 152
168
45
3.73
6.03%
2.7
6.3
10.7%

$52,737
853
$
162
35
4.63
5.70%
2.1
7.0
10.1%

$69,006
$ 1,123
163
37
4.41
5.78%
2.3
6.8
10.2%

Note 12

I N TA N G I B L E A S S E T S

Intangible assets consisted of the following:

December 31 (Dollars in Millions)

Estimated
Life (a)

Amortization
Method (b)

Goodwill ************************************************************
Merchant processing contracts *****************************************
Core deposit beneﬁts *************************************************
Mortgage servicing rights **********************************************
Trust relationships ****************************************************
Other identiﬁed intangibles *********************************************

—
9 years/8 years
10 years /6 years
7 years
15 years /7 years
8 years /4 years

—
SL/AC
SL/AC
AC
SL/AC
SL/AC

Total *************************************************************

2005

$7,005
767
262
1,118
477
250

$9,879

Balance

2004

$6,241
714
336
866
297
174

$8,628

(a) Estimated life represents the amortization period for assets subject to the straight line method and the weighted average amortization period for intangibles subject to accelerated methods.

If more than one amortization method is used for a category, the estimated life for each method is calculated and reported separately.

(b) Amortization methods: SL = straight line method

AC = accelerated methods generally based on cash ﬂows

Aggregate amortization expense consisted of the following:

Year Ended December 31 (Dollars in Millions)

Merchant processing contracts******************************************************************
Core deposit beneﬁts **************************************************************************
Mortgage servicing rights (a) ********************************************************************
Trust relationships *****************************************************************************
Other identiﬁed intangibles**********************************************************************

2005

$ 138
74
144
47
55

Total *************************************************************************************

$ 458

2004

$ 132
81
243
49
45

$ 550

2003

$ 132
88
365
53
44

$ 682

(a) Includes mortgage servicing rights reparation of $53 million and impairment of $57 million and $209 million for the years ended December 31, 2005, 2004 and 2003, respectively.

Below is the estimated amortization expense for the next ﬁve years:

(Dollars in Millions)

2006 **************************************************************************************************************************
2007 **************************************************************************************************************************
2008 **************************************************************************************************************************
2009 **************************************************************************************************************************
2010 **************************************************************************************************************************

$480
425
358
302
232

U.S. BANCORP 79

The following table reﬂects the changes in the carrying value of goodwill for the years ended December 31, 2004 and 2005:

(Dollars in Millions)

Wholesale
Banking

Consumer
Banking

Private Client,
Trust and Asset
Management

Balance at December 31, 2003 *******************************
Goodwill acquired *****************************************
Other (a) *************************************************

Balance at December 31, 2004 *******************************
Goodwill acquired *****************************************
Other (a) *************************************************

Balance at December 31, 2005 *******************************

$1,225
—
—

$1,225

(a) Other changes in goodwill include foreign exchange effects on non-dollar-denominated goodwill.

$2,242
—
—

$2,242

$ 742
101
—

$ 843
500
—

$1,343

Payment
Services

$1,816
105
10

$1,931
248
16

$2,195

Consolidated
Company

$6,025
206
10

$6,241
748
16

$7,005

Note 13

S H O RT - T E R M B O R R O W I N G S

The following table is a summary of short-term borrowings for the last three years:

(Dollars in Millions)

At year-end

2005

2004

2003

Amount

Rate

Amount

Rate

Amount

Rate

Federal funds purchased***********************************
Securities sold under agreements to repurchase **************
Commercial paper ****************************************
Treasury, tax and loan notes********************************
Other short-term borrowings *******************************

$ 3,133
10,854
4,419
430
1,364

3.93%
3.65
3.89
3.84
3.90

$ 3,379
4,848
2,634
251
1,972

1.25%
1.95
2.11
1.72
2.20

$ 5,098
3,586
699
809
658

Total *************************************************

$20,200

3.76%

$13,084

1.84%

$10,850

Average for the year

$ 2,916
11,849
3,326
142
1,149

6.63%
2.93
3.11
3.17
3.62

$ 3,823
6,144
1,144
804
2,619

3.10%
1.19
.91
1.01
2.01

$ 4,966
3,374
681
634
848

Total *************************************************

$19,382

3.56%

$14,534

1.81%

$10,503

.91%
.71
.88
.69
.65

.81%

2.36%
.79
1.06
.95
1.13

1.59%

Maximum month-end balance

$ 4,559
14,931
4,419
430
1,563

$ 6,342
8,972
2,687
7,867
3,856

$ 6,658
4,173
952
4,223
2,676

80 U.S. BANCORP

Note 14

L O N G - T E R M D E B T

Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following:

(Dollars in Millions)

U.S. Bancorp (Parent Company)
Fixed-rate subordinated notes

2005

2004

7.625% due 2005 *************************************************************************************
6.75% due 2005 **************************************************************************************
6.875% due 2007 *************************************************************************************
7.30% due 2007 **************************************************************************************
7.50% due 2026 **************************************************************************************

Floating-rate convertible senior debentures

2.69% due 2035 **************************************************************************************
3.00% due 2035 **************************************************************************************
Medium-term notes ***************************************************************************************
Junior subordinated debentures*****************************************************************************
Capitalized lease obligations, mortgage indebtedness and other (a) **********************************************

—
—
220
74
200

2,500
2,000
2,725
3,152
(17)

Subtotal*******************************************************************************************

10,854

Subsidiaries
Fixed-rate subordinated notes

7.30% due 2005 **************************************************************************************
6.875% due 2006 *************************************************************************************
6.625% due 2006 *************************************************************************************
6.50% due 2008 **************************************************************************************
6.30% due 2008 **************************************************************************************
5.70% due 2008 **************************************************************************************
7.125% due 2009 *************************************************************************************
7.80% due 2010 **************************************************************************************
6.375% due 2011 *************************************************************************************
6.30% due 2014 **************************************************************************************
4.95% due 2014 **************************************************************************************
4.80% due 2015 **************************************************************************************
3.80% due 2015 **************************************************************************************

Floating-rate subordinated notes

4.42% due 2014 **************************************************************************************
Federal Home Loan Bank advances *************************************************************************
Bank notes **********************************************************************************************
Capitalized lease obligations, mortgage indebtedness and other (a) **********************************************

Subtotal*******************************************************************************************

—
23
26
300
300
400
500
—
1,500
963
1,000
500
370

550
4,041
15,400
342

26,215

120
186
220
171
200

—
—
3,225
2,629
148

6,899

100
70
100
300
300
400
500
300
1,500
963
650
500
—

350
3,629
17,624
554

27,840

Total **********************************************************************************************

$37,069

$34,739

(a) Other includes debt issuance fees and unrealized gains and losses and deferred fees relating to derivative instruments.

In August 2005, the Company issued ﬂoating-rate

convertible senior debentures of $2.5 billion, due
August 21, 2035. These debentures bear interest at a
ﬂoating-rate equal to three-month LIBOR, minus
1.68 percent, payable quarterly until August 21, 2026. After
that date, the Company will not pay interest on the
debentures prior to maturity. On the maturity date or
certain earlier redemption dates, the holder will receive the
original principal amount of $1,000 per debenture, plus
accrued interest. At December 31, 2005, the interest rate
was 2.69 percent. The debentures are callable anytime on or
after August 21, 2006, at a price equal to 100 percent of
the accreted principle amount plus accrued and unpaid
interest and putable August 21, 2006, 2007, 2010, and
every ﬁve years, thereafter, until maturity at a price equal to
100 percent of the accreted principle amount plus accrued

and unpaid interest. The debentures are convertible at any
time on or prior to the maturity date at an initial
conversion rate of 27.7316 shares for each $1,000
debenture. This results in a conversion price of
approximately $36.06 per share and represents a premium
of 20 percent over the closing sale price of $30.05 per share
on August 9, 2005. If converted, holders of the convertible
debentures will generally receive cash up to the accreted
principal amount of the debentures and, if the market price
of the Company’s common stock exceeds the conversion
price in effect on the conversion date, holders will also
receive a number of shares of the Company’s common
stock, or the equivalent amount in cash at the option of the
Company, per debenture as determined pursuant to a
speciﬁed formula.

U.S. BANCORP 81

In December 2005, the Company issued ﬂoating-rate

In October 2004, the Company’s subsidiary U.S. Bank

convertible senior debentures of $2.0 billion, due
December 11, 2035. These debentures bear interest at a
ﬂoating-rate equal to three-month LIBOR, minus
1.46 percent, payable quarterly until December 11, 2030.
After that date, the Company will not pay interest on the
debentures prior to maturity. On the maturity date or
certain earlier redemption dates, the holder will receive the
original principal amount of $1,000 per debenture plus
accrued interest. At December 31, 2005, the interest rate
was 3.00 percent. The debentures are callable anytime on or
after December 11, 2006, at a price equal to 100 percent of
the accreted principle amount plus accrued and unpaid
interest and putable December 11, 2006, March 11, 2007,
June 11, 2007, September 11, 2007, December 11, 2007,
2010, and every ﬁve years, thereafter, until maturity at a
price equal to 100 percent of the accreted principle amount
plus accrued and unpaid interest. The debentures are
convertible at any time on or prior to the maturity date at
an initial conversion rate of 27.1370 shares for each $1,000
debenture. This results in a conversion price of
approximately $36.85 per share and represents a premium
of 20 percent over the closing sale price of $30.71 per share
on December 5, 2005. If converted, holders of the
convertible debentures will generally receive cash up to the
accreted principal amount of the debentures and, if the
market price of the Company’s common stock exceeds the
conversion price in effect on the conversion date, holders
will also receive a number of shares of the Company’s
common stock, or the equivalent amount in cash at the
option of the Company, per debenture as determined
pursuant to a speciﬁed formula.

Medium-term notes (‘‘MTNs’’) outstanding at

December 31, 2005, mature from March 2006 through July
2010. The MTNs bear ﬁxed interest rates ranging from
2.63 percent to 5.10 percent. The weighted-average interest
rate of MTNs at December 31, 2005, was 3.82 percent.

In March 2005, the Company issued $275 million of

ﬁxed-rate junior subordinated debentures due March 9,
2035. The interest rate is 5.75 percent per annum. In
August 2005, the Company issued $300 million of ﬁxed-
rate junior subordinated debentures due August 15, 2035.
The interest rate is 5.875 percent per annum. In December
2005, the Company also issued $375 million of ﬁxed-rate
junior subordinated debentures due December 29, 2065.
The interest rate is 6.35 percent per annum.

National Association (‘‘USBNA’’) issued $650 million of
ﬁxed-rate subordinated notes due October 30, 2014. The
interest rate is 4.95 percent per annum. In January of 2005,
USBNA issued $200 million of ﬁxed-rate subordinated
notes due October 30, 2014. The interest rate is
4.95 percent per annum. In March 2005, USBNA issued
$150 million of ﬁxed-rate subordinated debentures due
October 30, 2014. The interest rate is 4.95 percent per
annum. In August 2005, USBNA issued $370 million of
ﬁxed-rate subordinated notes in foreign denomination due
August 9, 2015. The interest rate is 3.80 percent per
annum. The Company presents these foreign notes in
U.S. dollars on the balance sheet.

In October 2004, USBNA issued ﬂoating-rate

subordinated notes of $350 million, due October 14, 2014.
These notes bear ﬂoating-rate interest of three-month
LIBOR plus .28 percent. The interest rate at December 31,
2005, was 4.42 percent. In January 2005, USBNA issued
ﬂoating-rate subordinated notes of $200 million, due
October 14, 2014. These notes bear ﬂoating-rate interest of
three-month LIBOR plus .28 percent. The interest rate at
December 31, 2005, was 4.42 percent.

Federal Home Loan Bank (‘‘FHLB’’) advances
outstanding at December 31, 2005, mature from August
2006 through September 2035. The advances bear ﬁxed or
ﬂoating interest rates ranging from .50 percent to
8.25 percent. The Company has an arrangement with the
FHLB whereby based on collateral available (residential and
commercial mortgages), the Company could have borrowed
an additional $23.0 billion at December 31, 2005. The
weighted-average interest rate of FHLB advances at
December 31, 2005, was 4.47 percent.

Bank notes outstanding at December 31, 2005, mature
from February 2006 through March 2009. The bank notes
bear ﬁxed or ﬂoating interest rates ranging from
2.40 percent to 4.55 percent. The weighted-average interest
rate of bank notes at December 31, 2005, was 4.09 percent.
During 2005, the Company prepaid long-term debt,

including subordinated notes and junior subordinated
debentures, of $.7 billion in connection with asset/liability
management decisions, incurring $54 million in prepayment
charges.

82 U.S. BANCORP

Maturities of long-term debt outstanding at December 31, 2005, were:

(Dollars in Millions)

2006 **********************************************************************************************************
2007 **********************************************************************************************************
2008 **********************************************************************************************************
2009 **********************************************************************************************************
2010 **********************************************************************************************************
Thereafter ******************************************************************************************************

Parent
Company

626
1,378
504
5
496
7,845

Total ***********************************************************************************************************

$10,854

Consolidated

$ 7,690
8,226
4,648
997
2,502
13,006

$37,069

Note 15

J U N I O R S U B O R D I N AT E D D E B E N T U R E S

The Company sponsors and wholly owns 100% of the
common equity of eleven trusts that were formed for the
purpose of issuing Company-obligated mandatorily
redeemable preferred securities (‘‘Trust Preferred Securities’’)
to third-party investors and investing the proceeds from the
sale of the Trust Preferred Securities solely in junior
subordinated debt securities of the Company (the
‘‘Debentures’’). The Debentures held by the trusts, which
total $3.2 billion, are the sole assets of each trust. The
Company’s obligations under the Debentures and related
documents, taken together, constitute a full and
unconditional guarantee by the Company of the obligations
of the Trusts. The guarantee covers the distributions and
payments on liquidation or redemption of the Trust
Preferred Securities, but only to the extent of funds held by
the Trusts. The Company used the proceeds from the sales
of the Debentures for general corporate purposes.

The Company has the right to redeem retail Debentures

in whole or in part, on or after speciﬁc dates, at a
redemption price speciﬁed in the indentures plus any
accrued but unpaid interest to the redemption date. The
Company has the right to redeem institutional Debentures
in whole, (but not in part), on or after speciﬁc dates, at a
redemption price speciﬁed in the indentures plus any
accrued but unpaid interest to the redemption date. The

Debentures are redeemable in 2006, 2007 and 2010 in the
amounts of $1.9 billion, $310 million and $979 million,
respectively.

In March 2004, as a result of adopting the provisions

of Interpretation No. 46 (revised December 2003),
‘‘Consolidation of Variable Interest Entities’’, an
interpretation of Accounting Research Bulletin No. 51,
‘‘Consolidated Financial Statements’’, the Company was
required to de-consolidate these subsidiary trusts from its
ﬁnancial statements. The de-consolidation of the net assets
and results of operations of the trusts had an insigniﬁcant
impact on the Company’s ﬁnancial statements and liquidity
position since the Company continues to be obligated to
repay the Debentures held by the trusts and guarantees
repayment of the Trust Preferred Securities issued by the
trusts. The consolidated debt obligation related to the trusts
increased $79 million upon de-consolidation with the
increase representing the Company’s common equity
ownership in the trusts. The Trust Preferred Securities held
by the trusts qualify as Tier 1 capital for the Company
under the Federal Reserve Board guidelines. The banking
regulatory agencies have issued guidance that would
continue the current regulatory capital treatment for
Trust Preferred Securities.

U.S. BANCORP 83

The following table is a summary of the Debentures included in long-term debt as of December 31, 2005:

Issuance Trust (Dollars in Millions)

Issuance Date

Retail

USB Capital VIII ******************* December 2005
USB Capital VII *******************
August 2005
USB Capital VI ********************
March 2005
USB Capital V ******************** December 2001
USB Capital IV ******************** November 2001
USB Capital III ********************
May 2001

Institutional

Star Capital I**********************
June 1997
Mercantile Capital Trust I ***********
February 1997
U.S. Bancorp Capital I ************* December 1996
Firstar Capital Trust I *************** December 1996
FBS Capital I ********************* November 1996

Trust
Preferred
Securities
Amount

$ 375
300
275
300
500
700

150
150
80
150
77

Debentures
Amount

Rate
Type (a)

Rate

Maturity Date

Earliest
Redemption Date

$ 387
309
283
309
515
722

Fixed
Fixed
Fixed
Fixed
Fixed
Fixed

155
155
82
155
80

Variable
Variable
Fixed
Fixed
Fixed

6.35
5.88
5.75
7.25
7.35
7.75

5.26
5.10
8.27
8.32
8.09

August 2035
March 2035

December 2065 December 29, 2010
August 15, 2010
March 9, 2010
December 2031 December 7, 2006
November 2031 November 1, 2006
May 4, 2006

May 2031

June 2027
February 2027

June 15, 2007
February 1, 2007
December 2026 December 15, 2006
December 2026 December 15, 2006
November 2026 November 15, 2006

Total**************************

$3,057

$3,152

(a) The variable-rate Trust Preferred Securities and Debentures reprice quarterly based on three-month LIBOR.

Note 16

S H A R E H O L D E R S ’ E Q U I T Y

At December 31, 2005 and 2004, the Company had
authority to issue 4 billion shares of common stock and
50 million shares of preferred stock. The Company had
1,815 million and 1,858 million shares of common stock
outstanding at December 31, 2005 and 2004, respectively.
At December 31, 2005, the Company had 151 million
shares of common stock reserved for future issuances,
primarily under stock option plans.

The Company has a preferred share purchase rights

plan intended to preserve the long-term value of the
Company by discouraging a hostile takeover of the
Company. Under the plan, each share of common stock
carries a right to purchase one one-thousandth of a share of
preferred stock. The rights become exercisable in certain
limited circumstances involving a potential business
combination transaction or an acquisition of shares of the
Company and are exercisable at a price of $100 per right,
subject to adjustment. Following certain other events, each
right entitles its holder to purchase for $100 an amount of
common stock of the Company, or, in certain
circumstances, securities of the acquirer, having a
then-current market value of twice the exercise price of the
right. The dilutive effect of the rights on the acquiring
company is intended to encourage it to negotiate with the
Company’s Board of Directors prior to attempting a
takeover. If the Board of Directors believes a proposed

acquisition is in the best interests of the Company and its
shareholders, the Board may amend the plan or redeem the
rights for a nominal amount in order to permit the
acquisition to be completed without interference from the
plan. Until a right is exercised, the holder of a right has no
rights as a shareholder of the Company. The rights expire
on February 27, 2011.

On December 18, 2001, the Board of Directors

approved an authorization to repurchase 100 million shares
of common stock through 2003. In 2003, the Company
repurchased 7 million shares of common stock under the
plan, which expired in December of 2003. On
December 16, 2003, the Board of Directors approved an
authorization to repurchase 150 million shares of
outstanding common stock during the following 24 months.
During 2003, the Company repurchased 8 million shares
under the December 2003 plan. In 2004, the Company
repurchased 89 million shares of common stock under the
plan. On December 21, 2004, the Board of Directors
approved an authorization to repurchase 150 million shares
of outstanding common stock during the following
24 months. This new repurchase program replaces the
Company’s December 16, 2003, program. In 2004, the
Company repurchased 5 million shares of common stock
under the plan. During 2005, all share repurchases were
made under the 2004 plan.

The following table summarizes the Company’s common stock repurchased in each of the last three years:

(Dollars and Shares in Millions)

2005 ******************************************************************************************************
2004 ******************************************************************************************************
2003 ******************************************************************************************************

62
94
15

Value

$1,807
2,656
417

84 U.S. BANCORP

Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to

Accumulated Other Comprehensive Income. The reconciliation of the transactions affecting Accumulated Other
Comprehensive Income included in shareholders’ equity for the years ended December 31, is as follows:

(Dollars in Millions)

2005
Unrealized loss on securities available-for-sale ***********************************
Unrealized loss on derivatives *************************************************
Foreign currency translation adjustment ****************************************
Realized loss on derivatives***************************************************
Reclassiﬁcation adjustment for losses realized in net income **********************
Minimum pension liability adjustment *******************************************

Pre-tax

$ (539)
(58)
3
(74)
39
(38)

Total *******************************************************************

$ (667)

2004
Unrealized loss on securities available-for-sale ***********************************
Unrealized loss on derivatives *************************************************
Foreign currency translation adjustment ****************************************
Realized gain on derivatives **************************************************
Reclassiﬁcation adjustment for losses realized in net income **********************

$ (123)
(43)
(17)
16
32

Total *******************************************************************

$ (135)

2003
Unrealized loss on securities available-for-sale ***********************************
Unrealized loss on derivatives *************************************************
Foreign currency translation adjustment ****************************************
Realized gain on derivatives **************************************************
Reclassiﬁcation adjustment for gains realized in net income ***********************

$ (716)
(373)
23
199
(288)

Total *******************************************************************

$(1,155)

Transactions

Tax-effect

Net-of-tax

Balances
Net-of-Tax

$205
22
(1)
28
(15)
15

$254

$ 47
16
6
(6)
(12)

$ 51

$272
142
(9)
(76)
110

$439

$(334)
(36)
2
(46)
24
(23)

$(413)

$ (76)
(27)
(11)
10
20

$ (84)

$(444)
(231)
14
123
(178)

$(716)

$(402)
(27)
7
16
—
(23)

$(429)

$(135)
9
5
105
—

$ (16)

$(123)
35
16
140
—

$ 68

Regulatory Capital The measures used to assess capital
include the capital ratios established by bank regulatory
agencies, including the speciﬁc ratios for the ‘‘well
capitalized’’ designation. For a description of the regulatory
capital requirements and the actual ratios as of

December 31, 2005 and 2004, for the Company and its
bank subsidiaries, see Table 21 included in Management’s
Discussion and Analysis, which is incorporated by reference
into these Notes to Consolidated Financial Statements.

Note 17

E A R N I N G S P E R S H A R E

The components of earnings per share were:

(Dollars and Shares in Millions, Except Per Share Data)

2005

2004

2003

Income from continuing operations **************************************************************
Income from discontinued operations (after-tax) ***************************************************

$4,489
—

Net income ****************************************************************************

$4,489

Average common shares outstanding ************************************************************
Net effect of the assumed purchase of stock based on the treasury stock method for options and

1,831

stock plans *******************************************************************************

Average diluted common shares outstanding******************************************************

1,857

Earnings per share

Income from continuing operations ***********************************************************
Discontinued operations ********************************************************************

$ 2.45
—

Net income *************************************************************************

$ 2.45

Diluted earnings per share

Income from continuing operations ***********************************************************
Discontinued operations ********************************************************************

$ 2.42
—

Net income *************************************************************************

$ 2.42

$4,167
—

$4,167

1,887

1,913

$ 2.21
—

$ 2.21

$ 2.18
—

$ 2.18

$3,710
23

$3,733

1,924

1,936

$ 1.93
.01

$ 1.94

$ 1.92
.01

$ 1.93

U.S. BANCORP 85

For the years ended December 31, 2005, 2004 and 2003,
options to purchase 16 million, 36 million and 79 million
shares, respectively, were outstanding but not included in
the computation of diluted earnings per share because they
were antidilutive. For the year ended December 31, 2005,

outstanding convertible notes that could potentially be
converted into shares of the Company’s common stock
pursuant to a speciﬁed formula, were not included in the
computation of diluted earnings per share because they
were antidilutive.

Note 18

E M P L O Y E E B E N E F I T S

Employee Investment Plan The Company has a deﬁned
contribution retirement savings plan which allows qualiﬁed
employees to make contributions up to 50 percent of their
annual compensation, subject to Internal Revenue Service
limits, through salary deductions under Section 401(k) of
the Internal Revenue Code. Employee contributions are
invested, at the employees’ direction, among a variety of
investment alternatives. Employee contributions are
100 percent matched by the Company, up to four percent
of an employee’s eligible annual compensation. The
Company’s matching contribution vests immediately;
however, a participant must be employed in an eligible
position on the last business day of the year to receive that
year’s matching contribution. Although the matching
contribution is initially invested in the Company’s common
stock, an employee can reinvest the matching contributions
among various investment alternatives. Total expense was
$53 million, $49 million and $49 million in 2005, 2004
and 2003, respectively.

Pension Plans Pension beneﬁts are provided to substantially
all employees based on years of service and employees’
compensation while employed with the Company.
Employees are fully vested after ﬁve years of service. Prior
to their acquisition dates, employees of certain acquired
companies were covered by separate, noncontributory
pension plans that provided beneﬁts based on years of
service and compensation. Generally, the Company merges
plans of acquired companies into its existing pension plans
when it becomes practicable.

Under the current plan’s beneﬁt structure, a
participant’s future retirement beneﬁts are based on a
participant’s highest ﬁve-year average annual compensation
during his or her last 10 years before retirement or
termination from the Company. Prior to the merger with
Firstar Corporation, two of the previous companies had
cash balance pension beneﬁt structures under which the
participants earned retirement beneﬁts based on their
average compensation over their entire career, while the
former Firstar Corporation retirement beneﬁt structure was
based on ﬁnal average pay and years of service, similar to
the current plan. Plan assets primarily consist of various
equities, equity mutual funds and other miscellaneous
assets.

86 U.S. BANCORP

In general, the Company’s pension plan objectives
include maintaining a funded status sufﬁcient to meet
participant beneﬁt obligations over time while reducing
long-term funding requirements and pension costs. The
Company has an established process for evaluating all the
plans, their performance and signiﬁcant plan assumptions,
including the assumed discount rate and the long-term rate
of return (LTROR). At least annually, an independent
consultant is engaged to assist U.S. Bancorp’s Compensation
Committee (‘‘the Committee’’) in evaluating plan objectives,
funding policies and plan investment policies considering its
long-term investment time horizon and asset allocation
strategies. The process also evaluates signiﬁcant plan
assumptions. Although plan assumptions are established
annually, the Company may update its analysis on an
interim basis in order to be responsive to signiﬁcant events
that occur during the year, such as plan mergers and
amendments.

In addition to the funded qualiﬁed retirement plan, the

Company maintains a non-qualiﬁed plan that is unfunded
and the aggregate accumulated beneﬁt obligation exceeds
the assets. The assumptions used in computing the present
value of the accumulated beneﬁt obligation, the projected
beneﬁt obligation and net pension expense are substantially
consistent with those assumptions used for the funded
qualiﬁed plan. The Company recognized a settlement loss of
$4 million on this plan in 2003, related to the level of
payouts made from the plan.

Funding Practices The Company’s funding policy is to
contribute amounts to its plans sufﬁcient to meet the
minimum funding requirements of the Employee Retirement
Income Security Act of 1974, plus such additional amounts
as the Company determines to be appropriate. No
contributions were made in 2004 or 2005. In 2006, the
Company anticipates no minimum funding requirement and
therefore does not expect to make any contributions to the
plan. Contributions made to the plan were invested in
accordance with established investment policies and asset
allocation strategies.

Investment Policies and Asset Allocation In establishing its
investment policies and asset allocation strategies, the
Company considers expected returns and the volatility
associated with different strategies. An independent
consultant performs modeling that projects numerous

outcomes using a broad range of possible scenarios,
including a mix of possible rates of inﬂation and economic
growth. Some of the scenarios included are: low inﬂation
and high growth (ideal growth), low inﬂation and low
growth (recession), high inﬂation and low growth
(stagﬂation) and high inﬂation and high growth
(inﬂationary growth). Starting with current economic
information, the model bases its projections on past
relationships between inﬂation, ﬁxed income rates and
equity returns when these types of economic conditions
have existed over the previous 30 years, both in the U.S.
and in foreign countries.

Generally, based on historical performance of the
various investment asset classes, investments in equities have

outperformed other investment classes but are subject to
higher volatility. While an asset allocation including bonds
and other assets generally has lower volatility and may
provide protection in a declining interest rate environment,
it limits the pension plan’s long-term up-side potential.
Given the pension plan’s investment horizon and the
ﬁnancial viability of the Company to meet its funding
objectives, the Committee has determined that an asset
allocation strategy investing in 100 percent equities
diversiﬁed among various domestic equity categories and
international equities is appropriate.

The following unaudited table provides a summary of asset allocations adopted by the Company compared with a typical
asset allocation alternative:

Asset Class

Typical
Asset Mix

Asset Allocation

December 2005

December 2004

2005
Expected Returns

Actual

Target

Actual

Target (a)

Compound

Average

Standard
Deviation

Domestic equities

Large Cap *********************
Mid Cap **********************
Small Cap *********************

International equities **********

Fixed income *******************

Other ***************************

Total mix or weighted rates****

LTROR assumed ***************
Standard deviation**************
Sharpe ratio (c)*****************

30%
15
15

—

100%

7.6%
13.5%
.405

56%
16
5

—

55%
19
6

—

53%
16
7

—

100%

8.9% (b)

17.8%
.379

55%
19
6

—

100%

8.9%
18.0%
.386

8.0%
8.2
8.4

8.2

9.5%

10.2
10.9

10.3

18.0%
21.1
24.0

21.9

8.3

9.8

17.8

(a) The target asset allocation was modiﬁed in December 2003, effective January 1, 2004, to reduce the potential volatility of the portfolio without signiﬁcantly reducing the expected returns.

The change in the allocation was completed by the second quarter of 2004 and the year end variations from the target allocation were a result of that change.

(b) The LTROR assumed for the target asset allocation strategy of 8.9 percent is based on a range of estimates evaluated by the Company including the compound expected return of

8.3 percent and the average expected return of 9.8 percent.

(c) The Sharpe ratio is a direct measure of reward-to-risk. The Sharpe ratio for these asset allocation strategies is considered to be within acceptable parameters.

In accordance with its existing practices, the independent

pension consultant utilized by the Company updated the
analysis of expected rates of return and evaluated peer group
data, market conditions and other factors relevant to
determining the LTROR assumptions for pension costs for
2004 and 2005. The analysis performed indicated that the
LTROR assumption of 8.9 percent, used in both 2004 and
2005, continued to be in line with expected returns based on
current economic conditions and the Company expects to
continue using this LTROR in 2006. The LTROR was first
reduced to the current LTROR of 8.9 percent in 2003 to
reflect the long range impact of the poor market performance
of equities in 2001 and 2002. Regardless of the extent of the
Company’s analysis of alternative asset allocation strategies,
economic scenarios and possible outcomes, plan assumptions
developed for the LTROR are subject to imprecision and
changes in economic factors. As a result of the modeling

imprecision and uncertainty, the Company considers a range
of potential expected rates of return, economic conditions for
several scenarios, historical performance relative to assumed
rates of return and asset allocation and LTROR information
for a peer group in establishing its assumptions.

Post-Retirement Medical Plans In addition to providing
pension beneﬁts, the Company provides health care and
death beneﬁts to certain retired employees through one
retiree medical program. Generally, all active employees
may become eligible for retiree health care beneﬁts by
meeting deﬁned age and service requirements. The Company
may also subsidize the cost of coverage for employees
meeting certain age and service requirements. The medical
plan contains other cost-sharing features such as deductibles
and coinsurance. The estimated cost of these retiree beneﬁt
payments is accrued during the employees’ active service.

U.S. BANCORP 87

In December 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) was
enacted. The Act established a prescription drug benefit
under Medicare, known as ‘‘Medicare Part D’’, and a federal
subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to
Medicare Part D. The Company recognized the estimated
expected benefit prospectively from July 1, 2004. The
expected subsidy reduced the accumulated postretirement
benefit obligation (APBO) at September 30, 2004, by

$40 million, and net periodic cost for 2004 by $2 million.
Based on final regulations issued during 2005, the expected
benefit impact of the Medicare subsidy increased and the
accumulated postretirement benefit obligation was reduced by
an additional $10 million as of September 30, 2005. The net
periodic cost for 2005 was reduced by $5 million. The
Company does not expect a significant reduction in future
participation in the postretirement medical plan as a result of
the Act.

The Company uses a measurement date of September 30 for its retirement plans. The following table summarizes beneﬁt
obligation and plan asset activity for the retirement plans:

(Dollars in Millions)

Projected beneﬁt obligation

Pension Plans

Post-Retirement
Medical Plans

2005

2004

2005

2004

Beneﬁt obligation at beginning of measurement period ************************
Service cost *************************************************************
Interest cost *************************************************************
Plan participants’ contributions *********************************************
Actuarial (gain) loss *******************************************************
Beneﬁt payments*********************************************************
Curtailments *************************************************************
Settlements**************************************************************
Amendments ************************************************************

$1,951
63
112
—
145
(88)
—
(36)
—

Beneﬁt obligation at end of measurement period (a)(b) *************************

$2,147

Fair value of plan assets

Fair value at beginning of measurement period *******************************
Actual return on plan assets ***********************************************
Employer contributions ****************************************************
Plan participants’ contributions *********************************************
Settlements**************************************************************
Beneﬁt payments*********************************************************

$2,127
398
18
—
(36)
(88)

Fair value at end of measurement period ************************************

$2,419

Funded status

Funded status at end of measurement period ********************************
Unrecognized transition (asset) obligation ************************************
Unrecognized prior service cost ********************************************
Unrecognized net (gain) loss ***********************************************
Fourth quarter contribution ************************************************

$ 272
—
(39)
724
11

Net amount recognized ***************************************************

$ 968

Components of statement of ﬁnancial position

Prepaid beneﬁt cost ******************************************************
Accrued beneﬁt liability ****************************************************
Additional minimum liability ************************************************
Intangible asset **********************************************************
Accumulated other comprehensive income***********************************

$1,146
(178)
(47)
9
38

Net amount recognized ***************************************************

$ 968

$1,801
59
109
—
150
(86)
—
(82)
—

$1,951

$1,976
298
21
—
(82)
(86)

$2,127

$ 176
—
(45)
841
4

$ 976

$1,155
(179)
—
—
—

$ 976

$ 281
5
16
17
(38)
(36)
—
—
—

$ 245

$ 39
1
18
17
—
(36)

$ 39

$(206)
5
(5)
—
155

$ (51)

$ —
(51)
—
—
—

$ (51)

$ 320
4
18
16
(40)
(37)
—
—
—

$ 281

$ 39
—
21
16
—
(37)

$ 39

$(242)
6
(6)
38
4

$(200)

$ —
(200)
—
—
—

$(200)

(a) At December 31, 2005 and 2004, the accumulated beneﬁt obligation for all qualiﬁed pension plans was $1.8 billion and $1.7 billion, respectively.
(b) U.S. Bancorp retained the qualiﬁed pension plan obligation for the inactive participants, relating to employees of the Piper Jaffray Companies. Therefore, all liabilities and plan assets related

to inactive participants in the qualiﬁed pension plan associated with the Piper Jaffray Companies are included in the pension plans beneﬁt obligation.

88 U.S. BANCORP

The following table sets forth the components of net periodic beneﬁt cost (income) for the retirement plans:

(Dollars in Millions)

2005

2004

2003

2005

2004

2003

Pension Plans

Post-Retirement Medical Plans

Components of net periodic beneﬁt cost (income)

Service cost *************************************************
Interest cost *************************************************
Expected return on plan assets ********************************
Net amortization and deferral **********************************
Recognized actuarial (gain) loss ********************************

Net periodic beneﬁt cost (income) *********************************
Curtailment and settlement (gain) loss ***************************

$ 63
112
(194)
(6)
58

33
—

$ 59
109
(203)
(6)
50

9
—

$ 56
108
(184)
(7)
(1)

(28)
4

$ 5
16
(1)
—
—

20
—

$ 4
18
(1)
—
2

23
—

$ 3
19
(1)
—
—

21
—

Net periodic beneﬁt cost (income) after curtailment and settlement (gain)

loss, and cost of special or contractual termination
beneﬁts recognized *******************************************

$ 33

$ (24)

$20

$23

$21

The following table sets forth the weighted-average plan assumptions and other data:

(Dollars in Millions)

Pension plan actuarial computations

2005

2004

2003

Expected long-term return on plan assets *******************************************************
Discount rate in determining beneﬁt obligations (a) ************************************************
Rate of increase in future compensation *********************************************************

Post-retirement medical plan actuarial computations

Expected long-term return on plan assets *******************************************************
Discount rate in determining beneﬁt obligations***************************************************
Health care cost trend rate (b)

8.9%
5.7
3.5

3.5%
5.7

Prior to age 65 ***************************************************************************
After age 65******************************************************************************

9.0%

11.0

Effect of one percent increase in health care cost trend rate

Service and interest costs *********************************************************************
Accumulated post-retirement beneﬁt obligation ***************************************************

Effect of one percent decrease in health care cost trend rate

Service and interest costs *********************************************************************
Accumulated post-retirement beneﬁt obligation ***************************************************

$ 1
18

$ (1)
(16)

8.9%
6.0
3.5

3.5%
6.0

10.0%
12.0

1
21

(1)
(19)

8.9%
6.2
3.5

3.5%
6.2

11.0%
13.0

1
23

(1)
(20)

(a) The discount rate at the measurement date approximated the Moody’s Aa corporate bond rating for projected beneﬁt distributions with a duration of 12.7 and 11.9 years for 2005 and

2004, respectively.

(b) The pre-65 and post-65 rates are assumed to decrease gradually to 5.5% and 6.0% respectively by 2011 and remain at these levels thereafter.

The following table provides information for pension plans with beneﬁt obligations in excess of plan assets:

(Dollars in Millions)

Beneﬁt obligation ***********************************************************************************************
Accumulated beneﬁt obligation ***********************************************************************************
Fair value of plan assets *****************************************************************************************

2005

$236
225
—

2004

$234
223
—

The following beneﬁt payments (net of participant contributions) are expected to be paid from the U.S. Bancorp Pension and
Postretirement Medical Plans:

(Dollars in Millions)

Estimated Future Beneﬁt Payments

Pension
Plans

Post-Retirement
Medical Plans

2006*****************************************************************************************************
2007*****************************************************************************************************
2008*****************************************************************************************************
2009*****************************************************************************************************
2010*****************************************************************************************************
2011 — 2015 *********************************************************************************************

$137
124
122
123
127
690

$ 20
21
21
21
21
104

U.S. BANCORP 89

Note 19

S T O C K - B A S E D C O M P E N S AT I O N

As part of its employee and director compensation
programs, the Company may grant certain stock awards
under the provisions of the existing stock compensation
plans, including plans assumed in acquisitions. The plans
provide for grants of options to purchase shares of common
stock at a ﬁxed price generally equal to the fair value of the
underlying stock at the date of grant. Option grants are
generally exercisable up to ten years from the date of grant.
In addition, the plans provide for grants of shares of
common stock or stock units that are subject to restriction
on transfer. Most stock awards vest over three to ﬁve years
and are subject to forfeiture if certain vesting requirements
are not met.

Stock incentive plans of acquired companies are
generally terminated at the merger closing dates. Option
holders under such plans receive the Company’s common
stock, or options to buy the Company’s stock, based on the
conversion terms of the various merger agreements. The
historical stock award information presented below has
been restated to reﬂect the options originally granted under
acquired companies’ plans.

At December 31, 2005, there were 25 million shares
(subject to adjustment for forfeitures) available for grant
under various plans.

The following is a summary of stock options outstanding and exercised under various stock options plans of the Company:

2005

2004

2003

Options/Shares

Stock Weighted-Average
Exercise Price

Options/Shares

Stock Weighted-Average
Exercise Price

Options/Shares

Stock Weighted-Average
Exercise Price

Year Ended December 31

Stock option plans
Number outstanding at beginning of

year ****************************
Granted****************************
Assumed/converted (a)***************
Exercised **************************
Cancelled (b) ***********************

134,727,285
12,489,062
—
(17,719,565)
(3,513,321)

Number outstanding at end of

year ****************************
Exercisable at end of year ************

125,983,461
100,110,188

Weighted-average fair value of shares

granted *************************

Restricted share plans
Number outstanding at beginning of

year ****************************
Granted****************************
Cancelled/vested ********************

2,265,625
1,024,622
(646,076)

Number outstanding at end of

year ****************************

2,644,171

Weighted-average fair value of shares

granted *************************

$22.77
23.00
—
18.27
25.13

$22.93
$23.60

$ 6.82

$23.41
30.14
—
20.96
25.07

$24.38
$23.64

$ 6.65

165,522,354
8,741,521
—
(27,319,242)
(12,217,348)

134,727,285
101,027,155

1,304,106
1,338,054
(376,535)

2,265,625

$22.93
28.46
—
21.59
24.56

$23.41
$23.51

$ 8.75

206,252,590
1,872,653
1,116,884
(22,484,069)
(21,235,704)

165,522,354
116,427,321

2,280,057
58,481
(1,034,432)

1,304,106

$30.03

$28.42

$24.43

(a) In connection with the December 31, 2003, tax-free distribution of Piper Jaffray Companies, stock options were adjusted in accordance with provisions of the contracts based on an

exchange ratio of 1.0068 representing the relative stock price adjustment at the time of distribution.

(b) Options cancelled includes both non-vested (i.e., forfeitures) and vested shares.

90 U.S. BANCORP

Additional information regarding stock options outstanding as of December 31, 2005, is as follows:

Range of Exercise Prices

$5.05 — $10.00 *****************************************
$10.01 — $15.00 ****************************************
$15.01 — $20.00 ****************************************
$20.01 — $25.00 ****************************************
$25.01 — $30.00 ****************************************
$30.01 — $35.00 ****************************************
$35.01 — $36.95 ****************************************

91,470
2,107,124
20,476,728
52,679,575
35,825,425
14,515,311
287,828

125,983,461

Options Outstanding

Exercisable Options

Weighted-
Average
Remaining
Contractual
Life (Years)

.7
1.7
5.1
5.1
4.3
7.0
1.4

5.0

Weighted-
Average
Exercise
Price

$ 7.31
11.37
18.80
22.37
28.58
30.91
35.90

91,470
2,107,124
20,295,870
45,685,591
27,713,694
3,928,611
287,828

$24.38

100,110,188

Weighted-
Average
Exercise
Price

$ 7.31
11.37
18.80
22.48
28.68
32.72
35.90

$23.64

Stock-based compensation was $132 million in 2005,

compared with $176 million and $158 million in 2004 and
2003, respectively. At the time employee stock options
expire, are exercised or cancelled, the Company determines
the tax beneﬁt associated with the stock award and under

certain circumstances may be required to recognize an
adjustment to tax expense. On an after-tax basis, stock-
based compensation was $83 million in 2005, compared
with $139 million and $123 million in 2004 and 2003,
respectively.

The following table provides a summary of the valuation assumptions utilized by the Company to determine the estimated
value of stock option grants:

Weighted-average assumptions in stock option valuation

2005

2004

2003

Risk-free interest rates ****************************************************************************************
Dividend yields***********************************************************************************************
Stock volatility factor******************************************************************************************
Expected life of options (in years) *******************************************************************************

3.6%
3.5%
.29
5.4

3.5%
3.5%
.40
5.9

2.8%
3.0%
.40
5.3

Stock-based compensation expense is based on the fair

value of the award at the date of grant or modiﬁcation. The
fair value of options was estimated using the Black-Scholes
option-pricing model requiring the use of subjective
valuation assumptions. Because employee stock options

have characteristics that differ from those of traded options,
including vesting provisions and trading limitations that
impact their liquidity, the determined value used to measure
compensation expense may vary from their actual fair
value.

U.S. BANCORP 91

Note 20

I N C O M E TA X E S

The components of income tax expense were:

(Dollars in Millions)

2005

2004

2003

Federal
Current ********************************************************************************
Deferred *******************************************************************************

$2,107
(281)

Federal income tax ******************************************************************

1,826

State
Current ********************************************************************************
Deferred *******************************************************************************

State income tax ********************************************************************

276
(20)

256

$1,531
260

1,791

197
21

218

$1,529
223

1,752

139
50

189

Total income tax provision ************************************************************

$2,082

$2,009

$1,941

A reconciliation of expected income tax expense at the federal statutory rate of 35 percent to the Company’s applicable
income tax expense follows:

(Dollars in Millions)

Tax at statutory rate (35 percent)**********************************************************
State income tax, at statutory rates, net of federal tax beneﬁt *********************************
Tax effect of

Tax credits**************************************************************************
Resolution of federal and state income tax examinations **********************************
Tax-exempt income from life insurance *************************************************
Tax-exempt interest, net **************************************************************
Other items *************************************************************************

2005

$2,300
166

(221)
(94)
(48)
(22)
1

2004

$2,162
142

(146)
(106)
(37)
(22)
16

2003

$1,978
123

(110)
—
(37)
(22)
9

Applicable income taxes *****************************************************************

$2,082

$2,009

$1,941

The tax effects of fair value adjustments on securities
available-for-sale, derivative instruments in cash ﬂow hedges
and certain tax beneﬁts related to stock options are
recorded directly to shareholders’ equity as part of other
comprehensive income.

In preparing its tax returns, the Company is required to

interpret complex tax laws and regulations and utilize
income and cost allocation methods to determine its taxable
income. On an ongoing basis, the Company is subject to
examinations by federal and state taxing authorities that
may give rise to differing interpretations of these complex
laws, regulations and methods. Due to the nature of the
examination process, it generally takes years before these
examinations are completed and matters are resolved.
Included in 2005 was a $94 million reduction in income tax
expense related to the resolution of federal income tax
examinations covering substantially all of the Company’s
legal entities for the years 2000 through 2002. In addition,

included in 2004 was a reduction in income tax expense of
$90 million related to the resolution of federal income tax
examinations covering substantially all of the Company’s
legal entities for the years 1995 through 1999 and
$16 million related to the resolution of a state tax
examination for tax years through 2000. The resolution of
these cycles was the result of negotiations held between the
Company and representatives of various taxing authorities
throughout the examinations. The resolution of these
matters and the taxing authorities’ acceptance of submitted
claims and tax return adjustments resulted in the reduction
of estimated income tax liabilities.

Deferred income tax assets and liabilities reﬂect the tax
effect of temporary difference between the carrying amounts
of assets and liabilities for ﬁnancial reporting purposes and
the amounts used for the same items for income tax
reporting purposes.

92 U.S. BANCORP

The signiﬁcant components of the Company’s net deferred tax liability as of December 31 were:

(Dollars in Millions)

2005

2004

Deferred tax assets
Allowance for credit losses**********************************************************************************
Stock compensation ***************************************************************************************
Securities available-for-sale and ﬁnancial instruments ***********************************************************
Intangible asset basis **************************************************************************************
Federal AMT credits and capital losses ***********************************************************************
Accrued expenses *****************************************************************************************
Accrued severance, pension and retirement beneﬁts ***********************************************************
Federal and state net operating loss carryforwards *************************************************************
Other deferred tax assets, net *******************************************************************************

$ 907
325
254
134
91
71
19
9
90

Gross deferred tax assets *******************************************************************************

1,900

Deferred tax liabilities
Leasing activities ******************************************************************************************
Pension and postretirement beneﬁts**************************************************************************
Mortgage servicing rights ***********************************************************************************
Loans****************************************************************************************************
Other investment basis differences ***************************************************************************
Deferred fees *********************************************************************************************
Accelerated depreciation ***********************************************************************************
Other deferred tax liabilities, net *****************************************************************************

Gross deferred tax liabilities ******************************************************************************
Valuation allowance ****************************************************************************************

(2,560)
(267)
(113)
(96)
(88)
(85)
(51)
(254)

(3,514)
(1)

$ 925
303
13
146
59
149
16
9
85

1,705

(2,771)
(272)
(94)
(59)
(80)
(78)
(56)
(193)

(3,603)
(1)

Net deferred tax liability *******************************************************************************

$(1,615)

$(1,899)

The Company has established a valuation allowance to
offset deferred tax assets related to state net operating loss
carryforwards which are expected to expire unused. The
Company has approximately $138 million of net operating
loss carryforwards which expire at various times through
2023.

Certain events covered by Internal Revenue Code
section 593(e), which was not repealed, will trigger a
recapture of base year reserves of acquired thrift
institutions. The base year reserves of acquired thrift

Note 21

D E R I VAT I V E I N S T R U M E N T S

In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate,
prepayment and foreign currency risks and to accommodate
the business requirements of its customers. The Company
does not enter into derivative transactions for speculative
purposes. Refer to Note 1 ‘‘Signiﬁcant Accounting Policies’’
in the Notes to Consolidated Financial Statements for a
discussion of the Company’s accounting policies for
derivative instruments. For information related to derivative
positions held for asset and liability management purposes
and customer-related derivative positions, see Table 18
‘‘Derivative Positions,’’ included in Management’s
Discussion and Analysis, which is incorporated by reference
in these Notes to Consolidated Financial Statements.

institutions would be recaptured if an entity ceases to
qualify as a bank for federal income tax purposes. The base
year reserves of thrift institutions also remain subject to
income tax penalty provisions that, in general, require
recapture upon certain stock redemptions of, and excess
distributions to, stockholders. At December 31, 2005,
retained earnings included approximately $102 million of
base year reserves for which no deferred federal income tax
liability has been recognized.

A S S E T A N D L I A B I L I T Y M A N A G E M E N T
P O S I T I O N S

Cash Flow Hedges The Company has $17.2 billion of
designated cash ﬂow hedges at December 31, 2005. These
derivatives are interest rate swaps that are hedges of the
forecasted cash ﬂows from the underlying variable-rate
LIBOR loans and ﬂoating-rate debt. All cash ﬂow hedges
are highly effective for the year ended December 31, 2005,
and the change in fair value attributed to hedge
ineffectiveness was not material.

At December 31, 2005 and 2004, accumulated other
comprehensive income included a deferred after-tax net loss
of $10 million and a deferred after-tax net gain of
$113 million, respectively, related to cash ﬂow hedges. The
unrealized gain or loss will be reﬂected in earnings when
the related cash ﬂows or hedged transactions occur and will
offset the related performance of the hedged items. The

U.S. BANCORP 93

occurrence of these related cash ﬂows and hedged
transactions remains probable. The estimated amount of
after-tax gain to be reclassiﬁed from accumulated other
comprehensive income into earnings during 2006 is $26
million. This includes gains related to hedges that were
terminated early and the forecasted transactions are still
probable.

Fair Value Hedges The Company has $10.1 billion of
designated fair value hedges at December 31, 2005. These
derivatives are primarily interest rate swaps that hedge the
change in fair value related to interest rate changes of
underlying ﬁxed-rate debt, trust preferred securities and
deposit obligations. In addition, the Company uses forward
commitments to sell residential mortgage loans to hedge its
interest rate risk related to residential mortgage loans held
for sale. The Company commits to sell the loans at speciﬁed
prices in a future period, typically within 90 days. The
Company is exposed to interest rate risk during the period
between issuing a loan commitment and the sale of the loan
into the secondary market.

All fair value hedges are considered highly effective for

the year ended December 31, 2005. The change in fair
value attributed to hedge ineffectiveness was a loss of $4
million, related to the Company’s mortgage loans held for
sale and its 2005 production volume of $23.0 billion.

Net Investment Hedges The Company enters into
derivatives to protect its net investment in certain foreign
operations. The Company uses forward commitments to sell
speciﬁed amounts of certain foreign currencies to hedge its
capital volatility risk associated with ﬂuctuations in foreign
currency exchange rates. The net amount of gains or losses
included in the cumulative translation adjustment for 2005
was not signiﬁcant.

Other Asset and Liability Management Derivative Positions
The Company has derivative positions that are used for
interest rate risk and other risk management purposes but
are not designated as cash ﬂow hedges or fair value hedges
in accordance with the provisions of Statement of Financial
Accounting Standards No. 133, ‘‘Accounting for Derivative
Instruments and Hedging Activities.’’ At December 31,
2005, the Company had $1.1 billion of forward
commitments to sell residential mortgage loans to hedge the
Company’s interest rate risk related to $1.1 billion of
unfunded residential loan commitments. Gains and losses
on mortgage banking derivatives and the unfunded loan
commitments are included in mortgage banking revenue on
the income statement.

C U S T O M E R - R E L AT E D P O S I T I O N S

The Company acts as a seller and buyer of interest rate
contracts and foreign exchange rate contracts on behalf of
customers. At December 31, 2005, the Company had
$26.9 billion of aggregate customer derivative positions,
including $22.7 billion of interest rate swaps, caps, and

94 U.S. BANCORP

ﬂoors and $4.2 billion of foreign exchange rate contracts.
The Company minimizes its market and liquidity risks by
taking similar offsetting positions. Gains or losses on
customer-related transactions were not signiﬁcant for the
year ended December 31, 2005.

Note 22

FA I R VA L U E S O F F I N A N C I A L
I N S T R U M E N T S

Due to the nature of its business and its customers’ needs,
the Company offers a large number of ﬁnancial instruments,
most of which are not actively traded. When market quotes
are unavailable, valuation techniques including discounted
cash ﬂow calculations and pricing models or services are
used. The Company also uses various aggregation methods
and assumptions, such as the discount rate and cash ﬂow
timing and amounts. As a result, the fair value estimates
can neither be substantiated by independent market
comparisons, nor realized by the immediate sale or
settlement of the ﬁnancial instrument. Also, the estimates
reﬂect a point in time and could change signiﬁcantly based
on changes in economic factors, such as interest rates.
Furthermore, the disclosure of certain ﬁnancial and
nonﬁnancial assets and liabilities is not required. Finally, the
fair value disclosure is not intended to estimate a market
value of the Company as a whole. A summary of the
Company’s valuation techniques and assumptions follows.

Cash and Cash Equivalents The carrying value of cash,
amounts due from banks, federal funds sold and securities
purchased under resale agreements was assumed to
approximate fair value.

Securities Investment securities were valued using available
market quotes. In some instances, for securities that are not
widely traded, market quotes for comparable securities were
used.

Loans The loan portfolio includes adjustable and ﬁxed-rate
loans, the fair value of which was estimated using
discounted cash ﬂow analyses and other valuation
techniques. To calculate discounted cash ﬂows, the loans
were aggregated into pools of similar types and expected
repayment terms. The expected cash ﬂows of loans
considered historical prepayment experiences and estimated
credit losses for nonperforming loans and were discounted
using current rates offered to borrowers of similar credit
characteristics. The fair value of adjustable rate loans is
assumed to be equal to their par value.

Deposit Liabilities The fair value of demand deposits,
savings accounts and certain money market deposits is
equal to the amount payable on demand at year-end. The
fair value of ﬁxed-rate certiﬁcates of deposit was estimated
by discounting the contractual cash ﬂow using the discount
rates implied by high-grade corporate bond yield curves.

Short-term Borrowings Federal funds purchased, securities
sold under agreements to repurchase, commercial paper and

other short-term funds borrowed are at ﬂoating rates or
have short-term maturities. Their par value is assumed to
approximate their fair value.

Long-term Debt The estimated fair value of medium-term
notes, bank notes, and subordinated debt was determined
by using discounted cash ﬂow analysis based on high-grade
corporate bond yield curves. Floating rate debt is assumed
to be equal to par value. Capital trust and other long-term
debt instruments were valued using market quotes.

Interest Rate Swaps, Equity Contracts and Options The
interest rate options and swap cash ﬂows were estimated
using a third-party pricing model and discounted based on
appropriate LIBOR, eurodollar futures, swap, treasury note
yield curves and equity market prices.

Loan Commitments, Letters of Credit and Guarantees The
fair value of commitments, letters of credit and guarantees
represents the estimated costs to terminate or otherwise
settle the obligations with a third-party. Residential
mortgage commitments are actively traded and the fair
value is estimated using available market quotes. Other loan
commitments, letters of credit and guarantees are not
actively traded. Substantially all loan commitments have
ﬂoating rates and do not expose the Company to interest
rate risk assuming no premium or discount was ascribed to
loan commitments because funding could occur at market
rates. The Company estimates the fair value of loan
commitments, letters of credit and guarantees based on the
related amount of unamortized deferred commitment fees
adjusted for the probable losses for these arrangements.

The estimated fair values of the Company’s ﬁnancial instruments at December 31 are shown in the table below.

(Dollars in Millions)

Financial Assets

2005

2004

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

Cash and cash equivalents *************************************************************
Investment securities ******************************************************************
Loans held for sale ********************************************************************
Loans *******************************************************************************

$ 8,202
39,768
1,686
135,765

$ 8,202
39,772
1,686
134,614

$ 6,537
41,481
1,439
124,235

$ 6,537
41,486
1,439
124,611

Total ﬁnancial assets****************************************************************

185,421

$184,274

173,692

$174,073

Nonﬁnancial assets *************************************************************

24,044

Total assets *****************************************************************

$209,465

21,412

$195,104

Financial Liabilities

Deposits *****************************************************************************
Short-term borrowings *****************************************************************
Long-term debt ***********************************************************************

$124,709
20,200
37,069

$124,532
20,201
37,114

$120,741
13,084
34,739

$120,788
13,084
35,160

Total ﬁnancial liabilities **************************************************************

181,978

$181,847

168,564

$169,032

Nonﬁnancial liabilities ************************************************************
Shareholders’ equity ************************************************************

7,401
20,086

Total liabilities and shareholders’ equity *****************************************

$209,465

7,001
19,539

$195,104

Derivative Positions

Asset and liability management positions

Interest rate swaps *****************************************************************
Futures and forwards ***************************************************************
Foreign exchange contracts *********************************************************
Options***************************************************************************
Equity contracts *******************************************************************

Customer related positions

Interest rate contracts **************************************************************
Foreign exchange contracts *********************************************************

57
(15)
18
3
3

53
4

57
(15)
18
3
3

53
4

435
(4)
(12)
1
4

36
4

435
(4)
(12)
1
4

36
4

The fair value of unfunded commitments, standby letters of credit and other guarantees is approximately equal to their

carrying value. The carrying value of unfunded commitments and standby letters of credit was $276 million. The carrying
value of other guarantees was $79 million.

U.S. BANCORP 95

Note 23

G U A R A N T E E S A N D C O N T I N G E N T
L I A B I L I T I E S

C O M M I T M E N T S T O E X T E N D C R E D I T

Commitments to extend credit are legally binding and
generally have ﬁxed expiration dates or other termination
clauses. The contractual amount represents the Company’s
exposure to credit loss, in the event of default by the
borrower. The Company manages this credit risk by using
the same credit policies it applies to loans. Collateral is
obtained to secure commitments based on management’s
credit assessment of the borrower. The collateral may
include marketable securities, receivables, inventory,
equipment and real estate. Since the Company expects many
of the commitments to expire without being drawn, total
commitment amounts do not necessarily represent the
Company’s future liquidity requirements. In addition, the
commitments include consumer credit lines that are
cancelable upon notiﬁcation to the consumer.

L E T T E R S O F C R E D I T

Standby letters of credit are commitments the Company
issues to guarantee the performance of a customer to a
third-party. The guarantees frequently support public and
private borrowing arrangements, including commercial paper
issuances, bond financings and other similar transactions.
The Company issues commercial letters of credit on behalf of
customers to ensure payment or collection in connection with
trade transactions. In the event of a customer’s
nonperformance, the Company’s credit loss exposure is the
same as in any extension of credit, up to the letter’s
contractual amount. Management assesses the borrower’s
credit to determine the necessary collateral, which may
include marketable securities, receivables, inventory,
equipment and real estate. Since the conditions requiring the
Company to fund letters of credit may not occur, the
Company expects its liquidity requirements to be less than
the total outstanding commitments. The maximum potential
future payments guaranteed by the Company under standby
letter of credit arrangements at December 31, 2005, were
approximately $10.7 billion with a weighted-average term of
approximately 23 months. The estimated fair value of
standby letters of credit was approximately $82 million at
December 31, 2005.

96 U.S. BANCORP

The contract or notional amounts of commitments to
extend credit and letters of credit at December 31, 2005,
were as follows:

(Dollars in Millions)

Commitments to extend credit

Commercial*****************
Corporate and purchasing

cards *******************
Consumer credit cards *******
Other consumer *************

Letters of credit

Standby********************
Commercial*****************

Less Than
One Year

After
One Year

Total

$19,493

$37,973

$ 57,466

11,730
41,040
3,439

5,212
242

25
—
12,512

5,531
74

11,755
41,040
15,951

10,743
316

L E A S E C O M M I T M E N T S

Rental expense for operating leases amounted to $192
million in 2005, $187 million in 2004 and $208 million in
2003. Future minimum payments, net of sublease rentals,
under capitalized leases and noncancelable operating leases
with initial or remaining terms of one year or more,
consisted of the following at December 31, 2005:

(Dollars in Millions)

2006 ****************************
2007 ****************************
2008 ****************************
2009 ****************************
2010 ****************************
Thereafter ************************

Total minimum lease payments ******

Less amount representing interest ***

Present value of net minimum lease

payments *********************

G U A R A N T E E S

Capitalized
Leases

Operating
Leases

$ 171
159
140
122
105
461

$1,158

$ 5
4
3
3
3
12

$ 9

Guarantees are contingent commitments issued by the
Company to customers or other third-parties. The
Company’s guarantees primarily include parent guarantees
related to subsidiaries’ third-party borrowing arrangements;
third-party performance guarantees inherent in the
Company’s business operations such as indemniﬁed
securities lending programs and merchant charge-back
guarantees; indemniﬁcation or buy-back provisions related
to certain asset sales; and contingent consideration
arrangements related to acquisitions. For certain guarantees,
the Company has recorded a liability related to the
potential obligation, or has access to collateral to support
the guarantee or through the exercise of other recourse
provisions can offset some or all of the maximum potential
future payments made under these guarantees.

Third-Party Borrowing Arrangements The Company
provides guarantees to third-parties as a part of certain
subsidiaries’ borrowing arrangements, primarily representing
guaranteed operating or capital lease payments or other
debt obligations with maturity dates extending through
2013. The maximum potential future payments guaranteed
by the Company under these arrangements were
approximately $466 million at December 31, 2005. The
Company’s recorded liabilities as of December 31, 2005,
included $8 million representing outstanding amounts owed
to these third-parties and required to be recorded on the
Company’s balance sheet in accordance with accounting
principles generally accepted in the United States.

Commitments from Securities Lending The Company
participates in securities lending activities by acting as the
customer’s agent involving the loan of securities. The
Company indemniﬁes customers for the difference between
the market value of the securities lent and the market value
of the collateral received. Cash collateralizes these
transactions. The maximum potential future payments
guaranteed by the Company under these arrangements were
approximately $13.0 billion at December 31, 2005, and
represented the market value of the securities lent to third-
parties. At December 31, 2005, the Company held assets
with a market value of $13.4 billion as collateral for these
arrangements.

Asset Sales The Company has provided guarantees to
certain third-parties in connection with the sale of certain
assets, primarily loan portfolios and low-income housing
tax credits. These guarantees are generally in the form of
asset buy-back or make-whole provisions that are triggered
upon a credit event or a change in the tax-qualifying status
of the related projects, as applicable, and remain in effect
until the loans are collected or ﬁnal tax credits are realized,
respectively. The maximum potential future payments
guaranteed by the Company under these arrangements were
approximately $843 million at December 31, 2005, and
represented the proceeds or guaranteed portion received
from the buyer in these transactions where the buy-back or
make-whole provisions have not yet expired. Recourse
available to the Company includes guarantees from the
Small Business Administration (for SBA loans sold),
recourse against the correspondent that originated the loan
or to the private mortgage issuer, the right to collect
payments from the debtors, and/or the right to liquidate the
underlying collateral, if any, and retain the proceeds. Based
on its established loan-to-value guidelines, the Company
believes the recourse available is sufﬁcient to recover future
payments, if any, under the loan buy-back guarantees.

Merchant Processing The Company, through its
subsidiaries NOVA Information Systems, Inc. and NOVA
European Holdings Company, provides merchant processing

services. Under the rules of credit card associations, a
merchant processor retains a contingent liability for credit
card transactions processed. This contingent liability arises
in the event of a billing dispute between the merchant and a
cardholder that is ultimately resolved in the cardholder’s
favor. In this situation, the transaction is ‘‘charged back’’ to
the merchant and the disputed amount is credited or
otherwise refunded to the cardholder. If the Company is
unable to collect this amount from the merchant, it bears
the loss for the amount of the refund paid to the
cardholder.

A cardholder, through its issuing bank, generally has

until the latter of up to four months after the date the
transaction is processed or the receipt of the product or
service to present a charge-back to the Company as the
merchant processor. The absolute maximum potential
liability is estimated to be the total volume of credit card
transactions that meet the associations’ requirements to be
valid charge-back transactions at any given time.
Management estimates that the maximum potential
exposure for charge-backs would approximate the total
amount of merchant transactions processed through the
credit card associations for the last four months. For the
last four months this amount totaled approximately $49.0
billion. In most cases, this contingent liability is unlikely to
arise, as most products and services are delivered when
purchased and amounts are refunded when items are
returned to merchants. However, where the product or
service is not provided until a future date (‘‘future
delivery’’), the potential for this contingent liability
increases. To mitigate this risk, the Company may require
the merchant to make an escrow deposit, may place
maximum volume limitations on future delivery transactions
processed by the merchant at any point in time, or may
require various credit enhancements (including letters of
credit and bank guarantees). Also, merchant processing
contracts may include event triggers to provide the
Company more ﬁnancial and operational control in the
event of ﬁnancial deterioration of the merchant.

The Company’s primary exposure to future delivery is
related to merchant processing for the airline industry. The
Company currently processes card transactions for various
airlines in the United States and Europe. In the event of
liquidation of these airlines, the Company could become
ﬁnancially liable for refunding tickets purchased through the
credit card associations under the charge-back provisions.
Charge-back risk related to an airline is evaluated in a
manner similar to credit risk assessments and as such
merchant processing contracts consider the potential risk of
default. Under certain situations, the Company may obtain
various forms of collateral to minimize the risk of charge-
backs. At December 31, 2005, the value of airline tickets
purchased to be delivered at a future date was

U.S. BANCORP 97

approximately $1.7 billion, and the Company held
collateral of $1.2 billion in escrow deposits, letters of credit
and liens on various assets. With respect to future delivery
risk for non-airline merchants, the Company held
$33 million of merchant escrow deposits as collateral. In
addition to speciﬁc collateral or other credit enhancements,
the Company maintains a liability for its implied guarantees
associated with future delivery. At December 31, 2005, the
liability was $24 million primarily related to these airline
processing arrangements.

In the normal course of business, the Company has

unresolved charge-backs that are in process of resolution.
The Company assesses the likelihood of its potential
liability based on the extent and nature of unresolved
charge-backs and its historical loss experience. At
December 31, 2005, the Company had a recorded liability
for potential losses of $19 million.

Contingent Consideration Arrangements The Company has
contingent payment obligations related to certain business
combination transactions. Payments are guaranteed as long
as certain post-acquisition performance-based criteria are
met or customer relationships are maintained. At
December 31, 2005, the maximum potential future
payments required to be made by the Company under these
arrangements was approximately $80 million and
represented contingent payments related to the acquisition
of the Wachovia Corporation’s corporate trust and
institutional custody business on December 30, 2005. If
required, these contingent payments would be payable
within the next 12 months.

Minimum Revenue Guarantees In the normal course of
business, the Company may enter into revenue share
agreements with third party business partners who generate
customer referrals or provide marketing or other services
related to the generation of revenue. In certain of these
agreements, the Company may guarantee that a minimum
amount of revenue share payments will be made to the
third party over a speciﬁed period of time. For the period
ending December 31, 2005, the maximum potential future
payments required to be made by the Company under these
agreements was $42 million.

Other Guarantees The Company provides liquidity and
credit enhancement facilities to a Company-sponsored
conduit, as more fully described in the ‘‘Off-Balance Sheet
Arrangements’’ section within Management’s Discussion
and Analysis. Although management believes a draw against
these facilities is remote, the maximum potential future
payments guaranteed by the Company under these
arrangements were approximately $3.8 billion at
December 31, 2005. The recorded fair value of the
Company’s liability for the credit enhancement liquidity
facility was $20 million at December 31, 2005, and was
included in other liabilities.

The Company has also made ﬁnancial performance
guarantees related to the operations of its subsidiaries. The
maximum potential future payments guaranteed by the
Company under these arrangements were approximately
$1.8 billion at December 31, 2005.

O T H E R C O N T I N G E N T L I A B I L I T I E S

In connection with the spin-off of Piper Jaffray Companies,
the Company has agreed to indemnify Piper Jaffray
Companies against losses that may result from third-party
claims relating to certain speciﬁed matters. The Company’s
indemniﬁcation obligation related to these speciﬁed matters
is capped at $18 million and can be terminated by the
Company if there is a change in control event for Piper
Jaffray Companies. Through December 31, 2005, the
Company has paid approximately $4 million to Piper
Jaffray Companies under this agreement.

The Company is subject to various other litigation,

investigations and legal and administrative cases and
proceedings that arise in the ordinary course of its
businesses. Due to their complex nature, it may be years
before some matters are resolved. While it is impossible to
ascertain the ultimate resolution or range of ﬁnancial
liability with respect to these contingent matters, the
Company believes that the aggregate amount of such
liabilities will not have a material adverse effect on the
ﬁnancial condition, results of operations or cash ﬂows of
the Company.

98 U.S. BANCORP

Note 24

U . S . B A N C O R P ( PA R E N T C O M PA N Y )

Condensed Balance Sheet

December 31 (Dollars in Millions)

2005

2004

Assets
Deposits with subsidiary banks, principally interest-bearing *****************************************************
Available-for-sale securities *********************************************************************************
Investments in bank and bank holding company subsidiaries ***************************************************
Investments in nonbank subsidiaries *************************************************************************
Advances to nonbank subsidiaries **************************************************************************
Other assets *********************************************************************************************

$ 9,882
107
21,681
376
10
659

Total assets****************************************************************************************

$32,715

Liabilities and Shareholders’ Equity
Short-term funds borrowed*********************************************************************************
Long-term debt*******************************************************************************************
Other liabilities ********************************************************************************************
Shareholders’ equity***************************************************************************************

782
10,854
993
20,086

Total liabilities and shareholders’ equity ****************************************************************

$32,715

$ 6,806
126
20,082
371
5
690

$28,080

683
6,899
959
19,539

$28,080

Condensed Statement of Income

Year Ended December 31 (Dollars in Millions)

2005

2004

2003

Income
Dividends from bank and bank holding company subsidiaries ***************************************
Dividends from nonbank subsidiaries*************************************************************
Interest from subsidiaries ***********************************************************************
Other income *********************************************************************************

$2,609
—
200
22

Total income ***************************************************************************

2,831

Expense
Interest on short-term funds borrowed ***********************************************************
Interest on long-term debt **********************************************************************
Other expense ********************************************************************************

Total expense **************************************************************************

Income (loss) before income taxes and equity in undistributed income of subsidiaries *******************
Income tax credit *****************************************************************************

Income (loss) of parent company ****************************************************************
Equity (deﬁciency) in undistributed income of subsidiaries *******************************************

25
311
93

429

2,402
(73)

2,475
2,014

$4,900
229
54
21

5,204

8
256
47

311

4,893
(53)

4,946
(779)

27
6
69
62

164

8
271
89

368

(204)
(37)

(167)
3,900

Net income ****************************************************************************

$4,489

$4,167

$3,733

U.S. BANCORP 99

Condensed Statement of Cash Flows

Year Ended December 31 (Dollars in Millions)

2005

2004

2003

Operating Activities
Net income **********************************************************************************
Adjustments to reconcile net income to net cash provided by operating activities

$ 4,489

$ 4,167

$ 3,733

(Equity) deﬁciency in undistributed income of subsidiaries ***************************************
Other, net ********************************************************************************

(2,014)
128

Net cash provided by (used in) operating activities ******************************************

2,603

Investing Activities
Proceeds from sales and maturities of investment securities ****************************************
Purchases of investment securities **************************************************************
Investments in subsidiaries *********************************************************************
Equity distributions from subsidiaries ************************************************************
Net (increase) decrease in short-term advances to subsidiaries**************************************
Principal collected on long-term advances to subsidiaries ******************************************
Other, net ***********************************************************************************

Net cash provided by (used in) investing activities*******************************************

Financing Activities
Net increase (decrease) in short-term advances from subsidiaries ***********************************
Net increase (decrease) in short-term borrowings *************************************************
Principal payments or redemptions of long-term debt **********************************************
Proceeds from issuance of long-term debt *******************************************************
Proceeds from issuance of common stock *******************************************************
Repurchase of common stock******************************************************************
Cash dividends paid **************************************************************************

Net cash provided by (used in) ﬁnancing activities*******************************************

Change in cash and cash equivalents *****************************************************
Cash and cash equivalents at beginning of year **************************************************

13
—
(43)
39
(5)
—
(18)

(14)

—
99
(1,862)
5,979
371
(1,855)
(2,245)

487

3,076
6,806

779
43

4,989

76
(76)
—
1,916
11
—
(12)

1,915

—
(16)
(909)
—
581
(2,660)
(1,820)

(4,824)

2,080
4,726

(3,900)
172

21
(73)
(284)
536
35
573
131

939

(117)
319
(1,954)
1,150
398
(326)
(1,557)

(2,087)

(1,143)
5,869

Cash and cash equivalents at end of year *************************************************

$ 9,882

$ 6,806

$ 4,726

Transfer of funds (dividends, loans or advances) from
bank subsidiaries to the Company is restricted. Federal law
prohibits loans unless they are secured and generally limits
any loan to the Company or individual afﬁliate to
10 percent of each bank’s unimpaired capital and surplus.
In aggregate, loans to the Company and all afﬁliates cannot
exceed 20 percent of each bank’s unimpaired capital and
surplus.

Dividend payments to the Company by its subsidiary

banks are subject to regulatory review and statutory
limitations and, in some instances, regulatory approval. The
approval of the Comptroller of the Currency is required if

total dividends by a national bank in any calendar year
exceed the bank’s net income for that year combined with
its retained net income for the preceding two calendar years
or if the bank’s retained earnings are less than zero.
Furthermore, dividends are restricted by the Comptroller of
the Currency’s minimum capital constraints for all national
banks. Within these guidelines, all bank subsidiaries have
the ability to pay dividends without prior regulatory
approval. The amount of dividends available to the parent
company from the bank subsidiaries at December 31, 2005,
was approximately $1.0 billion.

100 U.S. BANCORP

Report of Management

Responsibility for the ﬁnancial statements and other information presented throughout the Annual Report on Form 10-K rests
with the management of U.S. Bancorp. The Company believes that the consolidated ﬁnancial statements have been prepared in
conformity with accounting principles generally accepted in the United States and present the substance of transactions based
on the circumstances and management’s best estimates and judgment.

In meeting its responsibilities for the reliability of the ﬁnancial statements, management is responsible for establishing and
maintaining an adequate system of internal control over ﬁnancial reporting as deﬁned by Rules 13a-15(f) and 15d-15(f) under
the Securities Exchange Act of 1934. The Company’s system of internal controls is designed to provide reasonable assurance
regarding the reliability of ﬁnancial reporting and the preparation of publicly ﬁled ﬁnancial statements in accordance with
accounting principles generally accepted in the United States.

To test compliance, the Company carries out an extensive audit program. This program includes a review for compliance with
written policies and procedures and a comprehensive review of the adequacy and effectiveness of the internal control system.
Although control procedures are designed and tested, it must be recognized that there are limits inherent in all systems of
internal control and, therefore, errors and irregularities may nevertheless occur. Also, estimates and judgments are required to
assess and balance the relative cost and expected beneﬁts of the controls. Projection of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

The Board of Directors of the Company has an Audit Committee composed of directors who are independent of
U.S. Bancorp. The committee meets periodically with management, the internal auditors and the independent accountants to
consider audit results and to discuss internal accounting control, auditing and ﬁnancial reporting matters.

Management assessed the effectiveness of the Company’s internal controls over ﬁnancial reporting as of December 31, 2005.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in its Internal Control-Integrated Framework. Based on our assessment and those criteria, management
believes that the Company designed and maintained effective internal control over ﬁnancial reporting as of December 31,
2005.

The Company’s independent accountants, Ernst & Young LLP, have been engaged to render an independent professional
opinion on the ﬁnancial statements and issue an attestation report on management’s assessment of the Company’s system of
internal control over ﬁnancial reporting. Their opinion on the ﬁnancial statements appearing on page 102 and their attestation
on the system of internal controls over ﬁnancial reporting appearing on page 103 are based on procedures conducted in
accordance with auditing standards of the Public Company Accounting Oversight Board (United States).

U.S. BANCORP 101

Report of Independent Registered Public Accounting Firm
on the Consolidated Financial Statements

The Board of Directors and Shareholders of U.S. Bancorp:

We have audited the accompanying consolidated balance sheets of U.S. Bancorp as of December 31, 2005 and 2004, and the
related consolidated statements of income, shareholders’ equity, and cash ﬂows for each of the three years in the period ended
December 31, 2005. These ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these ﬁnancial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and
signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the consolidated ﬁnancial
position of U.S. Bancorp at December 31, 2005 and 2004, and the consolidated results of its operations and its cash ﬂows for
each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the effectiveness of U.S. Bancorp’s internal control over ﬁnancial reporting as of December 31, 2005, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 17, 2006 expressed an unqualiﬁed opinion thereon.

Minneapolis, Minnesota
February 17, 2006

102 U.S. BANCORP

Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting

The Board of Directors and Shareholders of U.S. Bancorp:

We have audited management’s assessment, included in the accompanying Report of Management, that U.S. Bancorp
maintained effective internal control over ﬁnancial reporting as of December 31, 2005, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). U.S. Bancorp’s management is responsible for maintaining effective internal control over ﬁnancial reporting
and for its assessment of the effectiveness of internal control over ﬁnancial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over ﬁnancial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over ﬁnancial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over ﬁnancial reporting, evaluating management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over ﬁnancial reporting is a process designed to provide reasonable assurance regarding the
reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over ﬁnancial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of ﬁnancial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the ﬁnancial statements.

Because of its inherent limitations, internal control over ﬁnancial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that U.S. Bancorp maintained effective internal control over ﬁnancial reporting as of
December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, U.S. Bancorp
maintained, in all material respects, effective internal control over ﬁnancial reporting as of December 31, 2005, based on the
COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of U.S. Bancorp as of December 31, 2005 and 2004, and the related consolidated statements
of income, shareholders’ equity, and cash ﬂows for each of the three years in the period ended December 31, 2005 and our
report dated February 17, 2006 expressed an unqualiﬁed opinion thereon.

Minneapolis, Minnesota
February 17, 2006

U.S. BANCORP 103

U.S. BANCORP
CONSOLIDATED BALANCE SHEET — FIVE-YEAR SUMMARY

December 31 (Dollars in Millions)

2005

2004

2003

2002

2001

% Change
2005 v 2004

Assets
Cash and due from banks ***********************************
Held-to-maturity securities************************************
Available-for-sale securities ***********************************
Loans held for sale ******************************************
Loans *****************************************************
Less allowance for loan losses*****************************

Net loans ***********************************************
Other assets ***********************************************

$ 8,004
109
39,659
1,686
137,806
(2,041)

135,765
24,242

$ 6,336
127
41,354
1,439
126,315
(2,080)

124,235
21,613

$ 8,630
152
43,182
1,433
118,235
(2,184)

116,051
20,023

$ 10,758
233
28,255
4,159
116,251
(2,422)

113,829
22,793

$ 9,120
299
26,309
2,820
114,405
(2,457)

111,948
20,894

26.3%
(14.2)
(4.1)
17.2
9.1
(1.9)

9.3
12.2

Total assets ******************************************

$209,465

$195,104

$189,471

$180,027

$171,390

7.4%

Liabilities and Shareholders’ Equity
Deposits

Noninterest-bearing **************************************
Interest-bearing******************************************

$ 32,214
92,495

$ 30,756
89,985

$ 32,470
86,582

$ 35,106
80,428

$ 31,212
74,007

Total deposits ****************************************
Short-term borrowings ***************************************
Long-term debt *********************************************
Other liabilities **********************************************

Total liabilities ****************************************
Shareholders’ equity*****************************************

124,709
20,200
37,069
7,401

189,379
20,086

120,741
13,084
34,739
7,001

175,565
19,539

119,052
10,850
33,816
6,511

170,229
19,242

115,534
7,806
31,582
6,669

161,591
18,436

105,219
14,670
28,542
6,214

154,645
16,745

4.7%
2.8

3.3
54.4
6.7
5.7

7.9
2.8

Total liabilities and shareholders’ equity ******************

$209,465

$195,104

$189,471

$180,027

$171,390

7.4%

104 U.S. BANCORP

U.S. BANCORP
CONSOLIDATED STATEMENT OF INCOME — FIVE-YEAR SUMMARY

Year Ended December 31 (Dollars in Millions)

2005

2004

2003

2002

2001

% Change
2005 v 2004

Interest Income
Loans*****************************************************
Loans held for sale *****************************************
Investment securities****************************************
Other interest income ***************************************

$ 8,381
106
1,954
110

Total interest income**********************************

10,551

Interest Expense
Deposits **************************************************
Short-term borrowings **************************************
Long-term debt ********************************************

Total interest expense*********************************

Net interest income *****************************************
Provision for credit losses************************************

Net interest income after provision for credit losses *************

Noninterest Income

Credit and debit card revenue ********************************
Corporate payment products revenue *************************
ATM processing services ************************************
Merchant processing services ********************************
Trust and investment management fees ***********************
Deposit service charges *************************************
Treasury management fees **********************************
Commercial products revenue ********************************
Mortgage banking revenue***********************************
Investment products fees and commissions ********************
Securities gains (losses), net *********************************
Other *****************************************************

Total noninterest income ******************************

Noninterest Expense
Compensation *********************************************
Employee beneﬁts ******************************************
Net occupancy and equipment *******************************
Professional services ****************************************
Marketing and business development *************************
Technology and communications *****************************
Postage, printing and supplies *******************************
Goodwill **************************************************
Other intangibles *******************************************
Debt prepayment *******************************************
Other *****************************************************

Total noninterest expense *****************************

Income from continuing operations before income taxes *********
Applicable income taxes*************************************

Income from continuing operations****************************
Income (loss) from discontinued operations (after-tax)************
Cumulative effect of accounting change (after-tax) **************

1,559
690
1,247

3,496

7,055
666

6,389

713
488
229
770
1,009
928
437
400
432
152
(106)
593

6,045

2,383
431
641
166
235
466
255
—
458
54
774

5,863

6,571
2,082

4,489
—
—

$7,168
91
1,827
100

9,186

904
263
908

2,075

7,111
669

6,442

649
407
175
675
981
807
467
432
397
156
(105)
478

$7,272
202
1,684
100

9,258

1,097
167
805

2,069

7,189
1,254

5,935

561
361
166
561
954
716
466
401
367
145
245
370

$ 7,743
171
1,484
96

$ 9,414
147
1,296
90

9,494

10,947

1,485
223
972

2,680

6,814
1,349

5,465

517
326
161
567
892
690
417
479
330
133
300
399

2,828
476
1,292

4,596

6,351
2,529

3,822

466
298
153
309
888
645
347
437
234
131
329
432

5,519

5,313

5,211

4,669

2,252
389
631
149
194
430
248
—
550
155
787

5,785

6,176
2,009

4,167
—
—

2,177
328
644
143
180
418
246
—
682
—
779

5,597

5,651
1,941

3,710
23
—

2,167
318
659
130
171
392
243
—
553
—
1,107

5,740

4,936
1,708

3,228
(23)
(37)

2,037
285
667
116
178
354
242
237
278
7
1,748

6,149

2,342
818

1,524
(45)
—

Net income ************************************************

$ 4,489

$4,167

$3,733

$ 3,168

$ 1,479

* Not meaningful

16.9%
16.5
7.0
10.0

14.9

72.5
*
37.3

68.5

(.8)
(.4)

(.8)

9.9
19.9
30.9
14.1
2.9
15.0
(6.4)
(7.4)
8.8
(2.6)
(1.0)
24.1

9.5

5.8
10.8
1.6
11.4
21.1
8.4
2.8
—
(16.7)
(65.2)
(1.7)

1.3

6.4
3.6

7.7
—
—

7.7

U.S. BANCORP 105

U.S. BANCORP
QUARTERLY CONSOLIDATED FINANCIAL DATA

(Dollars in Millions, Except Per Share Data)

2005

2004

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$1,911
21
476
27

$2,027
24
486
28

$2,167
30
492
29

$2,276
31
500
26

$1,747
20
469
22

$1,740
27
444
25

$1,803
21
453
26

$1,878
23
461
27

Total interest income *********************************

2,435

2,565

2,718

2,833

2,258

2,236

2,303

2,389

Interest Expense
Deposits **************************************************
Short-term borrowings **************************************
Long-term debt ********************************************

Total interest expense ********************************

308
112
271

691

361
143
307

811

414
205
317

936

Net interest income *****************************************
Provision for credit losses ***********************************

1,744
172

1,754
144

1,782
145

476
230
352

1,058

1,775
205

227
50
209

486

205
59
200

464

222
74
232

528

250
80
267

597

1,772
235

1,772
204

1,775
166

1,792
64

Net interest income after provision for credit losses *************

1,572

1,610

1,637

1,570

1,537

1,568

1,609

1,728

Noninterest Income
Credit and debit card revenue ********************************
Corporate payment products revenue *************************
ATM processing services ************************************
Merchant processing services ********************************
Trust and investment management fees ***********************
Deposit service charges *************************************
Treasury management fees **********************************
Commercial products revenue********************************
Mortgage banking revenue***********************************
Investment products fees and commissions ********************
Securities gains (losses), net *********************************
Other *****************************************************

154
107
47
178
247
210
107
96
102
39
(59)
154

177
120
57
198
253
234
117
100
110
39
1
135

185
135
64
200
251
246
109
103
111
37
1
134

197
126
61
194
258
238
104
101
109
37
(49)
170

142
95
42
141
249
185
118
110
94
39
—
103

159
103
45
165
251
202
121
108
110
43
(172)
107

164
108
45
188
240
208
118
106
97
37
88
125

184
101
43
181
241
212
110
108
96
37
(21)
143

Total noninterest income ******************************

1,382

1,541

1,576

1,546

1,318

1,242

1,524

1,435

Noninterest Expense
Compensation *********************************************
Employee beneﬁts ******************************************
Net occupancy and equipment *******************************
Professional services ****************************************
Marketing and business development *************************
Technology and communications *****************************
Postage, printing and supplies *******************************
Other intangibles *******************************************
Debt prepayment *******************************************
Other *****************************************************

567
116
154
36
43
106
63
71
—
175

612
108
159
39
67
113
63
181
54
199

603
106
162
44
61
118
64
125
—
190

601
101
166
47
64
129
65
81
—
210

536
100
156
32
35
102
62
226
35
171

573
91
153
35
49
102
60
(47)
2
215

564
100
159
37
61
110
61
210
5
211

579
98
163
45
49
116
65
161
113
190

Total noninterest expense *****************************

1,331

1,595

1,473

1,464

1,455

1,233

1,518

1,579

Income before income taxes *********************************
Applicable income taxes*************************************

1,623
552

1,556
435

1,740
586

1,652
509

1,400
392

1,577
540

1,615
549

1,584
528

Net income ************************************************

$1,071

$1,121

$1,154

$1,143

$1,008

$1,037

$1,066

$1,056

Earnings per share *****************************************
Diluted earnings per share ***********************************

$ .58
$ .57

$ .61
$ .60

$ .63
$ .62

$ .53
$ .52

$ .55
$ .54

$ .57
$ .56

106 U.S. BANCORP

U.S. BANCORP
SUPPLEMENTAL FINANCIAL DATA

Earnings Per Share Summary

Earnings per share from continuing operations **********************
Discontinued operations******************************************
Cumulative effect of accounting change ****************************

Earnings per share **********************************************

Diluted earnings per share from continuing operations ****************
Discontinued operations******************************************
Cumulative effect of accounting change ****************************

2005

2.45
—
—

2.45

2.42
—
—

2004

2.21
—
—

2.21

2.18
—
—

2003

1.93
.01
—

1.94

1.92
.01
—

2002

1.68
(.01)
(.02)

1.65

1.68
(.01)
(.02)

2001

.79
(.02)
—

.77

.79
(.03)
—

Diluted earnings per share ****************************************

2.42

2.18

1.93

1.65

.76

Ratios

Return on average assets ****************************************
Return on average equity*****************************************
Average total equity to average assets *****************************
Dividends per share to net income per share************************

2.21%
22.5
9.8
50.2

2.17%
21.4
10.2
46.2

1.99%
19.2
10.3
44.1

1.84%
18.3
10.0
47.3

.89%
9.0
9.9
97.4

Other Statistics (Dollars and Shares in Millions)

Common shares outstanding (a) ***********************************
Average common shares outstanding and common stock equivalents

Earnings per share *******************************************
Diluted earnings per share*************************************
Number of shareholders (b) ***************************************
Common dividends declared**************************************

(a) Deﬁned as total common shares less common stock held in treasury at December 31.
(b) Based on number of common stock shareholders of record at December 31.

Stock Price Range and Dividends

1,815

1,858

1,923

1,917

1,952

1,831
1,857
69,217
$ 2,246

1,887
1,913
71,492
$ 1,917

1,924
1,936
74,341
$ 1,645

1,916
1,925
74,805
$ 1,488

1,928
1,940
76,395
$ 1,447

First quarter *******************************
Second quarter ****************************
Third quarter*******************************
Fourth quarter *****************************

2005

Sales Price

2004

Sales Price

High

Low

$31.36
29.91
30.91
31.21

$28.17
26.80
27.77
27.32

Closing
Price

$28.82
29.20
28.08
29.89

Dividends
Declared

$.300
.300
.300
.330

High

Low

$29.70
28.65
30.00
31.65

$26.41
24.89
27.42
27.52

Closing
Price

$27.65
27.56
28.90
31.32

Dividends
Declared

$.240
.240
.240
.300

The common stock of U.S. Bancorp is traded on the New York Stock Exchange, under the ticker symbol ‘‘USB.’’

U.S. BANCORP 107

U.S. BANCORP
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND

Year Ended December 31

2005

2004

(Dollars in Millions)

Average
Balances

Interest

Yields
and Rates

Average
Balances

Interest

Yields
and Rates

$ 42,103
1,795

$ 1,962
106

4.66%
5.88

$ 43,009
1,608

$1,836
91

4.27%
5.69

Assets
Investment securities*********************************************
Loans held for sale **********************************************
Loans (b)

Commercial *************************************************
Commercial real estate****************************************
Residential mortgages ****************************************
Retail *******************************************************

Total loans ********************************************
Other earning assets*********************************************

Total earning assets ************************************
Allowance for credit losses****************************************
Unrealized gain (loss) on available-for-sale securities******************
Other assets (c) *************************************************

2,501
1,804
1,001
3,100

8,406
110

10,584

42,641
27,964
18,036
44,464

133,105
1,422

178,425
(2,098)
(368)
27,239

Total assets *******************************************

$203,198

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits **************************************
Interest-bearing deposits

$ 29,229

Interest checking *********************************************
Money market savings ****************************************
Savings accounts ********************************************
Time certiﬁcates of deposit less than $100,000*******************
Time deposits greater than $100,000 ***************************

Total interest-bearing deposits ***************************
Short-term borrowings *******************************************
Long-term debt *************************************************

22,785
29,314
5,819
13,199
20,655

91,772
19,382
36,141

Total interest-bearing liabilities*******************************
Other liabilities (d)************************************************
Shareholders’ equity *********************************************

147,295
6,721
19,953

Total liabilities and shareholders’ equity *******************

$203,198

135
358
15
389
662

1,559
690
1,247

3,496

5.87
6.45
5.55
6.97

6.32
7.77

5.93

.59
1.22
.26
2.95
3.20

1.70
3.56
3.45

2.37

2,213
1,543
812
2,620

7,188
100

9,215

71
235
15
341
242

904
263
908

2,075

39,348
27,267
14,322
41,204

122,141
1,365

168,123
(2,303)
(346)
26,119

$191,593

$ 29,816

20,933
32,854
5,866
13,074
13,679

86,406
14,534
35,115

136,055
6,263
19,459

$191,593

Net interest income **********************************************

$ 7,088

$7,140

Gross interest margin ********************************************

Gross interest margin without taxable-equivalent increments ***********

Percent of Earning Assets
Interest income *************************************************
Interest expense*************************************************

Net interest margin **********************************************

Net interest margin without taxable-equivalent increments *************

3.56%

3.54

5.93%
1.96

3.97%

3.95%

(a) Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent.
(b) Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
(c) Includes approximately $1,427 million, $1,733 million, and $1,664 million of earning assets from discontinued operations in 2003, 2002, and 2001, respectively.
(d) Includes approximately $1,034 million, $1,524 million, and $1,776 million of interest-bearing liabilities from discontinued operations in 2003, 2002, and 2001, respectively.

108 U.S. BANCORP

5.62
5.66
5.67
6.36

5.89
7.33

5.48

.34
.72
.26
2.61
1.77

1.05
1.81
2.59

1.53

3.95%

3.93

5.48%
1.23

4.25%

4.23%

RELATED YIELDS AND RATES (a)

2003

2002

2001

Average
Balances

Interest

Yields
and Rates

Average
Balances

Interest

Yields
and Rates

Average
Balances

Interest

Yields
and Rates

2005 v 2004

% Change
Average
Balances

$ 37,248
3,616

$1,697
202

4.56%
5.59

$ 28,829
2,644

$1,504
171

5.22%
6.45

$ 21,916
1,911

$ 1,335
147

6.09%
7.69

(2.1)%
11.6

2,315
1,585
713
2,674

7,287
100

9,286

84
318
21
451
223

1,097
167
805

2,069

41,326
27,142
11,696
38,198

118,362
1,582

160,808
(2,467)
120
29,169

$187,630

$ 31,715

19,104
32,310
5,612
15,493
12,319

84,838
10,503
33,663

129,004
7,518
19,393

$187,630

2,622
1,636
595
2,903

7,756
96

9,527

102
313
25
743
302

1,485
223
972

2,680

5.60
5.84
6.10
7.00

6.16
6.32

5.77

.44
.98
.38
2.91
1.81

1.29
1.59
2.39

1.60

43,817
25,723
8,412
36,501

114,453
1,484

147,410
(2,542)
409
26,671

$171,948

$ 28,715

15,631
25,237
4,928
19,283
11,330

76,409
10,116
32,172

118,697
7,263
17,273

$171,948

5.98
6.36
7.08
7.95

6.78
6.48

6.46

.65
1.24
.51
3.86
2.66

1.94
2.20
3.02

2.26

3,609
2,003
658
3,158

9,428
91

11,001

204
711
42
1,241
630

2,828
476
1,292

4,596

50,072
26,081
8,576
33,448

118,177
1,497

143,501
(1,979)
165
24,257

$165,944

$ 25,109

13,962
24,932
4,571
23,328
13,054

79,847
11,679
26,088

117,614
6,795
16,426

$165,944

$7,217

$6,847

$ 6,405

4.17%

4.15

5.77%
1.28

4.49%

4.47%

4.20%

4.18

6.46%
1.81

4.65%

4.63%

8.4
2.6
25.9
7.9

9.0
4.2

6.1
8.9
(6.4)
4.3

6.1

(2.0)

8.8
(10.8)
(.8)
1.0
51.0

6.2
33.4
2.9

8.3
7.3
2.5

6.1%

7.21
7.68
7.67
9.44

7.98
6.05

7.67

1.46
2.85
.93
5.32
4.82

3.54
4.07
4.95

3.91

3.76%

3.72

7.67%
3.21

4.46%

4.43%

U.S. BANCORP 109

Annual Report on Form 10-K

United States Securities and Exchange Commission
Washington, D.C. 20549

Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the ﬁscal year ended
December 31, 2005

Commission File Number 1-6880

U.S. Bancorp

Incorporated in the State of Delaware
IRS Employer Identiﬁcation #41-0255900
Address: 800 Nicollet Mall
Minneapolis, Minnesota 55402-7014
Telephone: (651) 466-3000

Securities registered pursuant to Section 12(b) of the Act
(and listed on the New York Stock Exchange): Common
Stock, par value $.01.

Securities registered pursuant to section 12(g) of the

Act: None.

U.S. Bancorp is a well-known seasoned issuer, as

deﬁned by Rule 405 of the Securities Act,

U.S. Bancorp is required to ﬁle reports pursuant to

Section 13 or Section 15(d) of the Act.

U.S. Bancorp (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.

Disclosure of delinquent ﬁlers pursuant to Item 405 of

Regulation S-K is contained in this Form 10-K and in the
registrant’s deﬁnitive proxy statement incorporated by
reference in Part III of this Form 10-K.

information under the caption ‘Safe Harbor’ statement
under the Private Securities Litigation Reform Act of 1995
are incorporated in the Form 10-K.

Index

Part I

Item 1

Page

Business
General Business Description ***************20, 111-112
Line of Business Financial Performance *********** 52-57
Website Access to SEC Reports ******************** 116

Item 1A Risk Factors ********************************** 112-116

Item 1B Unresolved Staff Comments *********************** none

Item 2

Properties **************************************** 116

Item 3

Legal Proceedings ******************************* none

Item 4

Submission of Matters to a Vote of

Security Holders ****************************** none

Part II

Item 5

Market for Registrant’s Common Equity, Related

Stockholder Matters and Issuer Purchases of Equity
Securities ********3, 49-50, 64, 83-85, 90-91, 107, 110

Item 6

Selected Financial Data***************************** 19

Item 7

Management’s Discussion and Analysis of

Financial Condition and Results of Operations*** 18-60

Item 7A Quantitative and Qualitative Disclosures About

Market Risk ********************************* 42-49

Item 8

Financial Statements and Supplementary Data **** 62-109

Item 9

Changes in and Disagreements with Accountants

on Accounting and Financial Disclosure ********* none

Item 9A Controls and Procedures************************* 59-60

Item 9B Other Information ******************************** none

U.S. Bancorp is a larger accelerated ﬁler, as deﬁned by

Part III

Rule 12b-2 of the Exchange Act.

Item 10 Directors and Executive Ofﬁcers of the Registrant******** *

U.S. Bancorp is not a shell company, as deﬁned by

Item 11 Executive Compensation ****************************** *

Rule 12b-2 of the Exchange Act.

The aggregate market value of common stock held by

non-afﬁliates as of June 30, 2005, was approximately
$53.4 billion based on the closing sale price as reported on
the New York Stock Exchange.

As of February 27, 2006, U.S. Bancorp had

1,800,880,986 shares of common stock outstanding and
68,868 registered holders of its common stock.

This report incorporates into a single document the
requirements of the Securities and Exchange Commission
with respect to annual reports on Form 10-K and annual
reports to shareholders. Only those sections of this report
referenced in the following cross-reference index and the

Item 12 Security Ownership of Certain Beneﬁcial Owners

and Management and Related Stockholder
Matters ****************************************** *

Item 13 Certain Relationships and Related Transactions ********* *

Item 14 Principal Accountant Fees and Services **************** *

Part IV

Item 15 Exhibits and Financial Statement Schedules****** 117-119

Signatures************************************************* 120

Certiﬁcations********************************************* 121-123

* U.S. Bancorp’s deﬁnitive proxy statement for the 2006 Annual Meeting of Shareholders

is incorporated herein by reference, other than the sections entitled ‘‘Report of the
Compensation Committee’’ and ‘‘Stock Performance Chart.’’

110 U.S. BANCORP

General Business Description U.S. Bancorp is a multi-state
ﬁnancial holding company headquartered in Minneapolis,
Minnesota. U.S. Bancorp was incorporated in Delaware in
1929 and operates as a ﬁnancial holding company and a
bank holding company under the Bank Holding Company
Act of 1956. U.S. Bancorp provides a full range of ﬁnancial
services, including lending and depository services, cash
management, foreign exchange and trust and investment
management services. It also engages in credit card services,
merchant and automated teller machine (‘‘ATM’’)
processing, mortgage banking, insurance, brokerage and
leasing.

U.S. Bancorp’s banking subsidiaries are engaged in the
general banking business, principally in domestic markets.
The subsidiaries range in size from $35 million to
$136 billion in deposits and provide a wide range of
products and services to individuals, businesses, institutional
organizations, governmental entities and other ﬁnancial
institutions. Commercial and consumer lending services are
principally offered to customers within the Company’s
domestic markets, to domestic customers with foreign
operations and within certain niche national venues.
Lending services include traditional credit products as well
as credit card services, ﬁnancing and import/export trade,
asset-backed lending, agricultural ﬁnance and other
products. Leasing products are offered through bank leasing
subsidiaries. Depository services include checking accounts,
savings accounts and time certiﬁcate contracts. Ancillary
services such as foreign exchange, treasury management and
receivable lock-box collection are provided to corporate
customers. U.S. Bancorp’s bank and trust subsidiaries
provide a full range of asset management and ﬁduciary
services for individuals, estates, foundations, business
corporations and charitable organizations.

U.S. Bancorp’s non-banking subsidiaries primarily offer

investment and insurance products to the Company’s
customers principally within its markets and mutual fund
processing services to a broad range of mutual funds.

Banking and investment services are provided through
a network of 2,419 banking ofﬁces principally operating in
24 states in the Midwest and West. The Company operates
a network of 5,003 branded ATMs and provides 24-hour,
seven day a week telephone customer service. Mortgage
banking services are provided through banking ofﬁces and
loan production ofﬁces throughout the Company’s markets.
Consumer lending products may be originated through
banking ofﬁces, indirect correspondents, brokers or other
lending sources, and a consumer ﬁnance division. The
Company is also one of the largest providers of Visa˛
corporate and purchasing card services and corporate trust
services in the United States. A wholly-owned subsidiary,
NOVA Information Systems, Inc. (‘‘NOVA’’), provides
merchant processing services directly to merchants and

through a network of banking afﬁliations. Afﬁliates of
NOVA provide similar merchant services in Canada and
segments of Europe. These foreign operations are not
signiﬁcant to the Company.

On a full-time equivalent basis, as of December 31,

2005, U.S. Bancorp employed 49,684 people.

Competition The commercial banking business is highly
competitive. Subsidiary banks compete with other
commercial banks and with other ﬁnancial institutions,
including savings and loan associations, mutual savings
banks, ﬁnance companies, mortgage banking companies,
credit unions and investment companies. In recent years,
competition has increased from institutions not subject to
the same regulatory restrictions as domestic banks and bank
holding companies.

Government Policies The operations of the Company’s
various operating units are affected by state and federal
legislative changes and by policies of various regulatory
authorities, including those of the numerous states in which
they operate, the United States and foreign governments.
These policies include, for example, statutory maximum
legal lending rates, domestic monetary policies of the Board
of Governors of the Federal Reserve System, United States
ﬁscal policy, international currency regulations and
monetary policies, U.S. Patriot Act and capital adequacy
and liquidity constraints imposed by bank regulatory
agencies.

Supervision and Regulation As a registered bank holding
company and ﬁnancial holding company under the Bank
Holding Company Act, U.S. Bancorp is subject to the
supervision of, and regulation by, the Board of Governors
of the Federal Reserve System.

Under the Bank Holding Company Act, a ﬁnancial
holding company may engage in banking, managing or
controlling banks, furnishing or performing services for
banks it controls, and conducting other ﬁnancial activities.
U.S. Bancorp must obtain the prior approval of the Federal
Reserve Board before acquiring more than 5 percent of the
outstanding shares of another bank or bank holding
company, and must provide notice to, and in some
situations obtain the prior approval of, the Federal Reserve
Board in connection with engaging in, or acquiring more
than 5 percent of the outstanding shares of a company
engaged in, a new ﬁnancial activity.

Under the Bank Holding Company Act, U.S. Bancorp

may acquire banks throughout the United States, subject
only to state or federal deposit caps and state minimum age
requirements.

National banks are subject to the supervision of, and

are examined by, the Comptroller of the Currency. All
subsidiary banks of the Company are members of the
Federal Deposit Insurance Corporation and are subject to

U.S. BANCORP 111

examination by the FDIC. In practice, the primary federal
regulator makes regular examinations of each subsidiary
bank subject to its regulatory review or participates in joint
examinations with other federal regulators. Areas subject to
regulation by federal authorities include the allowance for
credit losses, investments, loans, mergers, issuance of
securities, payment of dividends, establishment of branches
and other aspects of operations.

Risk Factors There are a number of factors, including those
specified below, that may adversely affect the Company’s
business, financial results or stock price. Additional risks that
the Company currently does not know about or currently
views as immaterial may also impair the Company’s business
or adversely impact its financial results or stock price.

Industry Risk Factors

The Company’s business and ﬁnancial results are

signiﬁcantly affected by general business and economic

conditions. The Company’s business activities and earnings
are affected by general business conditions in the United States
and abroad. These conditions include short-term and
long-term interest rates, inflation, monetary supply,
fluctuations in both debt and equity capital markets, and the
strength of the United States economy and the local economies
in which the Company operates. For example, an economic
downturn, an increase in unemployment, or other events that
affect household and/or corporate incomes could result in a
deterioration of credit quality, a change in the allowance for
credit losses, or reduced demand for credit or fee-based
products and services. Changes in the financial performance
and condition of the Company’s borrowers could negatively
affect repayment of those borrowers’ loans. In addition,
changes in securities market conditions and monetary
fluctuations could adversely affect the availability and terms of
funding necessary to meet the Company’s liquidity needs.

Changes in the domestic interest rate environment could

reduce the Company’s net interest income. The operations
of ﬁnancial institutions such as the Company are dependent
to a large degree on net interest income, which is the
difference between interest income from loans and
investments and interest expense on deposits and
borrowings. An institution’s net interest income is
signiﬁcantly affected by market rates of interest, which in
turn are affected by prevailing economic conditions, by the
ﬁscal and monetary policies of the federal government and
by the policies of various regulatory agencies. Like all
ﬁnancial institutions, the Company’s balance sheet is
affected by ﬂuctuations in interest rates. Volatility in interest
rates can also result in the ﬂow of funds away from
ﬁnancial institutions into direct investments. Direct
investments, such as U.S. Government and corporate
securities and other investment vehicles (including mutual

112 U.S. BANCORP

funds) generally pay higher rates of return than ﬁnancial
institutions, because of the absence of federal insurance
premiums and reserve requirements.

Changes in the laws, regulations and policies governing

ﬁnancial services companies could alter the Company’s

business environment and adversely affect operations. The
Board of Governors of the Federal Reserve System regulates
the supply of money and credit in the United States. Its
ﬁscal and monetary policies determine in a large part the
Company’s cost of funds for lending and investing and the
return that can be earned on those loans and investments,
both of which affect the Company’s net interest margin.
Federal Reserve Board policies can also materially affect the
value of ﬁnancial instruments that the Company holds, such
as debt securities and mortgage servicing rights.

The Company and its bank subsidiaries are heavily
regulated at the federal and state levels. This regulation is to
protect depositors, federal deposit insurance funds and the
banking system as a whole. Congress and state legislatures
and federal and state agencies continually review banking
laws, regulations and policies for possible changes. Changes
in statutes, regulations or policies could affect the Company
in substantial and unpredictable ways, including limiting the
types of ﬁnancial services and products that the Company
offers and/or increasing the ability of non-banks to offer
competing ﬁnancial services and products. The Company
cannot predict whether any of this potential legislation will
be enacted, and if enacted, the effect that it or any
regulations would have on the Company’s ﬁnancial
condition or results of operations.

The ﬁnancial services industry is highly competitive, and

competitive pressures could intensify and adversely affect

the Company’s ﬁnancial results. The Company operates in
a highly competitive industry that could become even more
competitive as a result of legislative, regulatory and
technological changes and continued consolidation. The
Company competes with other commercial banks, savings
and loan associations, mutual savings banks, ﬁnance
companies, mortgage banking companies, credit unions and
investment companies. In addition, technology has lowered
barriers to entry and made it possible for non-banks to
offer products and services traditionally provided by banks.
Many of the Company’s competitors have fewer regulatory
constraints and some have lower cost structures. Also, the
potential need to adapt to industry changes in information
technology systems, on which the Company and ﬁnancial
services industry are highly dependent, could present
operational issues and require capital spending.

Changes in consumer use of banks and changes in

consumer spending and saving habits could adversely

affect the Company’s ﬁnancial results. Technology and
other changes now allow many consumers to complete

ﬁnancial transactions without using banks. For example,
consumers can pay bills and transfer funds directly without
going through a bank. This ‘‘disintermediation’’ could result
in the loss of fee income, as well as the loss of customer
deposits and income generated from those deposits. In
addition, changes in consumer spending and saving habits
could adversely affect the Company’s operations, and the
Company may be unable to timely develop competitive new
products and services in response to these changes that are
accepted by new and existing customers.

Acts or threats of terrorism and political or military actions

and revenues from its fee-based products and services. In
addition, the widespread adoption of new technologies,
including internet services, could require the Company to
make substantial expenditures to modify or adapt the
Company’s existing products and services. Also, these and
other capital investments in the Company’s businesses may
not produce expected growth in earnings anticipated at the
time of the expenditure. The Company might not be
successful in introducing new products and services,
achieving market acceptance of its products and services, or
developing and maintaining loyal customers.

taken by the United States or other governments could

Because the nature of the ﬁnancial services business

adversely affect general economic or industry conditions.

involves a high volume of transactions, the Company faces

Geopolitical conditions may also affect the Company’s
earnings. Acts or threats or terrorism and political or military
actions taken by the United States or other governments in
response to terrorism, or similar activity, could adversely
affect general economic or industry conditions.

Company Risk Factors

The Company’s allowance for loan losses may not be

adequate to cover actual losses. Like all ﬁnancial
institutions, the Company maintains an allowance for loan
losses to provide for loan defaults and non-performance.
The Company’s allowance for loan losses is based on its
historical loss experience as well as an evaluation of the
risks associated with its loan portfolio, including the size
and composition of the loan portfolio, current economic
conditions and geographic concentrations within the
portfolio. The Company’s allowance for loan losses may
not be adequate to cover actual loan losses, and future
provisions for loan losses could materially and adversely
affect its ﬁnancial results.

The Company may suffer losses in its loan portfolio

despite its underwriting practices. The Company seeks to
mitigate the risks inherent in its loan portfolio by adhering
to speciﬁc underwriting practices. These practices often
include: analysis of a borrower’s credit history, ﬁnancial
statements, tax returns and cash ﬂow projections; valuation
of collateral based on reports of independent appraisers;
and veriﬁcation of liquid assets. Although the Company
believes that its underwriting criteria are appropriate for the
various kinds of loans it makes, the Company may incur
losses on loans that meet these criteria.

Maintaining or increasing the Company’s market share

may depend on lowering prices and market acceptance of

new products and services. The Company’s success
depends, in part, on its ability to adapt its products and
services to evolving industry standards. There is increasing
pressure to provide products and services at lower prices.
Lower prices can reduce the Company’s net interest margin

signiﬁcant operational risks. The Company operates in
many different businesses in diverse markets and relies on
the ability of its employees and systems to process a high
number of transactions. Operational risk is the risk of loss
resulting from the Company’s operations, including, but not
limited to, the risk of fraud by employees or persons
outside of the Company, the execution of unauthorized
transactions by employees, errors relating to transaction
processing and technology, breaches of the internal control
system and compliance requirements and business
continuation and disaster recovery. This risk of loss also
includes the potential legal actions that could arise as a
result of an operational deﬁciency or as a result of
noncompliance with applicable regulatory standards,
adverse business decisions or their implementation, and
customer attrition due to potential negative publicity. In the
event of a breakdown in the internal control system,
improper operation of systems or improper employee
actions, the Company could suffer ﬁnancial loss, face
regulatory action and suffer damage to its reputation.

The change in residual value of leased assets may have an

adverse impact on the Company’s ﬁnancial results. The
Company engages in leasing activities and is subject to the
risk that the residual value of the property under lease will
be less than the Company’s recorded asset value. Adverse
changes in the residual value of leased assets can have a
negative impact on the Company’s ﬁnancial results. The risk
of changes in the realized value of the leased assets
compared to recorded residual values depends on many
factors outside of the Company’s control, including supply
and demand for the assets, collecting insurance claims,
condition of the assets at the end of the lease term, and
other economic factors.

Negative publicity could damage the Company’s reputation

and adversely impact its business and ﬁnancial results.

Reputation risk, or the risk to the Company’s earnings and
capital from negative publicity, is inherent in the
Company’s business. Negative publicity can result from the
Company’s actual or alleged conduct in any number of

U.S. BANCORP 113

activities, including lending practices, corporate governance
and acquisitions, and actions taken by government
regulators and community organizations in response to
those activities. Negative publicity can adversely affect the
Company’s ability to keep and attract customers and can
expose the Company to litigation and regulatory action.
Because most of the Company’s businesses operate under
the ‘‘U.S. Bank’’ brand, actual or alleged conduct by one
business can result in negative publicity about other
businesses the Company operates. Although the Company
takes steps to minimize reputation risk in dealing with
customers and other constituencies, the Company, as a large
diversiﬁed ﬁnancial services company with a high industry
proﬁle, is inherently exposed to this risk.

The Company’s reported ﬁnancial results depend on

management’s selection of accounting methods and

certain assumptions and estimates. The Company’s
accounting policies and methods are fundamental to how
the Company records and reports its ﬁnancial condition and
results of operations. The Company’s management must
exercise judgment in selecting and applying many of these
accounting policies and methods so they comply with
GAAP and reﬂect management’s judgment of the most
appropriate manner to report the Company’s ﬁnancial
condition and results. In some cases, management must
select the accounting policy or method to apply from two
or more alternatives, any of which might be reasonable
under the circumstances yet might result in the Company’s
reporting materially different results than would have been
reported under a different alternative.

the Financial Accounting Standards Board (FASB) changes
the ﬁnancial accounting and reporting standards that govern
the preparation of the Company’s ﬁnancial statements.
These changes can be hard to predict and can materially
impact how the Company records and reports its ﬁnancial
condition and results of operations. In some cases, the
Company could be required to apply a new or revised
standard retroactively, resulting in the Company’s restating
prior period ﬁnancial statements.

Acquisitions may not produce revenue enhancements or

cost savings at levels or within timeframes originally

anticipated and may result in unforeseen integration

difﬁculties. The Company regularly explores opportunities
to acquire ﬁnancial services businesses or assets and may
also consider opportunities to acquire other banks or
ﬁnancial institutions. The Company cannot predict the
number, size or timing of acquisitions.

Difﬁculty in integrating an acquired business or
company may cause the Company not to realize expected
revenue increases, cost savings, increases in geographic or
product presence, and/or other projected beneﬁts from the
acquisition. The integration could result in higher than
expected deposit attrition (run-off), loss of key employees,
disruption of the Company’s business or the business of the
acquired company, or otherwise adversely affect the
Company’s ability to maintain relationships with customers
and employees or achieve the anticipated beneﬁts of the
acquisition. Also, the negative effect of any divestitures
required by regulatory authorities in acquisitions or business
combinations may be greater than expected.

Certain accounting policies are critical to presenting the

The Company must generally receive federal regulatory

Company’s ﬁnancial condition and results. They require
management to make difﬁcult, subjective or complex
judgments about matters that are uncertain. Materially
different amounts could be reported under different
conditions or using different assumptions or estimates.
These critical accounting policies include: the allowance for
credit losses; the valuation of mortgage servicing rights; the
valuation of goodwill and other intangible assets; and
income taxes. Because of the uncertainty of estimates
involved in these matters, the Company may be required to
do one or more of the following: signiﬁcantly increase the
allowance for credit losses and/or sustain credit losses that
are signiﬁcantly higher than the reserve provided; recognize
signiﬁcant provision for impairment of its mortgage
servicing rights; recognize signiﬁcant impairment on its
goodwill and other intangible asset balances; or signiﬁcantly
increase its accrued taxes liability.

For more information, refer to ‘‘Critical Accounting

Policies’’ in this Annual Report and Form 10-K.

approval before it can acquire a bank or bank holding
company. In determining whether to approve a proposed
bank acquisition, federal bank regulators will consider,
among other factors, the effect of the acquisition on the
competition, ﬁnancial condition, and future prospects. The
regulators also review current and projected capital ratios
and levels, the competence, experience, and integrity of
management and its record of compliance with laws and
regulations, the convenience and needs of the communities
to be served (including the acquiring institution’s record of
compliance under the Community Reinvestment Act) and
the effectiveness of the acquiring institution in combating
money laundering activities. In addition, the Company
cannot be certain when or if, or on what terms and
conditions, any required regulatory approvals will be
granted. The Company may be required to sell banks or
branches as a condition to receiving regulatory approval.

If new laws were enacted that restrict the ability of the

Company and its subsidiaries to share information about

Changes in accounting standards could materially impact

customers, the Company’s ﬁnancial results could be

the Company’s ﬁnancial statements. From time to time,

negatively affected. The Company’s business model

114 U.S. BANCORP

depends on sharing information among the family of
companies owned by U.S. Bancorp to better satisfy the
Company’s customer needs. Laws that restrict the ability of
the companies owned by U.S. Bancorp to share information
about customers could negatively affect the Company’s
revenue and proﬁt.

The Company’s business could suffer if the Company fails

to attract and retain skilled people. The Company’s success
depends, in large part, on its ability to attract and retain
key people. Competition for the best people in most
activities the Company engages in can be intense. The
Company may not be able to hire the best people or to
keep them.

The Company relies on other companies to provide key

components of the Company’s business infrastructure.

Third party vendors provide key components of the
Company’s business infrastructure such as internet
connections, network access and mutual fund distribution.
While the Company has selected these third party vendors
carefully, it does not control their actions. Any problems
caused by these third parties, including as a result of their
not providing the Company their services for any reason or
their performing their services poorly, could adversely affect
the Company’s ability to deliver products and services to
the Company’s customers and otherwise to conduct its
business. Replacing these third party vendors could also
entail signiﬁcant delay and expense.

Signiﬁcant legal actions could subject the Company to

substantial uninsured liabilities. The Company is from time
to time subject to claims related to its operations. These
claims and legal actions, including supervisory actions by
the Company’s regulators, could involve large monetary
claims and signiﬁcant defense costs. To protect itself from
the cost of these claims, the Company maintains insurance
coverage in amounts and with deductibles that it believes
are appropriate for its operations. However, the Company’s
insurance coverage may not cover all claims against the
Company or continue to be available to the Company at a
reasonable cost. As a result, the Company may be exposed
to substantial uninsured liabilities, which could adversely
affect the Company’s results of operations and ﬁnancial
condition.

The Company is exposed to risk of environmental liability

when it takes title to properties. In the course of the
Company’s business, the Company may foreclose on and
take title to real estate. As a result, the Company could be
subject to environmental liabilities with respect to these
properties. The Company may be held liable to a
governmental entity or to third parties for property damage,
personal injury, investigation and clean-up costs incurred by
these parties in connection with environmental

contamination or may be required to investigate or clean up
hazardous or toxic substances or chemical releases at a
property. The costs associated with investigation or
remediation activities could be substantial. In addition, if
the Company is the owner or former owner of a
contaminated site, it may be subject to common law claims
by third parties based on damages and costs resulting from
environmental contamination emanating from the property.
If the Company becomes subject to signiﬁcant
environmental liabilities, its ﬁnancial condition and results
of operations could be adversely affected.

A natural disaster could harm the Company’s business.

Natural disasters could harm the Company’s operations
directly through interference with communications,
including the interruption or loss of the Company’s
websites, which would prevent the Company from gathering
deposits, originating loans and processing and controlling
its ﬂow of business, as well as through the destruction of
facilities and the Company’s operational, ﬁnancial and
management information systems.

The Company faces systems failure risks as well as

security risks, including ‘‘hacking’’ and ‘‘identity theft.’’

The computer systems and network infrastructure the
Company and others use could be vulnerable to unforeseen
problems. These problems may arise in both our internally
developed systems and the systems of our third-party service
providers. Our operations are dependent upon our ability to
protect computer equipment against damage from ﬁre,
power loss or telecommunication failure. Any damage or
failure that causes an interruption in our operations could
adversely affect our business and ﬁnancial results. In
addition, our computer systems and network infrastructure
present security risks, and could be susceptible to hacking
or identity theft.

The Company relies on dividends from its subsidiaries for

its liquidity needs. The Company is a separate and distinct
legal entity from its bank subsidiaries and non-bank
subsidiaries. The Company receives substantially all of its
cash from dividends paid by its subsidiaries. These
dividends are the principal source of funds to pay dividends
on the Company’s stock and interest and principal on its
debt. Various federal and state laws and regulations limit
the amount of dividends that our bank subsidiaries and
certain of our non-bank subsidiaries may pay to the
Company. Also, the Company’s right to participate in a
distribution of assets upon a subsidiary’s liquidation or
reorganization is subject to prior claims of the subsidiary’s
creditors.

The Company has non-banking businesses that are subject

to various risks and uncertainties. The Company is a
diversiﬁed ﬁnancial services company and the Company’s

U.S. BANCORP 115

business model is based on a mix of businesses that provide
a broad range of products and services delivered through
multiple distribution channels. In addition to banking, the
Company provides payment services, investments,
mortgages and corporate and personal trust services.
Although the Company believes its diversity helps lessen the
effect of downturns in any one segment of its industry, it
also means the Company’s earnings could be subject to
various speciﬁc risks and uncertainties related to these non-
banking businesses.

The Company’s stock price can be volatile. The Company’s
stock price can ﬂuctuate widely in response to a variety of
factors, including: actual or anticipated variations in the
Company’s quarterly operating results; recommendations by
securities analysts; signiﬁcant acquisitions or business
combinations; strategic partnerships, joint ventures or
capital commitments by or involving the Company or the
Company’s competitors; operating and stock price
performance of other companies that investors deem
comparable to the Company; new technology used or
services offered by the Company’s competitors; news
reports relating to trends, concerns and other issues in the
ﬁnancial services industry, and changes in government
regulations.

General market ﬂuctuations, industry factors and
general economic and political conditions and events,
including terrorist attacks, economic slowdowns or
recessions, interest rate changes, credit loss trends or
currency ﬂuctuations, could also cause the Company’s stock
price to decrease regardless of the Company’s operating
results.

Properties U.S. Bancorp and its signiﬁcant subsidiaries
occupy headquarter ofﬁces under a long-term lease in
Minneapolis, Minnesota. The Company also leases eight
freestanding operations centers in Cincinnati, Denver,
Milwaukee, Minneapolis, Portland and St. Paul. The

Company owns nine principal operations centers in
Cincinnati, Coeur d’Alene, Fargo, Milwaukee, Owensboro,
Portland, St. Louis and St. Paul. At December 31, 2005, the
Company’s subsidiaries owned and operated a total of
1,431 facilities and leased an additional 1,405 facilities, all
of which are well maintained. The Company believes its
current facilities are adequate to meet its needs. Additional
information with respect to premises and equipment is
presented in Notes 10 and 23 of the Notes to Consolidated
Financial Statements.

Website Access to SEC Reports U.S. Bancorp’s internet
website can be found at usbank.com. U.S. Bancorp makes
available free of charge on its website its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports ﬁled
or furnished pursuant to Section 13 or 15(d) of the
Exchange Act, as well as all other reports ﬁled by
U.S. Bancorp with the SEC, as soon as reasonably
practicable after electronically ﬁled with, or furnished to,
the SEC.

Certiﬁcations We have ﬁled as exhibits to this annual
report on Form 10-K the Chief Executive Ofﬁcer and Chief
Financial Ofﬁcer certiﬁcations required by Section 302 of
the Sarbanes-Oxley Act. We have also submitted the
required annual Chief Executive Ofﬁcer certiﬁcation to the
New York Stock Exchange.

Governance Documents Our Corporate Governance
Guidelines, Code of Ethics and Business Conduct and Board
of Directors committee charters are available free of charge
on our web site at usbank.com, by clicking on ‘‘About
U.S. Bancorp,’’ then ‘‘Corporate Governance.’’ Shareholders
may request a free printed copy of any of these documents
from our investor relations department by contacting them
at investorrelations@usbank.com or calling (866) 775-9668.

116 U.S. BANCORP

E N T RY I N T O C E RTA I N C O V E N A N T S

E x h i b i t s

Simultaneously with the closing of the ICONs Offering,

4.1

USB Capital VIII Replacement Capital Covenant On
December 29, 2005, the Company and USB Capital VIII, a
Delaware statutory trust and wholly owned subsidiary of
U.S. Bancorp, closed the public offering of $375,000,000
principal amount of 6.35% Trust Preferred Securities (the
‘‘Capital Securities’’), representing preferred beneﬁcial
interests in the assets of USB Capital VIII. The proceeds
from the sale by USB Capital VIII of the Capital Securities
to investors, and its common securities to the Company,
were invested by USB Capital VIII in the Company’s 6.35%
Income Capital Obligation Notes (the ‘‘ICONs’’), due 2065
(the ‘‘ICONs Offering’’).

the Company entered into a replacement capital covenant
for the beneﬁt of persons that buy, hold or sell a speciﬁed
series of long-term indebtedness of the Company or
U.S. Bank National Association (‘‘ICONs Covered Debt’’).
We will provide a copy of the ICONs Replacement Capital
Covenant to holders of ICONs Covered Debt upon request
made to the Investor Relations contact listed inside the back
cover of this annual report.

The ICONs replacement capital covenant provides that
the Company will not redeem or repurchase, and will cause
USB Capital VIII not to redeem or repurchase, all or any
part of the ICONs or the Capital Securities on or before
December 29, 2035, except, with certain limited exceptions,
to the extent that, during the 180 days prior to the date of
that redemption or repurchase, the Company has received
proceeds from the sale of qualifying securities that (i) have
equity-like characteristics that are the same as, or more
equity-like than, the applicable characteristics of the ICONs
at the time of redemption or repurchase and qualify as
Tier 1 capital of the Company under the capital guidelines
of the Federal Reserve Board, and (ii) the Company has
obtained prior approval of the Federal Reserve Board, if
such approval is then required by the Federal Reserve
Board.

As of the date of this Annual Report, the U.S. Bancorp

4.50% Medium-Term Notes, Series P, CUSIP
No. 91159HGJ3, constitutes ICONs Covered Debt whose
holders are entitled to the beneﬁts of the ICONS
Replacement Capital Covenant.

Schedules to the consolidated ﬁnancial statements
required by Regulation S-X are omitted since the required
information is included in the footnotes or is not applicable.
The following Exhibit Index lists the Exhibits to the

Annual Report on Form 10-K.

(1)3.1 Restated Certiﬁcate of Incorporation, as

amended. Filed as Exhibit 3.1 to Form 10-Q
for the quarterly period ended March 31,
2005.

(1)3.2 Restated bylaws, as amended. Filed as

Exhibit 3.2 to Form 10-K for the year ended
December 31, 2001

[Pursuant to Item 601(b) (4)(iii)(A) of
Regulation S-K, copies of instruments deﬁning
the rights of holders of long-term debt are not
ﬁled. U.S. Bancorp agrees to furnish a copy
thereof to the Securities and Exchange
Commission upon request.]

(1)4.2 Amended and Restated Rights Agreement,
dated as of December 31, 2002, between
U.S. Bancorp and Mellon Investor Services
LLC. Filed as Exhibit 4.2 to Amendment
No. 1 to Registration Statement on Form 8-A
(File No. 001-06880) on December 31, 2002
(1)(2)10.1 U.S. Bancorp 2001 Stock Incentive Plan. Filed

as Exhibit 10.1 to Form 10-K for the year
ended December 31, 2001

(1)(2)10.2 Amendment No. 1 to U.S. Bancorp 2001

Stock Incentive Plan. Filed as Exhibit 10.2 to
Form 10-K for the year ended December 31,
2002

(1)(2)10.3 U.S. Bancorp 1998 Executive Stock Incentive
Plan. Filed as Exhibit 10.3 to Form 10-K for
the year ended December 31, 2002

(1)(2)10.4

Summary of U.S. Bancorp 1991 Executive
Stock Incentive Plan. Filed as Exhibit 10.4 to
Form 10-K for the year ended December 31,
2002

(1)(2)10.5 U.S. Bancorp 2001 Employee Stock Incentive
Plan. Filed as Exhibit 10.5 to Form 10-K for
the year ended December 31, 2002

(1)(2)10.6

(1)(2)10.7

Firstar Corporation 1999 Employee Stock
Incentive Plan. Filed as Exhibit 10.6 to
Form 10-K for the year ended December 31,
2002

Firstar Corporation 1998 Employee Stock
Incentive Plan. Filed as Exhibit 10.7 to
Form 10-K for the year ended December 31,
2002

U.S. BANCORP 117

(1)(2)10.8

Star Banc Corporation 1996 Starshare Stock
Incentive Plan for Employees. Filed as
Exhibit 10.8 to Form 10-K for the year ended
December 31, 2002

(1)(2)10.9 U.S. Bancorp Executive Incentive Plan. Filed as
Exhibit 10.2 to Form 10-K for the year ended
December 31, 2001

(1)(2)10.10 U.S. Bancorp Executive Deferral Plan, as

amended. Filed as Exhibit 10.7 to Form 10-K
for the year ended December 31, 1999
(1)(2)10.11 Summary of Nonqualiﬁed Supplemental

Executive Retirement Plan, as amended, of the
former U.S. Bancorp. Filed as Exhibit 10.4 to
Form 10-K for the year ended December 31,
2001

(1)(2)10.12 1991 Performance and Equity Incentive Plan
of the former U.S. Bancorp. Filed as
Exhibit 10.13 to Form 10-K for the year
ended December 31, 1997

(1)(2)10.13 Form of Director Indemniﬁcation Agreement

entered into with former directors of the
former U.S. Bancorp. Filed as Exhibit 10.15 to
Form 10-K for the year ended December 31,
1997

(1)(2)10.14 U.S. Bancorp Independent Director Retirement

and Death Beneﬁt Plan, as amended. Filed as
Exhibit 10.17 to Form 10-K for the year
ended December 31, 1999

(1)(2)10.15 U.S. Bancorp Deferred Compensation Plan for
Directors, as amended. Filed as Exhibit 10.18
to Form 10-K for the year ended
December 31, 1999

(1)(2)10.16 U.S. Bancorp Non Qualiﬁed Executive

Retirement Plan. Filed as Exhibit 10.16 to
Form 10-K for the year ended December 31,
2002

(1)(2)10.17 Appendix B-10 to U.S. Bancorp Non-Qualiﬁed
Executive Retirement Plan. Filed as
Exhibit 10.1 to Form 10-Q for the quarterly
period ended March 31, 2005

(1)(2)10.18 Amendments No. 1, 2 and 3 to U.S. Bancorp

Non-Qualiﬁed Executive Retirement Plan.
Filed as Exhibit 10.17 to Form 10-K for the
year ended December 31, 2003
(1)(2)10.19 Amendment No. 4 to U.S. Bancorp Non-

Qualiﬁed Executive Retirement Plan. Filed as
Exhibit 10.1 to Form 8-K ﬁled on
December 23, 2004

(1)(2)10.20 Amendment No. 5 to U.S. Bancorp Non-

Qualiﬁed Executive Retirement Plan. Filed as
Exhibit 10.2 to Form 10-Q for the quarterly
period ended March 31, 2005

118 U.S. BANCORP

(1)(2)10.21 Amendment No. 6 to U.S. Bancorp Non-

Qualiﬁed Executive Retirement Plan. Filed as
Exhibit 10.1 to Form 8-K ﬁled on October 20,
2005

(1)(2)10.22 U.S. Bancorp Executive Employees Deferred

Compensation Plan. Filed as Exhibit 10.18 to
Form 10-K for the year ended December 31,
2003

(1)(2)10.23 U.S. Bancorp 2005 Executive Employees

Deferred Compensation Plan. Filed as
Exhibit 10.2 to Form 8-K ﬁled on
December 21, 2005

(1)(2)10.24 U.S. Bancorp Outside Directors Deferred

Compensation Plan. Filed as Exhibit 10.19 to
Form 10-K for the year ended December 31,
2003

(1)(2)10.25 U.S. Bancorp 2005 Outside Directors Deferred

Compensation Plan. Filed as Exhibit 10.1 to
Form 8-K ﬁled on December 21, 2005
(1)(2)10.26 Form of Change in Control Agreement,
effective November 16, 2001, between
U.S. Bancorp and certain executive ofﬁcers of
U.S. Bancorp. Filed as Exhibit 10.12 to
Form 10-K for the year ended December 31,
2001

(1)(2)10.27 Form of Executive Ofﬁcer Stock Option

Agreement with cliff and performance vesting
under U.S. Bancorp 2001 Stock Incentive Plan.
Filed as Exhibit 10.1 to Form 10-Q for the
quarterly period ended September 30, 2004

(1)(2)10.28 Form of Executive Ofﬁcer Stock Option

Agreement with annual vesting under
U.S. Bancorp 2001 Stock Incentive Plan. Filed
as Exhibit 10.2 to Form 10-Q for the
quarterly period ended September 30, 2004

(1)(2)10.29 Form of 2006 Executive Ofﬁcer Stock Option
Agreement with annual vesting under
U.S. Bancorp 2001 Stock Incentive Plan. Filed
as Exhibit 10.1 to Form 8-K ﬁled on
January 17, 2006

(1)(2)10.30 Form of Executive Ofﬁcer Restricted Stock
Award Agreement under U.S. Bancorp 2001
Stock Incentive Plan. Filed as Exhibit 10.3 to
Form 10-Q for the quarterly period ended
September 30, 2004

(1)(2)10.31 Form of Director Stock Option Agreement

under U.S. Bancorp 2001 Stock Incentive Plan.
Filed as Exhibit 10.4 to Form 10-Q for the
quarterly period ended September 30, 2004

(1)(2)10.32 Form of Director Restricted Stock Unit

Agreement under U.S. Bancorp 2001 Stock
Incentive Plan. Filed as Exhibit 10.5 to
Form 10-Q for the quarterly period ended
September 30, 2004

(1)(2)10.33 Form of Executive Ofﬁcer Restricted Stock
Unit Agreement under U.S. Bancorp 2001
Stock Incentive Plan. Filed as Exhibit 10.6 to
Form 10-Q for the quarterly period ended
September 30, 2004

(1)(2)10.34 Employment Agreement with Jerry A.
Grundhofer. Filed as Exhibit 10.13 to
Form 10-K for the year ended December 31,
2001

(1)(2)10.35 Amendment of Employment Agreement with
Jerry A. Grundhofer. Filed as Exhibit 10.1 to
Form 10-Q for the quarterly period ended
June 30, 2004

(1)(2)10.36 Amendment No. 2 of Employment Agreement
with Jerry A. Grundhofer. Filed as
Exhibit 10.8 to Form 10-Q for the quarterly
period ended September 30, 2004
(1)(2)10.37 Restricted Stock Unit Award Agreement with
Jerry A. Grundhofer dated January 2, 2002.
Filed as Exhibit 10.7 to Form 10-Q for the
quarterly period ended September 30, 2004

(1)(2)10.38 Offer of Employment to Richard C. Hartnack.

Filed as Exhibit 10.3 to Form 10-Q for the
quarterly period ended March 31, 2005

(2)10.39 Information Regarding the 2006

Compensation of the Non-Employee Members
of the Board of Directors of U.S. Bancorp
Statement re: Computation of Ratio of
Earnings to Fixed Charges
Subsidiaries of the Registrant

21
23.1 Consent of Ernst & Young LLP
31.1 Certiﬁcation of Chief Executive Ofﬁcer

pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
31.2 Certiﬁcation of Chief Financial Ofﬁcer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
Certiﬁcation of Chief Executive Ofﬁcer and
Chief Financial Ofﬁcer pursuant to 18 U.S.C.
section 1350 as adopted pursuant to section
906 of the Sarbanes-Oxley Act of 2002

(1) Exhibit has previously been ﬁled with the Securities and Exchange Commission and is

incorporated herein as an exhibit by reference to the prior ﬁling.
(2) Management contracts or compensatory plans or arrangements.

U.S. BANCORP 119

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on March 7, 2006, on its
behalf by the undersigned, thereunto duly authorized.

U.S. Bancorp
By: Jerry A. Grundhofer
Chairman and Chief Executive Ofﬁcer

Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below on March 7,
2006, by the following persons on behalf of the registrant
and in the capacities indicated.

Jerry A. Grundhofer

Chairman and Chief Executive Ofﬁcer

(principal executive ofﬁcer)

David M. Moffett

Vice Chairman and Chief Financial Ofﬁcer

(principal ﬁnancial ofﬁcer)

Terrance R. Dolan

Executive Vice President and Controller

(principal accounting ofﬁcer)

Victoria Buyniski Gluckman

Director

Arthur D. Collins, Jr.

Director

Peter H. Coors

Director

Joel W. Johnson

Director

Jerry W. Levin

Director

David B. O’Maley

Director

O’dell M. Owens, M.D., M.P.H.

Director

Richard G. Reiten

Director

Craig D. Schnuck

Director

Warren R. Staley

Director

Patrick T. Stokes

Director

120 U.S. BANCORP

EXHIBIT 31.1

CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Jerry A. Grundhofer, Chief Executive Ofﬁcer of U.S. Bancorp, a Delaware corporation, certify that:

(1) I have reviewed this Annual Report on Form 10-K of U.S. Bancorp;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material

fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

(3) Based on my knowledge, the ﬁnancial statements, and other ﬁnancial information included in this report, fairly present in
all material respects the ﬁnancial condition, results of operations and cash ﬂows of the registrant as of, and for, the
periods presented in this report;

(4) The registrant’s other certifying ofﬁcers and I are responsible for establishing and maintaining disclosure controls and

procedures (as deﬁned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over ﬁnancial reporting (as
deﬁned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;

(b) designed such internal control over ﬁnancial reporting, or caused such internal control over ﬁnancial reporting to be

designed under our supervision, to provide reasonable assurance regarding the reliability of ﬁnancial reporting and the
preparation of ﬁnancial statements for external purposes in accordance with generally accepted accounting principles;

conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over ﬁnancial reporting that occurred during the
registrant’s most recent ﬁscal quarter (the registrant’s fourth ﬁscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over ﬁnancial reporting;
and

(5) The registrant’s other certifying ofﬁcers and I have disclosed, based on our most recent evaluation of internal control over
ﬁnancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) all signiﬁcant deﬁciencies and material weaknesses in the design or operation of internal control over ﬁnancial

reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report ﬁnancial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a signiﬁcant role in the

registrant’s internal control over ﬁnancial reporting.

Dated: March 7, 2006

/s /

JERRY A. GRUNDHOFER

Jerry A. Grundhofer
Chief Executive Ofﬁcer

U.S. BANCORP 121

EXHIBIT 31.2

CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, David M. Moffett, Chief Financial Ofﬁcer of U.S. Bancorp, a Delaware corporation, certify that: