U.S. Bancorp Annual Report 2007

Plain-text annual report

U.S. Bancorp 800 Nicollet Mall Minneapolis, MN 55402 usbank.com U S . . B a n c o r p 2 0 0 7 A n n u a l R e p o r t Building Deeper Customer Relationships Innovating Products and Services Expanding Capabilities and Distribution 2007 Annual Report Corporate Information Executive Offices U.S. Bancorp 800 Nicollet Mall Minneapolis, MN 55402 Common Stock Transfer Agent and Registrar BNY Mellon Investor Services acts as our transfer agent and registrar, dividend paying agent and dividend reinvestment plan administrator, and maintains all shareholder records for the corporation. Inquiries related to shareholder records, stock transfers, changes of ownership, lost stock certiﬁcates, changes of address and dividend payment should be directed to the transfer agent at: BNY Mellon Shareowner Services P.O. Box 358015 Pittsburgh, PA 15252-8015 Phone: 888-778-1311 or 201-680-6578 Internet: bnymellon.com/shareowner For Registered or Certiﬁed Mail: BNY Mellon Shareowner Services 500 Ross St., 6th Floor Pittsburgh, PA 15219 Telephone representatives are available weekdays from 8:00 a.m. to 6:00 p.m. Central Time, and automated support is available 24 hours a day, 7 days a week. Specific information about your account is available on BNY Mellon’s internet site by clicking on the Investor ServiceDirect® link. Independent Auditor Ernst & Young LLP serves as the independent auditor for U.S. Bancorp’s ﬁnancial statements. Common Stock Listing and Trading U.S. Bancorp common stock is listed and traded on the New York Stock Exchange under the ticker symbol USB. Dividends and Reinvestment Plan U.S. Bancorp currently pays quarterly dividends on our common stock on or about the 15th day of January, April, July and October, subject to approval by our Board of Directors. U.S. Bancorp share- holders can choose to participate in a plan that provides automatic reinvestment of dividends and/or optional cash purchase of additional shares of U.S. Bancorp common stock. For more information, please contact our transfer agent, BYN Mellon Investor Services. Investor Relations Contacts Judith T. Murphy Senior Vice President, Investor Relations judith.murphy@usbank.com Phone: 612-303-0783 or 866-775-9668 Financial Information U.S. Bancorp news and ﬁnancial results are available through our website and by mail. Website For information about U.S. Bancorp, including news, ﬁnancial results, annual reports and other documents ﬁled with the Securities and Exchange Commission, access our home page on the internet at usbank.com, click on About U.S. Bancorp, then Investor /Shareholder Information. Mail At your request, we will mail to you our quarterly earnings, news releases, quarterly ﬁnancial data reported on Form 10-Q and additional copies of our annual reports. Please contact: U.S. Bancorp Investor Relations 800 Nicollet Mall Minneapolis, MN 55402 investorrelations@usbank.com Phone: 866-775-9668 Media Requests Steven W. Dale Senior Vice President, Media Relations steve.dale@usbank.com Phone: 612-303-0784 Privacy U.S. Bancorp is committed to respecting the privacy of our customers and safeguarding the ﬁnancial and personal information provided to us. To learn more about the U.S. Bancorp commitment to protecting privacy, visit usbank.com and click on Privacy Pledge. Code of Ethics U.S. Bancorp places the highest importance on honesty and integrity. Each year, every U.S. Bancorp employee certiﬁes compliance with the letter and spirit of our Code of Ethics and Business Conduct, the guiding ethical standards of our organization. For details about our Code of Ethics and Business Conduct, visit usbank.com and click on About U.S. Bancorp, then Ethics at U.S. Bank. Diversity U.S. Bancorp and our subsidiaries are committed to developing and maintaining a workplace that reﬂects the diversity of the communities we serve. We support a work environment where individual differences are valued and respected and where each individual who shares the fundamental values of the company has an opportunity to contribute and grow based on individual merit. Equal Employment Opportunity/Affirmative Action U.S. Bancorp and our subsidiaries are committed to providing Equal Employment Opportunity to all employees and applicants for employment. In keeping with this commitment, employment decisions are made based upon performance, skill and abilities, not race, color, religion, national origin or ancestry, gender, age, disability, veteran status, sexual orientation or any other factors protected by law. The corpo- ration complies with municipal, state and federal fair employment laws, including regulations applying to federal contractors. U.S. Bancorp, including each of our subsidiaries, is an Equal Opportunity Employer committed to creating a diverse workforce. The paper utilized in this annual report is certified by the Forest Stewardship Council. The paper contains a mix of pulp that is derived from FSC certified well- managed forests, post-consumer recycled paper fibers and other controlled sources. U.S. Bank, Member FDIC U.S. Bancorp invests for growth by building deeper relationships with our 14.9 million customers, developing innovative products and services, expanding our delivery capabilities and enlarging the depth and breadth of our distribution systems. U.S. Bancorp, with total assets of Southwest and Northwest. Our $238 billion at year-end 2007, is a company’s diverse business mix of diverse multi-state financial services products and services are provided holding company serving more than through four major lines of business: 14.9 million customers. U.S. Bancorp Wholesale Banking, Payment is the parent company of U.S. Bank, Services, Wealth Management & the sixth-largest commercial bank Securities Services and Consumer in the nation. U.S. Bancorp offers Banking. Information about these regional consumer and business businesses can be found throughout banking and wealth management this report. U.S. Bancorp is head- services, national wholesale and quartered in Minneapolis, Minnesota. trust services and global payments U.S. Bancorp employs more than services. U.S. Bank operates 54,000 people. 2,518 banking offices in 24 states, primarily in the lower and upper Visit U.S. Bancorp online at Midwest and throughout the usbank.com 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 1 Table of Contents Page Page Page Page Page Page Page Page Page Page 2 4 5 6 8 10 12 14 15 16 Financials Page Page Page Page Page Page Page Page Page Page 18 65 68 72 108 110 111 114 120 121 Corporate Overview Selected Financial Highlights Financial Summary Letter to Shareholders Building Deeper Customer Relationships Innovating Products and Services Expanding Capabilities and Distribution Focusing on Employees Using Resources Responsibly Building Communities Management’s Discussion and Analysis Reports of Management and Independent Accountants Consolidated Financial Statements Notes to Consolidated Financial Statements Five-year Consolidated Financial Statements Quarterly Consolidated Financial Data Supplemental Financial Data Company Information Executive Ofﬁcers Directors Inside Back Cover Corporate Information “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: This report contains forward-looking statement about U.S. Bancorp. 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 the Company. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including changes in general business and economic conditions, changes in interest rates, deterioration in the credit quality of our loan portfolios or in the value of the collateral securing those loans, deterioration in the value of securities held in our investment securities portfolio, legal and regulatory developments, increased competition from both banks and non-banks, changes in customer behavior and preferences, effects of mergers and acquisitions and related integration, effects of critical accounting policies and judgments, and management’s ability to effectively manage credit risk, market risk, operational risk, legal risk, and regulatory and compliance risk. These and other risks are discussed throughout this report, which you should read carefully, including the sections entitled “Corporate Risk Proﬁle” beginning on page 33 and “Risk Factors” beginning on page 115. Forward-looking statements speak only as of the date they are made, and U.S. Bancorp undertakes no obligation to update them in light of new information of future events. U.S. BANCORP 1 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 2 Corporate Overview U.S. Bancorp at a Glance Ranking U.S. Bank is 6th largest U.S. commercial bank $238 billion $131 billion $154 billion $2.43 1.93% 21.3% 49.3% 46.6% 14.9 million Asset size Deposits Loans Earnings per common share (diluted) Return on average assets Return on average common equity Efﬁciency ratio Tangible efﬁciency ratio Customers Payment services and merchant processing Global Wholesale banking and trust services Consumer and business banking National and wealth management Employees Bank branches ATMs NYSE symbol At year-end 2007 24 states 54,000 2,518 4,867 USB Mission Statement U.S. Bancorp unveils its new mission statement — it’s our employees’ clear, strong commitment to our customers, communities and shareholders. We put our mission into action every day. U.S. Bancorp Business Scope Regional National Global Consumer & Business Banking & Wealth Management Wholesale Banking & Trust Services Payments 2 U.S. BANCORP 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 3 Points of Pride U.S. Banker Magazine Names U.S. Bank Awarded Top Women in Banking. Again. U.S. Bancorp Top Banking Team “Outstanding” Rating U.S. Banker, a SourceMedia publication, Solid performance landed U.S. Bancorp In 2007, U.S. Bank National Association ranked U.S. Bancorp number one in the Chairman, President and CEO Richard was awarded an “Outstanding” rating, nation for the second year in a row for Davis, CFO Andrew Cecere, and the highest rating possible, by the Ofﬁce its “Top Banking Team.” The award was the bank on U.S. Banker’s annual of the Comptroller of the Currency (OCC) announced in the October 2007 “Most All-Star Banking Team. The ranking for its commitment to the letter and Powerful Women in Banking” issue. was published in the magazine’s spirit of the Community Reinvestment Two U.S. Bancorp women — Pam Joseph January 2008 issue. Act (CRA). By awarding this rating, and Diane Thormodsgard — ranked in the OCC acknowledged that U.S. Bank the top 10 Most Powerful Women in is continuing to meet the credit needs Banking category, in addition to the bank of all segments of its communities. garnering the top team award. Lines of Business Revenue by Business Line for the Year-ended 2007 Payment Services — U.S. Bancorp is a world leader in payment services. Corporate Payment Systems Merchant Payment Services NOVA Information Systems® 26% Retail Payment Solutions: Debit, Credit, Specialty Cards and Gift Cards Transactions Services: ATM and Debit Processing and Services Wholesale Banking — U.S. Bancorp provides expertise, resources, prompt decision-making and commitment to partnerships that make us a leader in Corporate, Commercial and Real Estate Banking. Middle Market Commercial Banking Commercial Real Estate National Corporate Banking Correspondent Banking Dealer Commercial Services Community Banking Equipment Finance Foreign Exchange Government Banking International Banking Treasury Management 19% Small Business Equipment Finance Small Business Administration (SBA) Division Title Industry Banking Wealth Management & Securities Services — U.S. Bancorp provides solutions to help individuals, businesses and municipalities build, manage, preserve and protect wealth and distribute obligations. Wealth Management: The Private Client Group U.S. Bancorp Investments, Inc. U.S. Bancorp Insurance Services, LLC Securities Services: Corporate Trust Services Institutional Trust & Custody FAF Advisors, Inc. U.S. Bancorp Fund Services, LLC 14% Consumer Banking — Convenience, customer service, accessibility and a comprehensive set of quality products make U.S. Bank the ﬁrst choice of 13 million-plus consumers. Community Banking Metropolitan Branch Banking In-store and Corporate On-site Banking 41% Small Business Banking Consumer Lending 24-Hour Banking & Financial Sales Home Mortgage Community Development Workplace and Student Banking U.S. BANCORP 3 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 4 Selected Financial Highlights Net Income (Dollars in Millions) 1 5 7 4 , 9 8 4 4 , 4 2 3 4 , 7 6 1 4 , 3 3 7 3 , 5,000 2,500 03 04 05 06 07070 Return on Average Assets (In Percents) 7 1 2 . 1 2 2 . 3 2 2 . 9 9 1 . 3 9 . 1 03 04 05 06 07070 Net Interest Margin (Taxable-Equivalent Basis) (In Percents) 9 4 4 . 5 2 4 . 7 9 3 . 5 6 3 . 7 4 3 . 0 2.4 1.2 0 5.00 2.50 0 3.00 1.50 0 24 12 0 50 25 0 Diluted Earnings Per Common Share (In Dollars) Dividends Declared Per Common Share (In Dollars) 1 6 2 . 2 4 2 . 3 4 2 . 8 1 3 2 9 1 . . 03 04 05 06 07070 Return on Average Common Equity (In Percents) . 6 3 2 . 5 2 2 . 3 1 2 . 4 1 2 2 9 1 . 2.00 1.00 0 80 5 2 6 1 . 0 9 3 1 . 0 3 2 1 . 0 2 0 1 . 5 5 8 . 03 04 05 06 07070 Dividend Payout Ratio (In Percents) 1 . 6 6 40 . 1 4 4 . 2 6 4 2 . 0 5 7 . 2 5 03 04 05 06 07070 Tier 1 Capital (In Percents) 1 9 . 6 8 . 8 2 8 8 . . 3 8 . 03 04 05 06 07070 Efficiency Ratio (a) (In Percents) . 6 5 4 . 3 5 4 . 3 4 4 . 4 5 4 . 3 9 4 0 10 5 0 03 04 05 06 07070 03 04 05 06 07070 03 04 05 06 07070 Average Assets (Dollars in Millions) 240,000 0 3 6 7 8 1 , 3 9 5 1 9 1 , 120,000 2 1 5 3 1 2 , 8 9 1 3 0 2 , 1 2 6 3 2 2 , 0 25,000 12,500 0 Average Shareholders’ Equity (Dollars in Millions) 3 9 3 9 1 , 9 5 4 9 1 , 3 5 9 9 1 , 0 1 7 0 2 , 7 9 9 0 2 , Total Risk-Based Capital (In Percents) . 6 3 1 . 1 3 1 . 5 2 1 . 6 2 1 . 2 2 1 15 7.5 0 03 04 05 06 07070 03 04 05 06 07070 03 04 05 06 07070 (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. 4 U.S. BANCORP 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 5 Financial Summary Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data) 2007 2006 2005 2007 v 2006 Total net revenue (taxable-equivalent basis) . . . . . . . . . . . . . . $ 13,936 $ 13,636 $ 13,133 2.2% Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes and taxable-equivalent adjustments . . . . . . . . . 6,862 792 1,958 6,180 544 2,161 5,863 666 2,115 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,324 $ 4,751 $ 4,489 Net income applicable to common equity . . . . . . . . . . . . . . $ 4,264 $ 4,703 $ 4,489 11.0 45.6 (9.4) (9.0) (9.3) 2006 v 2005 3.8% 5.4 (18.3) 2.2 5.8 4.8 Per Common Share Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.46 $ 2.64 $ 2.45 (6.8)% 7.8% 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 . . . . . . . . . . . . . 2.43 1.625 11.60 31.74 1,735 1,758 2.61 1.390 11.44 36.19 1,778 1,804 2.42 1.230 11.07 29.89 1,831 1,857 (6.9) 16.9 1.4 (12.3) (2.4) (2.5) 7.9 13.0 3.3 21.1 (2.9) (2.9) Financial Ratios Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.93% 2.23% 2.21% Return on average common equity . . . . . . . . . . . . . . . . . . . . . Net interest margin (taxable-equivalent basis) . . . . . . . . . . . . . Efficiency ratio (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.3 3.47 49.3 23.6 3.65 45.4 22.5 3.97 44.3 Average Balances Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $147,348 $140,601 $131,610 4.8% Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,313 Earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,683 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,621 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,075 Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,997 39,961 186,231 213,512 120,589 20,710 42,103 178,425 203,198 121,001 19,953 Period End Balances Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $153,827 $143,597 $136,462 Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,260 Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,116 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,615 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,445 Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,046 2,256 40,117 219,232 124,882 21,197 2,251 39,768 209,465 124,709 20,086 Regulatory capital ratios Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3% 8.8% 8.2% Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 7.9 5.1 12.6 8.2 5.5 12.5 7.6 5.9 3.4 4.5 4.7 .4 1.4 7.1% (8.8) 7.5 8.4 5.3 (.7) (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. 6.8% (5.1) 4.4 5.1 (.3) 3.8 5.2% .2 .9 4.7 .1 5.5 U.S. BANCORP 5 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 6 Letter to Shareholders We are proud of the 2007 financial performance of U.S. Bancorp, given the challenges presented by the economic environment during the second half of 2007. It was another year in which we distinguished our Company from others in the industry. Total Shareholder Return U.S. Bancorp 1 Year = (7.9)% 3 Year = 15.8% 5 Year = 86.0% Fellow Shareholders: December of 2007 marked my one-year anniversary as CEO of U.S. Bancorp. My ﬁrst year proved to be much more than “business as usual” for our Company and for most companies in the ﬁnancial services industry. Although our Company’s results were somewhat affected by the rapidly changing economic environment in the latter half of the year, our overall 2007 ﬁnancial performance clearly demonstrated this Company’s ability to deliver S&P 500 Commercial Bank Index 1 Year = (22.7)% 3 Year = (9.2)% 5 Year = 36.5% S&P 500 Index 1 Year = 5.5% 3 Year = 28.1% 5 Year = 82.8% industry-leading returns, capital generation and quality core earnings for the beneﬁt of Source: Bloomberg our shareholders. Although our performance, both in terms of our ﬁnancial results and total return to shareholders, was relatively superior to that of the industry, 2007 total shareholder return was negative, and that was disappointing to me and our management team. Earnings Distributed to Common Shareholders During the second half of 2007, the banking industry faced issues which included the deterioration in credit quality resulting from exposure to subprime lending and related industry segments, as well as liquidity concerns as investors backed away from mortgage- related investments and corporate debt offerings. U.S. Bancorp was not immune to the issues facing the industry, but our Company’s strong balance sheet and capital position, our disciplined approach to interest rate, credit and operational risk, in addition to our strong fee-based businesses and efﬁcient operations, minimized their impact on our results. 112112 9 5 111 111 5 4 6 6 3 5 9090 0 4 0 5 TaTa Target % 120% 109 3 6 90 0 60 0 30 00 0 0 0 6 4 Overall, our credit quality remained strong in 2007, with some expected moderate increases in net charge-offs and nonperforming assets, reﬂecting recent changes in the credit cycle. Our net charge-off and nonperforming asset ratios compared favorably to our peers, denoting our limited exposure to the most stressed industry segments and prudent underwriting standards. Our allowance for loan loss reserves and corresponding coverage ratios were adequate at year end. We expect the economic environment to continue to have a somewhat negative impact on our industry. We believe our overall conservative risk proﬁle and prudent approach to credit will serve us well going forward and mitigate its inﬂuence on our Company. Our Company began and ended the year with a strong capital base. The proﬁtability of our Company has led to industry leading returns on average common equity and average assets, and this generation of capital has enabled us to return earnings to our shareholders through both dividends and share repurchases. The strength of our earnings and capital base enabled us to return 111 percent of earnings to shareholders in 2007. I am especially proud of the fact that we were able to, once again, increase our dividend last December. This marked the 36th consecutive year in which U.S. Bancorp, through its predecessor companies, has increased its annual dividend rate and the 145th consecutive year that a dividend has been paid to our shareholders. 6 U.S. BANCORP 04 04 0505 0606 0707 Share Repurchase Common Dividends History of Cash Dividends U.S. Bancorp (S&P 500) Toronto-Dominion Bank WGL Holdings Bank of Nova Scotia Bank of Montreal JP Morgan Chase & Co (S&P 500) Westpac Banking ADS York Water Bank of New York Mellon (S&P 500) Source: Standard & Poors 1863 1857 1852 1834 1829 1827 1817 1816 1785 U.S. Bancorp has the third-longest record of paying a dividend of all stocks listed on the S&P 500 and is the ninth-oldest payer of a dividend overall. 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 7 The ﬁnancial highlights charts on page 4 and the ﬁnancial summary on page 5 provide you with a snapshot of our 2007 performance, but I would like to note two signiﬁcant items that had an impact on our results for 2007. We recorded a $107 million asset valuation loss in the fourth quarter related to the purchase of certain asset-backed commercial paper holdings from several money market funds managed by our subsidiary FAF Advisors. We also reported charges totaling $330 million representing our proportionate share of litigation expense involving Visa® and a number of other Visa® banks. These Visa®-related charges should be more than offset by the Company’s proportionate share of the gains that will be recognized from Visa’s initial public offering, anticipated to be completed during 2008. Neither the valuation losses nor Visa® charges reﬂected the fundamental performance of our businesses. Together, these items reduced 2007 earnings per share by $.17. As we manage through these uncertain times, you may be assured that I, the board of directors and senior leaders of our Company will continue to manage U.S. Bancorp with transparency, the highest levels of risk management and the long-term future of the Company as our priorities. We are not exiting businesses; we are expanding them. We are not pulling back investments in our Company; we are increasing resources to grow revenue, build relationships, innovate and expand. To lead our investments in growth initiatives, in 2007 we established a new division, the Enterprise Revenue Ofﬁce or ERO, reporting to me. The ERO focuses on developing new ways to build deeper customer relationships, including new product design, and revenue sharing and incentives within the Company. We expect these to add hundreds of millions of dollars of incremental revenue over the next several years. I believe that the long-term success of our Company lies in our ability to leverage the skill, attitude and common sense of purpose of our extraordinary employees — all 54,000 of us. I want to ensure that each employee has everything he or she needs to excel, by creating a professional, stimulating and challenging workplace focused on employees and their personal and professional growth and performance. We are investing in the talent and technology that will create competitive advantages. We are building our communities. We are expanding our capabilities while holding fast to a corporate culture that values integrity, transparency, people and performance. I believe that’s the kind of company that will best increase the value of your investment in U.S. Bancorp and the kind of company you can be most proud of. Our goal is to deliver earnings and a return on your investment that are consistent, predictable and repeatable. Sincerely, Richard K. Davis Chairman, President and Chief Executive Ofﬁcer February 25, 2008 U.S. BANCORP 7 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 8 U.S. Bank believes the best way to serve its customers is to know them, know their business, understand their goals and anticipate their needs. We become full financial partners and develop long-term relationships. At U.S. Bank, we view every transaction as an opportunity to build deeper relationships with our customers. We do not pressure customers. Instead, we listen, we learn and try to understand every customer better in order to see how we might be a better bank for them. Our customers’ goals are our goals U.S. Bankers are knowledgeable, responsive and thorough. They live our mission statement: We put the power of US to work for you. Whether it’s through personal contact on a business call, across the teller line, on the telephone or even online, our goal is to let customers and prospects know that we have their ﬁnancial goals in mind. And that we have the products and services — and especially the customer service — that can help achieve those goals. Sometimes a single employee or product can be the right answer, but more often, it takes the collaboration and teamwork of ﬁnancial professionals across many areas of the bank working together to make sure the customer gets the best we have to offer. Sometimes the answers are simple, but more often, our customers depend on our regional, national and global capabilities and our expertise in specialized ﬁelds to see the big picture and to bring to the table sophisticated solutions to complex questions. Working together to build deeper, better relationships We have developed new, more comprehensive reporting and tracking programs that let our bankers across all lines of business understand a customer’s full relationship so that more advantageous recommendations and innovative solutions can be presented. We have launched new incentive plans that encourage and reward our bankers working together across businesses, across departments, across our customer base and across the country, to make U.S. Bank the bank of choice for every customer. On the next page, you will read just a few examples of how U.S. Bank builds deeper relationships that last for years. 8 U.S. BANCORP At U.S. Bank, we view every transaction as an opportunity to build deeper relationships with our customers. 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 9 From private company to worldwide Healthcare Payment Management Building relationships helps health corporation with U.S. Bank and more build companies Cerner Corporation, headquartered BJC HealthCare, headquartered in We’ve built our relationship with in Kansas City, is the leading U.S. St. Louis, is one of the largest non- United Properties, one of the supplier of healthcare information profit healthcare organizations in the nation’s premier real estate services technology products with clients country and a customer of ours since and development companies, into worldwide. Their expertise strengthens its formation in 1993. Our relationship a solid financial partnership that clinical practice and helps solve has grown to meet the expanding incorporates multiple operating healthcare’s challenges. Cerner has needs of BJC and its 13 hospitals accounts, a multi-million dollar been a customer since 1983, when and multiple health service organiza- operating line of credit, construction they were still a private company. tions throughout mid-Missouri and financing, treasury management, Cerner has grown tremendously southern Illinois. We have brought corporate card, ATMs, capital market since then. Our expanding capabilities the services and expertise of many products and investment services. have allowed us to continue to serve lines of business from commercial We could not be prouder that our Cerner’s demanding financial needs, lending and treasury management to financing expertise, capabilities and including credit, treasury management, consumer banking and payment customer service have provided this equipment finance, foreign exchange services to benefit BJC. In support of diversified real estate company, with and syndication and private debt BJC’s effort to improve its revenue 550 employees and 26 million placement services. cycle, we recently implemented square feet of industrial, office and Healthcare Payment Management,™ retail assets management, with the a web-based tool to enable collec- tools they need to grow. tion of patient payments at the point of care. We also operate an on-site retail branch at BJC’s Barnes-Jewish Hospital medical center campus. U.S. BANCORP 9 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 10 U.S. Bancorp possesses the innovative vision, disciplined investment procedures and operational capability which are critical in developing products, services and delivery systems that create customer value, competitive advantages and new sources of revenue. Fast-paced change has long been a hallmark of the banking industry, and at no time has this been more evident than today. Changing customer demands and expectations have driven innovation, as have relentless competitive pressures. Technological advances in hardware, software, programming and platforms have facilitated innovation, making possible transactions, speed and accuracy that would have been unimaginable just a few short years ago. Successful history of innovation U.S. Bancorp has a successful track record of innovation in developing and enhancing products and services, as well as a history of intellectual property development and patent success. One of those successes is our PowerTrack® Payment Network, providing online commercial payment services for payables, receivables, freight, telecom, utilities and global trade payments. Another is our SinglePoint® suite of treasury management services from a single point of access. A third is U.S. Bank Access® Online, a unique commercial card program management tool completely owned and operated by U.S. Bank. Its functionality is built on Service Oriented Architecture to leverage the latest technology and ensure scalability and ﬂexibility, solve workﬂow problems and support everyday business processes. New ideas for tomorrow Until recently, many of our innovation efforts were focused on improving existing products and services and improving their delivery. Many were driven by near-term needs, with limited cross channel or product integration. Today, U.S. Bank’s innovation process is newly structured to broaden efforts at the enterprise level and identify future customer needs, utilizing advanced market research techniques and the latest technology. A focus is to leverage our strengths in payments while developing new businesses and products across all lines of business. Supporting innovation through investment in emerging industries U.S. Bank also supports the innovations of pioneering companies outside of our industry. We ﬁnance the work of original and new businesses and provide other ﬁnancial services they need to grow their businesses proﬁtably. 10 U.S. BANCORP U.S. Bancorp has a successful track record of innovation in developing and enhancing products and services 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 11 U.S. Bank supports fast-growing Our Electronic Check Service lets Ground-breaking new fund helps wind energy industry retailers accept checks as easily global development The U.S. currently leads the world and fast as card payments FAF Advisors, the investment advisor in wind capacity growth and ranks U.S. Bank Electronic Check Service to First American Funds, recently third globally in total wind capacity. is designed to convert consumer launched the First American Global U.S. Bank has strong banking checks to EFT (electronic funds Infrastructure Fund, one of the first relationships with leading wind transfer) transactions using MICR of its type in the industry. The fund energy companies such as Airtricity and check imaging so companies allows FAF Advisors to exhibit North America, which has a wind can process all checks electronically. thought leadership and capitalize farm portfolio with 214 megawatts It’s an integrated end-to-end solution on early-mover advantage. Global in operation and approximately that is faster, more economical, infrastructure funds help finance the 2.0 gigawatts of wind energy in presents less risk to the merchant, repair, replacement, and modernization development. Financing the wind accelerates funds availability and of infrastructure worldwide. They energy sector helps the nation deal expedites end-of-day processing also support new and innovative with environmental change and for our customers. Electronic Check technology, including renewable energy security. U.S. Bank provides Service also supports a variety energy. Infrastructure funds can also the wind energy sector with treasury of card-based payment options, provide valuable diversification for management and investment providing companies a single solution investors. The new fund offers a services, foreign exchange, credit for all of their electronic payment highly differentiated strategy from cards, letters of credit and financing processing needs. The nation’s its competitors and leverages the for wind farm construction. top retailers save time, money experience of FAF Advisors’ real and resources using U.S. Bank estate investment team in fields Electronic Check Service. related to global infrastructure. See page 121 for important disclosures. U.S. BANCORP 11 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 12 U.S. Bancorp is continuously expanding its scope of quality services, its depth of market presence and its capacity to serve our customers wherever they may work, live or conduct business. At U.S. Bancorp, expansion means far more than just geographic extension — although we continue to grow our businesses across the country and around the world. More important than a larger franchise footprint is our success in expanding our product and service beneﬁts, expanding our expertise, and expanding the accessibility, speed and security of our distribution and delivery systems. In-market expansion continues Large banking acquisitions are not among our priorities; however, we continue to look at smaller ﬁll-in opportunities to expand distribution in existing markets. We have been very successful at this type of expansion. In February 2007, we completed the acquisition of United Financial Corp., the parent company of Heritage Bank in Montana. The transaction strengthened U.S. Bank’s franchise both by enhancing its existing market presence in certain regions of Montana and expanding into new regions of the state. Line of business expansion in 2007 We expanded our payment capabilities and our commercial payments services in Canada by acquiring a large Canadian bank’s Visa® purchasing and corporate card portfolio. With our existing U.S. Bank Canada capabilities, that expansion gave us unparalleled capacity to serve organizations or government entities of any size in the country. We continue to grow our wholesale banking platform on a national scale to serve the sophisticated needs of large corporate and institutional clients. In November, we opened a national corporate and institutional banking ofﬁce in midtown New York City, which also includes the bank’s Wealth Management division. That ofﬁce bolsters U.S. Bank’s presence on the East Coast where we have been serving our clients’ corporate trust and escrow needs from our 100 Wall Street location for 14 years. Last year, U.S. Bank purchased AIMS Logistics, a leading services provider to the logistics industry. Our customers will have the advantage of enhanced global invoice processing capabilities, and the purchase is expected to add billions of dollars in invoicing processing volume to the PowerTrack Payment Network, solidifying U.S. Bank PowerTrack as the leading commercial payment provider. We continue to expand our payments capabilities in this country and across western Europe. Closer to home, we continue to increase our presence in growing markets through traditional and in-store and on-site ofﬁces. 12 U.S. BANCORP We’re expanding our product and service set, our expertise, and the accessibility, speed and security of our delivery systems. 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:45 AM Page 13 In-store and on-site branches A world leader in payments Mobile Banking provides expand distribution continues to grow anywhere, anytime access We successfully open 40 to 50 in-store U.S. Bancorp subsidiary NOVA U.S. Bank is developing new access and corporate on-site branches Information Systems and its for customers using their mobile annually and now operate more than European affiliate Elavon Merchant phones. Cell phone text alerts keep 500 of these full-service offices. Services are global providers of customers current on account Customer response to the convenience payment processing. We leverage activities and now account for is extraordinary, and we are expanding that global strength, industry-leading 700,000 messages per day. economically via this capital-efficient technology and expertise, and our U.S. Bank, MasterCard Worldwide distribution system. Our dedicated expanding reach now processes and Nokia partnered to introduce management team focuses exclusively transactions on behalf of merchants a mobile pilot program in Spokane, on these branches and their unique based in more than 30 countries, Washington to allow customers to characteristics. Non-traditional branch supporting more than 1,000,000 make purchases by “tapping” their locations include supermarkets, merchant locations. NOVA is the specially equipped mobile phone at retailers, universities, corporate facilities, third largest U.S. credit card the point of sale at stores, vending airports, hospitals, retirement processor, Elavon is a top 4 acquirer machines, cinemas, and restaurants. centers and other high-traffic in Europe, and together, we are a Soon, customers will be able to venues, including Churchill Downs top 10 processor worldwide. view account history and balances in Louisville, Kentucky, and Ever-expanding services include over the mobile web, transfer Malmstrom Air Force Base outside credit and debit card processing, funds between accounts, pay bills Great Falls, Montana. electronic check services, gift and more. cards, dynamic currency conversion, multi-currency support, and cross- border acquiring. U.S. BANCORP 13 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:46 AM Page 14 Focusing on Employees contribute more to the success of the We debuted the ﬁlm at our January company, serve customers well and 2008 all-employee “Celebration of US” ultimately increase shareholder return. meetings in 75 different locations across Engaging employees through knowledge, networking and opportunity In an industry that leads in the use and development of technology, we recognize it’s people who make technology effective. In an economic climate that demands corporate results, we never forget it’s people who deliver those results. In a competitive environment, we appreciate that it’s our employees’ skills and attitudes that create customer loyalty. The four-part logo shown above reﬂects our primary employee programs. Some link employees to one another and to the organization. Others promote professional and personal growth. Rewards include performance incentives, as well as other recognition, perks and beneﬁts. Other programs offer development and networking opportunities for employees We have put renewed focus on creating in leadership positions and for those opportunities for our 54,000 employees. who aspire to be. We want to recruit the best and keep the best and develop the full potential of every employee. Our goal is to give employees the knowledge and tools they need to be successful in their work, combined with recognition, reward and growth opportunity. We see that engaged People, performance, pride We recently worked with employees to produce a short ﬁlm that features our employees sharing their pride in their work at U.S. Bank, in their own words. It’s a valuable recruiting and employees connect with corporate goals, retention tool. 14 14 U.S. BANCORP U.S. BANCORP the country. We celebrated employee contributions, shared company goals, strategies and results, and announced new employee beneﬁt and reward programs. An example of the new programs include a Five Star Volunteer Day, a day off with pay to volunteer with a non-proﬁt organization of the employee’s choice. We also announced the creation of an Employee Assistance Fund to which employees can voluntarily contribute to assist fellow employees who may experience ﬁnancial stress due to natural disasters, illness or other difﬁculties. And, we announced a special Appreciation Bonus for 46,000 eligible employees. 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:46 AM Page 15 Using Resources Responsibly Environmental sustainability has become an important issue for individuals, communities, governments and businesses around the world — including U.S. Bank. Our environmental initiatives have the full support and backing of our Managing Committee and Board of Directors. U.S. Bancorp focuses on U.S. Bancorp recognizes the importance areas of direct control, we are providing environmental sustainability of environmental sustainability. Our energy saving tips to our employees so As part of its environmental customers, communities, shareholders, they can assist in our efforts. commitment, in the summer of 2007, investors, and employees expect U.S. Bancorp created a new position, U.S. Bancorp to act in an environmen- the Environmental Policy Director. tally responsible manner, and it is The director’s role is to coordinate our responsibility as good corporate efforts across all business lines and citizens to respect those expectations. U.S. Bancorp will strive to invest in new ﬁnancial products and services that will help sustain our resources and the environment and promote energy conservation, the reduction of waste across our national footprint to ensure that U.S. Bank is an environmentally responsible corporate citizen and leader. This is a meaningful undertaking and will not occur overnight. Although we have made progress in and other environmental initiatives. recent years, it is our intent to address We will pursue opportunities to develop environmental sustainability issues in a products and services that will have more systematic manner moving forward. a positive impact on the environment We will be leveraging our internal while assisting our clients in meeting The Director formed the Environmental expertise, as well as the power of our their personal waste reduction, recycling, Task Force with the goal of developing employees, to positively impact the and energy conservation goals. a company-wide environmental policy environment through new opportunities by year end 2007. The policy was ﬁnal- and our programs outlined below. ized in January. The task force includes U.S. Bancorp has several energy members from business lines through- reduction initiatives currently underway out the company and recommends including the use of Energy Star rated environmental initiatives to address the appliances and equipment, lighting company’s business practices, products retro ﬁt upgrades and adding program- and services, internal operations and mable thermostats for increased HVAC employee involvement. control. In addition to the focus on U.S. Bancorp’s focus on key issues The task force addresses the following major issues: climate change, forest protection, internal operations, employee involvement, environmental investments, products and services. U.S. BANCORP U.S. BANCORP 15 15 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:46 AM Page 16 Building Communities In Putting the power of U.S. Bank Community Build Day — U.S. Bank Five Star Volunteer Day program to work for our communities employees’ efforts recognized and Five Star Volunteer Awards U.S. Bank is active in the communities More than 5,000 U.S. Bank employees U.S. Bank has inaugurated Five Star we serve, helping to assure access to participated in 194 Community Build Volunteer Day which allows employees ﬁnancial resources, information and Day events, in 119 cities in 30 states in up to a full day off — with pay — to expertise that will foster economic 2007 helping more than 5,000 families. volunteer with a non-proﬁt organization development, create affordable housing, The Financial Services Roundtable, a or event. New in 2008, this program support the arts, and further educational trade association of 100 of the largest further encourages U.S. Bank employees and social programs. integrated ﬁnancial services companies in to help build their communities. We partner with many organizations, as well as provide U.S. Bank ﬁnancial, volunteer and leadership support to a wide variety of community initiatives. In 2007, nearly $20 million was contributed in grants to thousands of charitable organizations through the U.S. Bancorp Foundation in support of economic opportunity, education and artistic and cultural enrichment. In 2007, thousands of U.S. Bancorp employees devoted tens of thousands of hours of volunteer time to support communities and causes. 16 U.S. BANCORP the nation, sponsors this nationwide event annually. The Roundtable awarded U.S. Bank its Community Build Day Leadership Award in honor of all our employees nationwide at an all-employee celebration in January. Each year U.S. Bank presents the Five Star Volunteer Award to our most outstanding employee volunteers. In 2007 we recognized 135 employees in 26 states and the District of Columbia, chosen from more than 300 nominations. U.S. Bank Development Network In honor of their dedication to their fosters leadership and service communities, U.S. Bank contributed over Development Network chapters assist $100,000 to the nonproﬁt organizations employees in taking an active role in where they volunteer. their careers and personal development and community service. Currently 54 Development Network chapters are active across the U.S. 3698_Narr_Q7.qxd:USB_07AR_ 2/25/08 11:46 AM Page 17 Building Deeper Customer Relationships Innovating Products and Services Expanding Capabilities and Distribution The following pages discuss in greater detail the results we achieved in 2007 by investing resources in the three crucial areas listed above. In management’s discussion and analysis of our ongoing operations, you’ll also learn about the strategies, policies and procedures we employ to keep U.S. Bancorp strong and our earnings consistent, predictable and repeatable. Financials Page Page Page Page Page Page Page Page Page Page 18 65 68 72 108 110 111 114 120 121 Management’s Discussion and Analysis Reports of Management and Independent Accountants Consolidated Financial Statements Notes to Consolidated Financial Statements Five-year Consolidated Financial Statements Quarterly Consolidated Financial Data Supplemental Financial Data Company Information Executive Ofﬁcers Directors Inside Back Cover Corporate Information U.S. BANCORP 17 Management’sDiscussionandAnalysisOVERVIEWIn2007,U.S.Bancorpanditssubsidiaries(the“Company”)continuedtodemonstrateitsfinancialstrengthandshareholderfocus,despiteaparticularlychallengingeconomicenvironmentforthebankingindustry.Throughout2007,themortgagelendingandhomebuildingindustriesexperiencedstressresultinginhigherdelinquencies,netcharge-offsandnonperformingloansfortheindustry,especiallywithinthesub-primemortgagesector.Thefinancialmarketsexperiencedsignificantturbulenceduringthesecondhalfof2007astheimpactofsub-primemortgagedelinquencies,defaultsandforeclosuresadverselyaffectedinvestorconfidenceinabroadrangeofinvestmentsectorsandassetclasses.Despitethesechallenges,theCompany’sprudentcreditculture,balancesheetstrengthandcapitalmanagementenabledittomanagethroughtheturbulentmarketconditions.TheCompany’sfinancialstrengthenabledittoremainfocusedonorganicgrowthandinvestinginbusinessinitiativesthatstrengthenitspresenceandproductofferingsforcustomers.Thisfocusoverthepastseveralyearshascreatedawelldiversifiedbusiness,generatingstrongfee-basedrevenuesthatrepresentedover50percentoftotalnetrevenuein2007.Whilenetinterestincomedeclinedin2007duetolowernetinterestmargins,averageearningassetsincreased4.5percentyear-over-year,despiteaverycompetitivecreditenvironmentinthefirsthalfoftheyear.Bytheendof2007,theCompany’snetinterestmarginwasbeginningtostabilizeandaverageearningassetsgrewby11.1percent,onanannualizedbasis,inthefourthquarter,comparedwiththethirdquarterof2007.TheCompany’sperformancewasalsodrivenbythecontinuedstrongcreditqualityoftheCompany’sloanportfolios,despitestressinthemortgagelendingandhomebuildingindustriesandananticipatedincreaseinconsumercharge-offs,primarilyrelatedtocreditcards.Theratioofnonperformingassetstototalloansandotherrealestatewas.45percentatDecember31,2007,comparedwith.41percentatDecember31,2006.Totalnetcharge-offswere.54percentofaverageloansoutstandingin2007,comparedwith.39percentin2006.In2008,creditqualitywithintheindustryisexpectedtocontinuetodeteriorate.WhiletheCompany’sloanportfoliosarenotimmunetotheseeconomicfactorsandwilldeterioratesomewhat,creditqualitytrendsoftheCompanyareexpectedtobemanageablethroughtheforeseeablebusinesscycle.Finally,theCompany’sefficiencyratio(theratioofnoninterestexpensetotaxable-equivalentnetrevenueexcludingnetsecuritiesgainsorlosses)was49.3percentin2007,comparedwith45.4percentin2006,andcontinuestobeanindustryleader.TheCompany’sabilitytoeffectivelymanageitscoststructurehasprovidedastrategicadvantageinthishighlycompetitiveenvironment.Asaresultofthesefactors,theCompanyachievedareturnonaveragecommonequityof21.3percentin2007.TheCompany’sstrongperformanceisalsoreflectedinitscapitallevelsandthefavorablecreditratingsassignedbyvariouscreditratingagencies.EquitycapitaloftheCompanycontinuedtobestrongat5.1percentoftangibleassetsatDecember31,2007,comparedwith5.5percentatDecember31,2006.TheCompany’sregulatoryTier1capitalratiowas8.3percentatDecember31,2007,comparedwith8.8percentatDecember31,2006.In2007,theCompany’screditratingswereupgradedbyStandard&Poor’sRatingsServices.Creditratingsassignedbyvariouscreditratingagenciesreflecttheratingagencies’recognitionoftheCompany’sindustry-leadingearningsperformanceandcreditriskprofile.Inconcertwiththisfinancialperformance,theCompanyachieveditsobjectiveofreturningatleast80percentofearningstoshareholdersintheformofdividendsandsharerepurchasesbyreturning111percentof2007earningstoshareholders.InDecember2007,theCompanyincreaseditscashdividendby6.3percentfromthedividendrateofthefourthquarterof2006.During2007,theCompanycontinuedtorepurchasecommonsharesunderthesharerepurchaseprogramannouncedinAugust2006.TheCompany’sfinancialandstrategicobjectivesareunchangedfromthosegoalsthathaveenabledittodeliverindustry-leadingfinancialperformance.Whilenetincomedeclinedin2007andisexpectedtogrowsomewhatmoderatelyin2008,theCompany’sfinancialobjectivesaretoachieve10percentlong-termgrowthinearningspercommonshareandareturnoncommonequityofatleast20percent.TheCompanywillcontinuetofocusoneffectivelymanagingcreditqualityandmaintaininganacceptablelevelofcreditandearningsvolatility.TheCompanyintendstoachievethesefinancialobjectivesbyprovidinghigh-qualitycustomerserviceandcontinuingtomakestrategicinvestmentsinbusinessesthatdiversifyandgeneratefee-basedrevenues,enhancetheCompany’sdistributionnetworkorexpanditsproductofferings.Finally,theCompanycontinuestotargetan80percentreturnofearningstoitsshareholdersthroughdividendsorsharerepurchases.EarningsSummaryTheCompanyreportednetincomeof$4.3billionin2007,or$2.43perdilutedcommonshare,comparedwith$4.8billion,or$2.61perdilutedcommon18U.S.BANCORPshare,in2006.Returnonaverageassetsandreturnonaveragecommonequitywere1.93percentand21.3percent,respectively,in2007,comparedwithreturnsof2.23percentand23.6percent,respectively,in2006.ThedeclineintheCompany’snetincomewasdrivenbyseveralsignificantitemsdiscussedbelowandmanagement’sdecisiontofurtherinvestinpaymentservicesbusinesses,geographicalpresence,technology,relationshipmanagementandothercustomerserviceinitiativesandproductinnovations.Also,creditlossesincreasedin2007duetoloanportfoliogrowth,somewhathigherlevelsofnonperformingassetsfromstressinthemortgagelendingandhomebuildingindustriesanddeteriorationinconsumercreditqualityexperiencedthroughoutthebankingindustry.U.S.BANCORP19Table1SELECTEDFINANCIALDATAYearEndedDecember31(DollarsandSharesinMillions,ExceptPerShareData)20072006200520042003CondensedIncomeStatementNetinterestincome(taxable-equivalentbasis)(a)........$6,764$6,790$7,088$7,140$7,217Noninterestincome.............................7,1576,8326,1515,6245,068Securitiesgains(losses),net......................1514(106)(105)245Totalnetrevenue............................13,93613,63613,13312,65912,530Noninterestexpense............................6,8626,1805,8635,7855,597Provisionforcreditlosses........................7925446666691,254Incomefromcontinuingoperationsbeforetaxes.......6,2826,9126,6046,2055,679Taxable-equivalentadjustment.....................7549332928Applicableincometaxes.........................1,8832,1122,0822,0091,941Incomefromcontinuingoperations................4,3244,7514,4894,1673,710Discontinuedoperations(after-tax)..................––––23Netincome................................$4,324$4,751$4,489$4,167$3,733Netincomeapplicabletocommonequity............$4,264$4,703$4,489$4,167$3,733PerCommonShareEarningspersharefromcontinuingoperations..........$2.46$2.64$2.45$2.21$1.93Dilutedearningspersharefromcontinuingoperations.....2.432.612.422.181.92Earningspershare.............................2.462.642.452.211.94Dilutedearningspershare........................2.432.612.422.181.93Dividendsdeclaredpershare......................1.6251.3901.2301.020.855Bookvaluepershare...........................11.6011.4411.0710.5210.01Marketvaluepershare..........................31.7436.1929.8931.3229.78Averagecommonsharesoutstanding................1,7351,7781,8311,8871,924Averagedilutedcommonsharesoutstanding...........1,7581,8041,8571,9131,936FinancialRatiosReturnonaverageassets........................1.93%2.23%2.21%2.17%1.99%Returnonaveragecommonequity..................21.323.622.521.419.2Netinterestmargin(taxable-equivalentbasis)(a).........3.473.653.974.254.49Efficiencyratio(b).............................49.345.444.345.345.6AverageBalancesLoans......................................$147,348$140,601$131,610$120,670$116,937Loansheldforsale.............................4,2983,6633,2903,0795,041Investmentsecurities...........................41,31339,96142,10343,00937,248Earningassets................................194,683186,231178,425168,123160,808Assets.....................................223,621213,512203,198191,593187,630Noninterest-bearingdeposits......................27,36428,75529,22929,81631,715Deposits....................................121,075120,589121,001116,222116,553Short-termborrowings...........................28,92524,42219,38214,53410,503Long-termdebt...............................44,56040,35736,14135,11533,663Shareholders’equity............................20,99720,71019,95319,45919,393PeriodEndBalancesLoans......................................$153,827$143,597$136,462$124,941$116,811Allowanceforcreditlosses........................2,2602,2562,2512,2692,369Investmentsecurities...........................43,11640,11739,76841,48143,334Assets.....................................237,615219,232209,465195,104189,471Deposits....................................131,445124,882124,709120,741119,052Long-termdebt...............................43,44037,60237,06934,73933,816Shareholders’equity............................21,04621,19720,08619,53919,242RegulatorycapitalratiosTier1capital...............................8.3%8.8%8.2%8.6%9.1%Totalrisk-basedcapital.........................12.212.612.513.113.6Leverage..................................7.98.27.67.98.0Tangiblecommonequity........................5.15.55.96.46.5(a)Presentedonafullytaxable-equivalentbasisutilizingataxrateof35percent.(b)Computedasnoninterestexpensedividedbythesumofnetinterestincomeonataxable-equivalentbasisandnoninterestincomeexcludingsecuritiesgains(losses),net.Totalnetrevenue,onataxable-equivalentbasisfor2007,was$300million(2.2percent)higherthan2006,primarilyreflectinga4.8percentincreaseinnoninterestincome,partiallyoffsetbya.4percentdeclineinnetinterestincomefromayearago.Noninterestincomegrowthwasdrivenprimarilybyorganicgrowthinfee-basedrevenueof8.6percent,mutedsomewhatby$107millionofmarketvaluationlossesrelatedtosecuritiespurchasedduring2007fromcertainmoneymarketfundsmanagedbyanaffiliate.Refertothe“MarketRiskManagement”sectionforfurtherinformationonsecuritiespurchasedfromcertainmoneymarketfundsmanagedbyanaffiliate.Thefee-basedrevenuegrowthwasfurtheroffsetbythenetfavorableimpactin2006of$142millionfromseveralpreviouslyreporteditems,includinga$50milliongainrelatedtocertainderivatives,$67millionofgainsfromtheinitialpublicofferingandsubsequentsaleofequityinterestsinacardholderassociation,a$52milliongainfromthesaleofa401(k)definedcontributionrecordkeepingbusinessanda$10milliongainrelatedtoafavorablesettlementinthemerchantprocessingbusiness,offsetbya$37millionreductioninmortgagebankingrevenuedueprincipallytotheadoptionoffairvalueaccountingformortgageservicingrights(“MSRs”).Themodestdeclineinnetinterestincomereflectedgrowthinaverageearningassets,morethanoffsetbyalowernetinterestmargin.In2007,averageearningassetsincreased$8.5billion(4.5percent),comparedwith2006,primarilyduetogrowthintotalaverageloansof$6.7billion(4.8percent)andinvestmentsecuritiesof$1.4billion(3.4percent).Thenetinterestmarginin2007was3.47percent,comparedwith3.65percentin2006.Theyear-over-yeardeclineinnetinterestmarginreflectedlowercreditspreadsgiventhecompetitiveenvironment,aflatyieldcurveduringearly2007andlowernetfreefundsrelativetoayearago.Inaddition,fundingcostswerehigherasratespaidoninterest-bearingdepositsincreasedandthefundingmixcontinuedtoshifttowardhighercostdepositsandwholesalefundingsources.Theseadversefactorsimpactingthenetinterestmarginwereoffsetsomewhatbyhigherloanfees.Totalnoninterestexpensein2007increased$682million(11.0percent),comparedwith2006,representinganefficiencyratioof49.3percentin2007,comparedwith45.4percentin2006.Theincreaseincluded$330millionofchargesrecognizedin2007fortheCompany’sproportionateshareofacontingentobligationtoindemnifyVisaInc.forcertainlitigationmatters,includingthesettlementbetweenVisaU.S.A.Inc.andAmericanExpress(collectively“VisaCharge”).FormoreinformationontheVisaCharge,refertoNote21oftheNotestoConsolidatedFinancialStatements.Additionally,theincreaseinnoninterestexpensewascausedbyspecificmanagementdecisionstomakefurtherinvestmentsinrevenue-enhancingbusinessinitiativesdesignedtoexpandtheCompany’sgeographicalpresence,strengthencorporateandcommercialbankingrelationshipmanagement,capitalizeoncurrentproductofferings,furtherimprovetechnologyandsupportinnovationofproductsandservicesforcustomers.Growthinexpensesfromayearagoalsoincludedcostsrelatedtoacquiredpaymentsbusinesses,investmentsinaffordablehousingandothertax-advantagedproducts,anincreaseincredit-relatedcostsforotherrealestateownedandcollectionactivities,andanincreaseinmerchantairlineprocessingexpensesprimarilyduetosalesvolumesandbusinessexpansionwithamajorairline.Theincreaseinthesecostswaspartiallyoffsetbya$33milliondebtprepaymentchargerecordedin2006.Theprovisionforcreditlosseswas$792millionfor2007,anincreaseof$248million(45.6percent)from2006,reflectinggrowthincreditcardaccounts,increasingretailloandelinquenciesandhighercommercialandconsumercreditlossesfromayearago.Inaddition,theprovisionforcreditlossesin2006partiallyreflectedthefavorableresidualimpactonnetcharge-offs,principallyforcreditcardsandotherretailcharge-offs,resultingfromchangesinbankruptcylawsenactedinthefourthquarterof2005.STATEMENTOFINCOMEANALYSISNetInterestIncomeNetinterestincome,onataxable-equivalentbasis,was$6.8billionin2007,$6.8billionin2006and$7.1billionin2005.Averageearningassetswere$194.7billionfor2007,comparedwith$186.2billionand$178.4billionfor2006and2005,respectively.The$8.5billion(4.5percent)increaseinaverageearningassetsfor2007,comparedwith2006,wasprimarilydrivenbygrowthintotalaverageloansof$6.7billion(4.8percent)andaverageinvestmentsecuritiesof$1.4billion(3.4percent).Thepositiveimpactonnetinterestincomefromgrowthinearningassetswasmorethanoffsetbyalowernetinterestmarginfromayearago.Thenetinterestmarginin2007was3.47percent,comparedwith3.65percentand3.97percentin2006and2005,respectively.The18basispointdeclinein2007netinterestmargin,comparedwith2006,reflectedthecompetitivebusinessenvironmentin2007,theimpactofaflatyieldcurveduringthefirsthalfoftheyearanddecliningnetfreefundsrelativetoayearago.Comparedwith2006,creditspreadstightenedbyapproximately6basispointsacrossmostlendingproductsduetocompetitiveloanpricing.Thereductioninnetfreefundswasprimarilyduetoadeclineinnon-interestbearingdeposits,aninvestmentinbank-ownedlifeinsurance,sharerepurchasesthroughmid-thirdquarter2007andtheimpactofacquisitions.Inaddition,fundingcostswerehigherasratespaidoninterest-bearingdeposits20U.S.BANCORPincreasedandthefundingmixcontinuedtoshifttowardhighercostdepositsandotherfundingsources.Anincreaseinloanfeespartiallyoffsetthesefactors.Duringthesecondhalfof2007,thefinancialmarketsexperiencedsignificantturbulenceastheimpactofsub-primemortgagedelinquencies,defaultsandforeclosuresadverselyaffectedinvestorconfidenceinabroadrangeofinvestmentsectorsandassetclasses.Inresponsetocertainliquiditydisruptions,theincreasingriskofacreditcrunchandothereconomicfactors,theFederalReserveBankbegantoreduceinterestratesbeginninginSeptember2007,inanefforttostimulatetheeconomyandrestoreinvestorconfidenceinthefinancialmarkets.Sincethattime,thetargetFederalFundratedeclined100basispointsthroughyear-endandanother125basispointsduringJanuary2008.IftheFederalReserveBankleavesratesunchangedfromthecurrentFederalFundsrateof3.00percent,theCompanywouldexpectthenetinterestmargintoremainrelativelystableatlevelssimilarto2007.Thisoutlookisbasedonexpectationsthatcreditspreadswillimproveslightly,higheryieldingretailloanswillcontinuetogrow,fundingandliquidityintheovernightfinancialmarketswillnormalizeandtheCompanywillresumeitssharerepurchaseprogramafterthefirstquarterof2008.Averageloansin2007were$6.7billion(4.8percent)higherthan2006,drivenbygrowthinretailloans,commercialloansandresidentialmortgagesof$3.5billion(7.7percent),$2.4billion(5.2percent)and$1.0billion(4.9percent),respectively,partiallyoffsetbyamodestdeclineincommercialrealestateloansof$.2billion(.6percent).Thefavorablechangeinaverageretailloansincludedstronggrowthincreditcardbalancesof25.4percentasaresultofgrowthinbranchoriginated,co-brandedandfinancialinstitutionpartnerportfolios.Averageinstallmentloans,includingautomobileloans,increased11.2percentfromayearago.Averagehomeequityloansincreasedatamoremoderategrowthrateof5.1percent,impactedsomewhatbythechangingtrendsinresidentialhomevaluations,whileretailleasingbalancesdeclinedapproximately8.4percentfromayearago.Theincreaseinaveragecommercialloanswasprincipallyduetogrowthincorporateandindustriallending,equipmentleasingandcorporatepaymentsproductofferings.Thedeclineinaveragecommercialrealestatebalancesreflectedcustomerrefinancingactivitiesinthecapitalmarketsduringthefirsthalfof2007,adecisionbytheCompanytoreducecondominiumconstructionfinancingandtheimpactofaeconomicslowdowninresidentialhomebuildingsince2006.Averageinvestmentsecuritieswere$1.4billion(3.4percent)higherin2007,comparedwith2006.Theincreaseprincipallyreflectedhigherbalancesinthemunicipalsecuritiesportfolioandthepurchaseinthefourthquarterof2007ofsecuritiesfromcertainmoneymarketfundsmanagedbyanaffiliate.Thisincreasewaspartiallyoffsetbyareductioninmortgage-backedassetsduetoprepayments.Refertothe“InterestRateRiskManagement”sectionforfurtherinformationonthesensitivityofnetinterestincometochangesininterestrates.Averagenoninterest-bearingdepositsin2007were$1.4billion(4.8percent)lowerthan2006.Theyear-over-U.S.BANCORP21Table2ANALYSISOFNETINTERESTINCOME(DollarsinMillions)2007200620052007v20062006v2005ComponentsofNetInterestIncomeIncomeonearningassets(taxable-equivalentbasis)(a)..$13,309$12,351$10,584$958$1,767Expenseoninterest-bearingliabilities(taxable-equivalentbasis).................................6,5455,5613,4969842,065Netinterestincome(taxable-equivalentbasis)...........$6,764$6,790$7,088$(26)$(298)Netinterestincome,asreported....................$6,689$6,741$7,055$(52)$(314)AverageYieldsandRatesPaidEarningassetsyield(taxable-equivalentbasis)........6.84%6.63%5.93%.21%.70%Ratepaidoninterest-bearingliabilities(taxable-equivalentbasis).................................3.913.552.37.361.18Grossinterestmargin(taxable-equivalentbasis).........2.93%3.08%3.56%(.15)%(.48)%Netinterestmargin(taxable-equivalentbasis)...........3.47%3.65%3.97%(.18)%(.32)%AverageBalancesInvestmentsecurities.........................$41,313$39,961$42,103$1,352$(2,142)Loans...................................147,348140,601131,6106,7478,991Earningassets.............................194,683186,231178,4258,4527,806Interest-bearingliabilities.......................167,196156,613147,29510,5839,318Netfreefunds(b)...........................27,48729,61831,130(2,131)(1,512)(a)Interestandratesarepresentedonafullytaxable-equivalentbasisutilizingafederaltaxrateof35percent.(b)Representsnoninterest-bearingdeposits,allowanceforloanlosses,unrealizedgain(loss)onavailable-for-salesecurities,non-earningassets,othernoninterest-bearingliabilitiesandequity.yeardecreasereflectedadeclineinpersonalandbusinessdemanddeposits,partiallyoffsetbyhighertrustdeposits.ThedeclineinpersonaldemanddepositbalancesoccurredwithintheConsumerBankingbusinessline.Thedeclineinbusinessdemanddepositsoccurredwithinmostbusinesslinesasbusinesscustomersutilizeddepositbalancestofundbusinessgrowthandmeetotherliquidityrequirements.Averagetotalsavingsproductsincreased$.9billion(1.7percent)in2007,comparedwith2006,asincreasesininterestcheckingbalancesmorethanoffsetdeclinesinmoneymarketandsavingsbalances,primarilywithinConsumerBanking.Interestcheckingbalancesincreased$2.6billion(10.9percent)in2007,comparedwith2006,duetohigherbroker-dealer,governmentandinstitutionaltrustbalances.Averagemoneymarketsavingsbalancesdeclinedyear-over-yearby$1.3billion(5.0percent)asaresultoftheCompany’sdepositpricingdecisionsformoneymarketproductsinrelationtootherfixed-ratedepositproducts.During2007,aportionofbranch-basedmoneymarketsavingsaccountsmigratedtofixed-ratetimecertificates,ascustomerstookadvantageofhigherinterestratesfortheseproducts.Averagetimecertificatesofdepositlessthan$100,000were$.9billion(6.5percent)higherin2007,comparedwith2006.Theyear-over-yeargrowthintimecertificateslessthan$100,000wasprimarilyduetobranch-basedtimedeposits,reflectingcustomermigrationtohigherratedepositproductsandpricingdecisionsfortheseproducts.Averagetimedepositsgreaterthan$100,000werebasicallyunchangedin2007,comparedwith2006.Timedepositsgreaterthan$100,000arelargelyviewedaspurchasedfundsandaremanagedatlevelsdeemedappropriate,givenalternativefundingsources.Thedeclineinnetinterestincomein2006,comparedwith2005,reflectedgrowthinaverageearningassets,morethanoffsetbyalowernetinterestmargin.The$7.8billion(4.4percent)increaseinaverageearningassetsfor2006,comparedwith2005,wasprimarilydrivenbygrowthinaverageloans,partiallyoffsetbyadecreaseinaverageinvestmentsecurities.The32basispointdeclineinnetinterestmarginin2006,comparedwith2005,reflectedthecompetitivelendingenvironmentandtheimpactofaflatteryieldcurve.Thenetinterestmarginalsodeclinedduetofundingincrementalassetgrowthwithhighercostwholesalefunding,sharerepurchasesandasset/liabilitydecisions.An22U.S.BANCORPTable3NETINTERESTINCOME—CHANGESDUETORATEANDVOLUME(a)(DollarsinMillions)VolumeYield/RateTotalVolumeYield/RateTotal2007v20062006v2005Increase(decrease)inInterestIncomeInvestmentsecurities.................$70$106$176$(100)$201$101Loansheldforsale..................41–41203555LoansCommercial.....................15519174164304468Commercialrealestate.............(12)(13)(25)51249300Residentialmortgages.............607013016756223Retail.........................279199478167410577Totalloans...................4822757575491,0191,568Otherearningassets.................(22)6(16)45(2)43Totalearningassets.............5713879585141,2531,767InterestExpenseInterest-bearingdepositsInterestchecking.................259311859398Moneymarketsavings.............(28)11082(32)243211Savingsaccounts.................(1)1–(1)54Timecertificatesofdepositlessthan$100,000....................348612017118135Timedepositsgreaterthan$100,000....2434551331382Totalinterest-bearingdeposits......3233336540790830Short-termborrowings................22960289179373552Long-termdebt.....................201129330145538683Totalinterest-bearingliabilities......4625229843641,7012,065Increase(decrease)innetinterestincome..$109$(135)$(26)$150$(448)$(298)(a)Thistableshowsthecomponentsofthechangeinnetinterestincomebyvolumeandrateonataxable-equivalentbasisutilizingataxrateof35percent.Thistabledoesnottakeintoaccountthelevelofnoninterest-bearingfunding,nordoesitfullyreflectchangesinthemixofassetsandliabilities.Thechangeininterestnotsolelyduetochangesinvolumeorrateshasbeenallocatedonapro-ratabasistovolumeandyield/rate.increaseinthemarginbenefitofnetfreefundsandloanfeespartiallyoffsetthesefactors.Averageloansin2006werehigherby$9.0billion(6.8percent),comparedwith2005,drivenbygrowthinresidentialmortgages,commercialloansandretailloans.Averageinvestmentsecuritieswere$2.1billion(5.1percent)lowerin2006,comparedwith2005,principallyreflectingasset/liabilitymanagementdecisionstoreducethefocusonresidentialmortgage-backedassetsgiventherisinginterestrateenvironmentin2006andthemixofloangrowthexperiencedbytheCompany.Averagenoninterest-bearingdepositsin2006were$.5billion(1.6percent)lowerthanin2005.Theyear-over-yeardecreasereflectedadeclineinpersonalandbusinessdemanddeposits,partiallyoffsetbyhighercorporatetrustdepositsresultingfromacquisitions.Averagetotalsavingsproductsdeclined$2.1billion(3.6percent)in2006,comparedwith2005,duetoreductionsinaveragemoneymarketsavingsandothersavingsaccounts,partiallyoffsetbyanincreaseininterestcheckingbalances.Averagemoneymarketsavingsaccountbalancesdeclinedfrom2005to2006by$2.6billion(9.0percent),primarilyduetoadeclineinbranch-basedbalances.ThedeclinewasprimarilytheresultoftheCompany’sdepositpricingdecisionsformoneymarketproductsinrelationtootherfixed-ratedepositproductsoffered.During2006,aportionofbranch-basedmoneymarketsavingsbalancesmigratedtofixed-ratetimecertificatestotakeadvantageofhigherinterestratesfortheseproducts.Averagetimecertificatesofdepositlessthan$100,000andaveragetimedepositsgreaterthan$100,000grew$.6billion(4.3percent)and$1.6billion(7.7percent),respectively,in2006comparedwith2005,primarilydrivenbythemigrationofmoneymarketbalanceswithintheConsumerBankingandWealthManagement&SecuritiesServicesbusinesslines,ascustomersmigratedbalancestohigherratedeposits.ProvisionforCreditLossesTheprovisionforcreditlossesisrecordedtobringtheallowanceforcreditlossestoaleveldeemedappropriatebymanagement,basedonfactorsdiscussedinthe“AnalysisandDeterminationofAllowanceforCreditLosses”section.In2007,theprovisionforcreditlosseswas$792million,comparedwith$544millionand$666millionin2006and2005,respectively.The$248million(45.6percent)increaseintheprovisionforcreditlossesin2007reflectedgrowthincreditcardaccounts,increasingloandelinquenciesandnonperformingloans,andhighercommercialandconsumercreditlossesfromayearago.Inaddition,theprovisionfor2006partiallyreflectedthefavorableresidualimpactonnetcharge-offs,principallyforcreditcardsandotherretailcharge-offs,resultingfromchangesinbankruptcylawsenactedinthefourthquarterof2005.Nonperformingloansincreased$87million(18.5percent)fromDecember31,2006,asaresultofstressincondominiumandotherresidentialhomeconstruction.Accruingloansninetydayspastdueincreased$235million(67.3percent),primarilyrelatedtoresidentialmortgages,creditcardsandhomeequityloans.Restructuredloansthatcontinuetoaccrueinterestincreased$127million(31.3percent),reflectingtheimpactofprogramsforcertaincreditcardandsub-primeresidentialmortgagecustomersinlightofcurrenteconomicconditions.Netcharge-offsincreased$248million(45.6percent)from2006,primarilyduetoananticipatedincreaseinconsumercharge-offsprincipallyrelatedtogrowthincreditcardbalances,andsomewhathighercommercialloannetcharge-offs.Inaddition,netcharge-offswerelowerduring2006,reflectingthebeneficialimpactofbankruptcylegislationthatwentintoeffectduringthefourthquarterof2005.The$122million(18.3percent)decreaseintheprovisionforcreditlossesin2006,comparedwith2005,reflectedstablecreditqualityin2006andtheadverseimpactinthefourthquarterof2005onnetcharge-offsfromchangesinbankruptcylawsenactedin2005.Nonperformingloans,principallyreflectingfavorablechangesinthequalityofcommercialloans,declined$74millionfromDecember31,2005.However,accruingloansninetydayspastdueandrestructuredloansthatcontinuetoaccrueinterestincreasedby$186millionoverthissameperiod.Netcharge-offsdeclined$141millionfrom2005,principallyduetotheimpactofchangesinbankruptcylawsthatwentintoeffectduringthefourthquarterof2005.In2005,approximately$64millionofincrementalnetcharge-offsoccurredduetothechangeinbankruptcylawsandaseparatepolicychangerelatedtooverdraftbalances.Asaresultofthesechanges,bankruptcycharge-offswerelowerin2006,whilecustomersexperiencingcreditdeteriorationmigratedfurtherthroughcontractualdelinquencies.Referto“CorporateRiskProfile”forfurtherinformationontheprovisionforcreditlosses,netcharge-offs,nonperformingassetsandotherfactorsconsideredbytheCompanyinassessingthecreditqualityoftheloanportfolioandestablishingtheallowanceforcreditlosses.NoninterestIncomeNoninterestincomein2007was$7.2billion,comparedwith$6.8billionin2006and$6.0billionin2005.The$326million(4.8percent)increasein2007over2006,wasdrivenbystrongorganicfee-basedrevenuegrowth(8.6percent)inmostfeecategories,offsetsomewhatbythe$107millioninvaluationlossesrelatedtosecuritiespurchasedfromcertainmoneymarketfundsmanagedbyanaffiliate.Additionally,2006includedseveralsignificantitemsrepresentingapproximately$142millionofincrementalrevenue,including:highertradingincomerelatedtogainsfromtheterminationofcertaininterestrateswaps,equitygainsfromtheinitialpublicofferingandU.S.BANCORP23subsequentsaleoftheequityinterestsinacardholderassociation,againonthesaleofa401(k)definedcontributionrecordkeepingbusiness,andafavorablesettlementinthemerchantprocessingbusiness,offsetbylowermortgagebankingrevenueduetoadoptingfairvalueaccountingstandardsforMSRs.Thegrowthincreditanddebitcardrevenueof18.6percentwasprimarilydrivenbyanincreaseincustomeraccountsandhighercustomertransactionvolumesfromayearago.Theincreasecoincideswiththestrongorganicgrowthincreditcardbalancesduringtheyear.Thecorporatepaymentproductsrevenuegrowthof13.3percentreflectedgrowthincustomersalesvolumesandcardusage,andtheimpactofanacquiredbusiness.Merchantprocessingservicesrevenuewas14.3percenthigherin2007,comparedwith2006,reflectinganincreaseincustomersandsalesvolumesonbothadomesticandglobalbasis.Trustandinvestmentmanagementfeesincreased8.4percentprimarilyduetocoreaccountgrowthandfavorableequitymarketconditionsduringtheyear.Depositservicechargeswere3.4percenthigheryear-over-yeardueprimarilytoincreasedtransaction-relatedfeesandtheimpactofcontinuedgrowthinnetnewcheckingaccounts.Thisgrowthindepositaccount-relatedrevenuewasmutedsomewhatasservicecharges,traditionallyreflectedinthisfeecategory,continuedtomigratetoyield-relatedloanfeesascustomersutilizednewconsumerproducts.Treasurymanagementfeesincreased7.0percentovertheprioryeardue,inpart,tonewcustomeraccountgrowth,newproductofferingsandhighertransactionvolumes.Commercialproductsrevenueincreased4.3percentovertheprioryearduetohighersyndicationfees,andforeignexchangeandcommercialleasingrevenue.Mortgagebankingrevenueincreased34.9percentin2007,comparedwith2006,duetoanincreaseinmortgageoriginationsandservicingincome,partiallyoffsetbyanadversenetchangeinthevaluationofMSRsandrelatedeconomichedgingactivitiesgivenchanginginterestrates.In2006,mortgagebankingrevenueincludedavaluationlossof$37millionrelatedtotheadoptionoffairvalueaccountingforMSRs.Growthinthesefee-basedrevenuecategorieswaspartiallyoffsetbyslightlylowerinvestmentproductsfeesandcommissionsandadeclineinotherincome.The35.5percentreductionofotherrevenuein2007,comparedwith2006,included$107millioninvaluationlossesrecognizedin2007,relatedtosecuritiespurchasedfromcertainmoneymarketfundsmanagedbyanaffiliate.Inaddition,2006resultsreflecteda$52milliongainonthesaleofa401(k)definedcontributionrecordkeepingbusiness,$67millionofgainsontheinitialpublicofferingandsubsequentsaleoftheequityinterestsinacardholderassociation,a$10millionfavorablelegalsettlementwithinthemerchantprocessingbusinessanda$50milliontradinggainrelatedtoterminatingcertaininterestrateswaps.The$801million(13.3percent)increasein2006over2005,wasdrivenbyorganicbusinessgrowthinseveralfeecategories,expansionintrustandpaymentprocessingbusinesses,afavorablechangeof$120millioninnetsecuritiesgains(losses)andothergainsrecordedin2006of$179million.Theseincludedthegainsfromterminatedinterestrateswaps,equitygainsfromtheinitialpublicofferingandsubsequentsaleoftheequityinterestsinacardholderassociation,gainsfromthesaleofa401(k)definedcontributionrecordkeepingbusinessandafavorablelegalsettlementinthemerchantprocessingbusiness.Thegrowthincreditanddebitcardrevenuewasprincipallydrivenbyhighercustomertransactionsalesvolumesandfeesrelatedtocashadvances,balancetransfersandover-limitpositions.Thecorporatepaymentproductsrevenuegrowthreflectedorganicgrowthinsalesvolumesandcardusage,enhancementsinproductpricingandacquiredbusinessexpansion.ATMprocessingservicesrevenuewashigherdue24U.S.BANCORPTable4NONINTERESTINCOME(DollarsinMillions)2007200620052007v20062006v2005Creditanddebitcardrevenue........................$949$800$71318.6%12.2%Corporatepaymentproductsrevenue...................63155748813.314.1ATMprocessingservices...........................245243229.86.1Merchantprocessingservices........................1,10196377014.325.1Trustandinvestmentmanagementfees.................1,3391,2351,0098.422.4Depositservicecharges............................1,0581,0239283.410.2Treasurymanagementfees..........................4724414377.0.9Commercialproductsrevenue........................4334154004.33.8Mortgagebankingrevenue..........................25919243234.9(55.6)Investmentproductsfeesandcommissions...............146150152(2.7)(1.3)Securitiesgains(losses),net........................1514(106)7.1*Other........................................524813593(35.5)37.1Totalnoninterestincome.........................$7,172$6,846$6,0454.8%13.3%*NotmeaningfultoanATMbusinessacquisitioninMay2005.Merchantprocessingservicesrevenuereflectedanincreaseinsalesvolumedrivenbyacquisitions,highersamestoresales,newmerchantsigningsandassociatedequipmentfees.Theincreaseintrustandinvestmentmanagementfeeswasprimarilyduetoorganiccustomeraccountgrowth,improvingassetmanagementfeesgivenfavorableequitymarketconditions,andincrementalrevenuegeneratedbyacquisitionsofcorporateandinstitutionaltrustbusinesses.Depositservicechargesgrewduetoincreasedtransaction-relatedfeesandtheimpactofnetnewcheckingaccounts.MortgagebankingrevenuedeclinedprimarilyduetotheadoptionoffairvalueaccountingforMSRs.Otherincomeincreasedprimarilyduetothenotableassetgainspreviouslydiscussed.NoninterestExpenseNoninterestexpensein2007was$6.9billion,comparedwith$6.2billionand$5.9billionin2006and2005,respectively.TheCompany’sefficiencyratioincreasedto49.3percentin2007from45.4percentin2006.Thechangeintheefficiencyratioandthe$682million(11.0percent)increaseinnoninterestexpensesin2007,comparedwith2006,wasprincipallyduetoa$330millionVisaChargerecognizedin2007forthecontingentobligationforcertainVisaU.S.A.Inc.litigationmatters.Theremainingexpenseincreasewasprincipallyrelatedtohighercreditcosts,incrementalgrowthintax-advantagedprojectsorspecificmanagementinvestmentinrevenue-enhancingbusinessinitiativesdesignedtoexpandtheCompany’sgeographicalpresence,strengthencorporateandcommercialbankingrelationshipmanagement,capitalizeoncurrentproductofferings,furtherimprovetechnologyandsupportinnovationofproductsandservicesforcustomers.Theimpactofthesefactorswasreflectedinvariousexpensecategories.Compensationexpensewas5.1percenthigheryear-over-yearprimarilyduetoinvestmentinpersonnelwithinthebranchdistributionnetwork,WholesaleBankingandPaymentServicesinconnectionwithvariousbusinessinitiatives,includingtheCompany’sPowerBankinitiativewithConsumerBanking,expandingitscorporatebankingteam,enhancingrelationshipmanagementprocessesandsupportingorganicbusinessgrowthandacquiredbusinesses.Employeebenefitsexpenseincreased2.7percentyear-over-yearashighermedicalcostswerepartiallyoffsetbylowerpensioncosts.Netoccupancyandequipmentexpenseincreased3.9percentprimarilyduetobankacquisitionsandinvestmentsinbranches.Professionalservicesexpensewas17.1percenthigherduetorevenueenhancingbusinessinitiatives,higherlitigation-relatedcosts,andhigherlegalfeesassociatedwiththeestablishmentofabankcharterinIrelandtosupportpan-Europeanpaymentprocessing.Marketingandbusinessdevelopmentexpenseincreased11.5percentovertheprioryearduetohighercustomerpromotion,solicitationandadvertisingactivities.Postage,printingandsuppliesincreased6.8percentduetoincreasingcustomerpromotionalmailingsandchangesinpostalratesfromayearago.Otherintangiblesexpenseincreased5.9percentyear-over-yearduetorecentacquisitionsinConsumerBanking,WealthManagement&SecuritiesServicesandPaymentServices.Otherexpenseincreased$444million(46.6percent)overtheprioryearprimarilyduetothe$330millionVisaCharge,highercostsrelatedtoaffordablehousingandothertax-advantagedinvestments,anincreaseinmerchantprocessingexpensestosupportorganicgrowthinPaymentServices,integrationexpensesrelatedtorecentacquisitionsandhighercredit-relatedcostsforotherrealestateownedandloancollectionactivities.Theseincreaseswerepartiallyoffsetby$33millionofdebtprepaymentchargesrecordedduring2006.The$317million(5.4percent)increaseinnoninterestexpensesin2006,comparedwith2005,wasprimarilydrivenbyincrementaloperatingandbusinessintegrationcostsassociatedwithacquisitions,increasedpensioncostsandhigherexpenserelatedtocertaintax-advantagedU.S.BANCORP25Table5NONINTERESTEXPENSE(DollarsinMillions)2007200620052007v20062006v2005Compensation..................................$2,640$2,513$2,3835.1%5.5%Employeebenefits................................4944814312.711.6Netoccupancyandequipment.......................6866606413.93.0Professionalservices..............................23319916617.119.9Marketingandbusinessdevelopment...................24221723511.5(7.7)Technologyandcommunications......................5125054661.48.4Postage,printingandsupplies........................2832652556.83.9Otherintangibles.................................3763554585.9(22.5)Debtprepayment................................–3354*(38.9)Other(a)......................................1,39695277446.623.0Totalnoninterestexpense........................$6,862$6,180$5,86311.0%5.4%Efficiencyratio(b)................................49.3%45.4%44.3%(a)Includedinotherexpensein2007wasa$330millionchargerelatedtotheCompany’scontingentobligationtoVisaU.S.A.Incforindemnificationofcertainlitigationmatters.(b)Computedasnoninterestexpensedividedbythesumofnetinterestincomeonataxable-equivalentbasisandnoninterestincomeexcludingsecuritiesgains(losses),net.*Notmeaningfulinvestments.Thiswaspartiallyoffsetbyareductioninotherintangiblesexpenseandlowerdebtprepaymentchargesin2006.CompensationexpensewashigherprimarilyduetocorporateandinstitutionaltrustandpaymentsprocessingacquisitionsandothergrowthinitiativesundertakenbytheCompany.Employeebenefitsincreasedprimarilyasaresultofhigherpensionexpense.Netoccupancyandequipmentexpenseincreasedprimarilyduetobusinessexpansion.Professionalservicesexpensewashigherprimarilyduetorevenueenhancement-relatedbusinessinitiativesandhigherlegalcosts.Technologyandcommunicationsexpenserose,reflectinghigheroutsidedataprocessingexpenseprincipallyassociatedwithexpandingaprepaidgiftcardprogramandacquisitions.OtherintangiblesexpensedecreasedinconnectionwiththeadoptionoffairvalueaccountingforMSRsin2006,andtheimpactofeliminatingtheamortizationandrelatedimpairmentsorreparationsoftheseservicingrights.Debtprepaymentchargesdeclinedfrom2005andwererelatedtolonger-termcallabledebtthatwasprepaidbytheCompanyaspartofasset/liabilitydecisionstoimprovefundingcostsandrepositiontheCompany’sinterestrateriskposition.Otherexpenseincreasedprimarilyduetoincreasedinvestmentsintax-advantagedprojectsandbusinessintegrationcosts.PensionPlansBecauseofthelong-termnatureofpensionplans,theadministrationandaccountingforpensionsiscomplexandcanbeimpactedbyseveralfactors,includinginvestmentandfundingpolicies,accountingmethodsandtheplans’actuarialassumptions.RefertoNote16oftheNotestoConsolidatedFinancialStatementsforfurtherinformationonfundingpractices,investmentpoliciesandassetallocationstrategies.TheCompany’spensionaccountingpolicyfollowsgenerallyacceptedaccountingstandardsandreflectsthelong-termnatureofbenefitobligationsandtheinvestmenthorizonofplanassets.Actuarialgainsandlossesincludetheimpactofplanamendmentsandvariousunrecognizedgainsandlossesrelatedtodifferencesinactualplanexperiencecomparedwithactuarialassumptions,whicharedeferredandamortizedoverthefutureserviceperiodsofactiveemployees.Theactuariallyderivedmarket-relatedvalueutilizedtodeterminetheexpectedreturnonplanassetsisbasedonfairvalue,adjustedforthedifferencebetweenexpectedreturnsandactualperformanceofplanassets.Theunrealizeddifferencebetweenactualexperienceandexpectedreturnsisincludedintheactuariallyderivedmarket-relatedvalueandamortizedasacomponentofpensionexpenseratablyoverafive-yearperiod.AtSeptember30,2007,thisaccumulatedunrecognizedgainapproximated$358million,comparedwith$249millionatSeptember30,2006.Theimpactonpensionexpenseoftheunrecognizedassetgainswillincrementallydecreasepensioncostsineachyearfrom2008to2012,byapproximately$38million,$29million,$24million,$15millionand$12million,respectively.Thisassumesthattheperformanceofplanassetsin2008andbeyondequalstheassumedlong-termrateofreturn(“LTROR”).Actualresultswillvarydependingontheperformanceofplanassetsandchangestoassumptionsrequiredinthefuture.RefertoNote1oftheNotestoConsolidatedFinancialStatementsforfurtherdiscussionoftheCompany’saccountingpoliciesforpensionplans.In2008,theCompanyanticipatesthatpensioncostswilldecreasebyapproximately$36million.Thedecreasewillbeprimarilydrivenbyutilizingahigherdiscountrateandamortizationofunrecognizedactuarialgainsfromprioryears,accountingforapproximately$14millionand$37millionoftheanticipateddecrease,respectively,partiallyoffsetbya$15millionincreaserelatedtoachangeintheassumptionoffuturesalarygrowth.Duetothecomplexityofforecastingpensionplanactivities,theaccountingmethodutilizedforpensionplans,management’sabilitytorespondtofactorsimpactingtheplansandthehypotheticalnatureofthisinformation,theactualchangesinperiodicpensioncostscouldbedifferentthantheinformationprovidedinthesensitivityanalysisbelow.Note16oftheNotestoConsolidatedFinancialStatementsprovidesasummaryofthesignificantpensionplanassumptions.Becauseofthesubjectivenatureofplanassumptions,asensitivityanalysistohypotheticalchangesintheLTRORandthediscountrateisprovidedbelow:LTROR(DollarsinMillions)7.9%Base8.9%9.9%Incrementalbenefit(cost).....$(25)$–$25Percentof2007netincome....(.36)%–%.36%DiscountRate(DollarsinMillions)5.3%Base6.3%7.3%Incrementalbenefit(cost).....$(56)$–$42Percentof2007netincome....(.80)%–%.60%IncomeTaxExpenseTheprovisionforincometaxeswas$1,883million(aneffectiverateof30.3percent)in2007,comparedwith$2,112million(aneffectiverateof30.8percent)in2006and$2,082million(aneffectiverateof31.7percent)in2005.Thedecreaseintheeffectivetaxratefrom2006primarilyreflectedhighertaxexemptincomefrominvestmentsecuritiesandinsuranceproductsaswellasincrementaltaxcreditsfromaffordablehousingandothertax-advantagedinvestments.Includedin2006wasareductionofincometaxexpenseof$61millionrelatedtotheresolutionoffederalincometaxexaminationscoveringsubstantiallyalloftheCompany’slegalentitiesforallyearsthrough2004and$22millionrelatedtocertainstateexaminations.Includedinthedeterminationofincometaxesfor2005wasareduction26U.S.BANCORPofincometaxexpenseof$94millionrelatedtotheresolutionofincometaxexaminations.TheCompanyanticipatesthatitseffectivetaxratefortheforeseeablefuturewillremainstablerelativetothefullyearratefor2007of30.3percentofpretaxearnings.Forfurtherinformationonincometaxes,refertoNote18oftheNotestoConsolidatedFinancialStatements.BALANCESHEETANALYSISAverageearningassetswere$194.7billionin2007,comparedwith$186.2billionin2006.Theincreaseinaverageearningassetsof$8.5billion(4.5percent)wasduetogrowthintotalaverageloans(4.8percent),investmentsecurities(3.4percent)andloansheld-for-sale(17.3percent),partiallyoffsetbyslightlylowertradingandotherearningassets.Thechangeintotalaverageearningassetswasprincipallyfundedbyincreasesinwholesalefunding.Foraveragebalanceinformation,refertoConsolidatedDailyAverageBalanceSheetandRelatedYieldsandRatesonpages112and113.LoansTheCompany’sloanportfoliowas$153.8billionatDecember31,2007,anincreaseof$10.2billion(7.1percent)fromDecember31,2006.Theincreasewasdrivenbygrowthinallmajorloancategorieswithstronggrowthincommercialloans(10.6percent),retailloans(6.9percent),andresidentialmortgages(7.0percent)andmoremoderateU.S.BANCORP27Table6LOANPORTFOLIODISTRIBUTIONAtDecember31(DollarsinMillions)AmountPercentofTotalAmountPercentofTotalAmountPercentofTotalAmountPercentofTotalAmountPercentofTotal20072006200520042003CommercialCommercial..............$44,83229.1%$40,64028.3%$37,84427.7%$35,21028.2%$33,53628.7%Leasefinancing............6,2424.15,5503.95,0983.74,9634.04,9904.3Totalcommercial........51,07433.246,19032.242,94231.440,17332.238,52633.0CommercialRealEstateCommercialmortgages......20,14613.119,71113.720,27214.920,31516.320,62417.6Constructionanddevelopment..9,0615.98,9346.28,1916.07,2705.86,6185.7Totalcommercialrealestate..29,20719.028,64519.928,46320.927,58522.127,24223.3ResidentialMortgagesResidentialmortgages.......17,09911.115,31610.714,53810.79,7227.87,3326.3Homeequityloans,firstliens...5,6833.75,9694.16,1924.55,6454.56,1255.2Totalresidentialmortgages..22,78214.821,28514.820,73015.215,36712.313,45711.5RetailCreditcard...............10,9567.18,6706.07,1375.26,6035.35,9335.1Retailleasing.............5,9693.96,9604.97,3385.47,1665.76,0295.2Homeequityandsecondmortgages.............16,44110.715,52310.814,97911.014,85111.913,21011.3OtherretailRevolvingcredit.........2,7311.82,5631.82,5041.82,5412.02,5402.2Installment.............5,2463.44,4783.13,5822.62,7672.22,3802.0Automobile............8,9705.88,6936.18,1126.07,4195.97,1656.1Student...............451.3590.4675.5469.4329.3Totalotherretail.......17,39811.316,32411.414,87310.913,19610.512,41410.6Totalretail.............50,76433.047,47733.144,32732.541,81633.437,58632.2Totalloans..........$153,827100.0%$143,597100.0%$136,462100.0%$124,941100.0%$116,811100.0%Table7SELECTEDLOANMATURITYDISTRIBUTIONDecember31,2007(DollarsinMillions)OneYearorLessOverOneThroughFiveYearsOverFiveYearsTotalCommercial...............................................$21,999$25,092$3,983$51,074Commercialrealestate.......................................9,30813,1826,71729,207Residentialmortgages.......................................8992,54019,34322,782Retail...................................................18,66118,60713,49650,764Totalloans.............................................$50,867$59,421$43,539$153,827TotalofloansdueafteroneyearwithPredeterminedinterestrates.................................$52,001Floatinginterestrates......................................$50,959growthincommercialrealestateloans(2.0percent).Table6providesasummaryoftheloandistributionbyproducttype,whileTable7providesasummaryofselectedloanmaturitydistributionbyloancategory.Averagetotalloansincreased$6.7billion(4.8percent)in2007,comparedwith2006.Theincreasewasduetostronggrowthinretailloansandmoderategrowthincommercialloansandresidentialmortgages,whileaveragecommercialrealestateloanswereessentiallyunchangedfromayearago.CommercialCommercialloans,includingleasefinancing,increased$4.9billion(10.6percent)asofDecember31,2007,comparedwithDecember31,2006.During2007,theCompanymadecertainpersonnelinvestmentsandorganizationalchangestobetteremphasizecorporatebanking,withanenhancedfocusonrelationshipbanking.Asaresultofthesebusinessinitiativesandchangingeconomicconditions,theCompanyexperiencedgrowthincommercialloansdrivenbynewcustomerrelationships,utilizationoflinesofcreditandgrowthincommercialleasingandcorporatepaymentcardbalances.Averagecommercialloansincreased$2.4billion(5.2percent)in2007,comparedwith2006,primarilyduetotheseinitiativesandanincreaseincommercialloandemanddrivenbygeneraleconomicconditionsin2007.Table8providesasummaryofcommercialloansbyindustryandgeographicallocations.CommercialRealEstateTheCompany’sportfolioofcommercialrealestateloans,whichincludescommercialmortgagesandconstructionloans,wasessentiallyunchangedfromayearago.Totalcommercialrealestatebalancesincreased$.6billion(2.0percent)atDecember31,2007,comparedwithDecember31,2006.Averagecommercialrealestateloansdecreased$.2billion(.6percent)in2007,comparedwith2006.Since2006,growthincommercialrealestatebalanceshasbeenlimitedduetocapitalmarket28U.S.BANCORPTable8COMMERCIALLOANSBYINDUSTRYGROUPANDGEOGRAPHYIndustryGroup(DollarsinMillions)LoansPercentLoansPercentDecember31,2007December31,2006Consumerproductsandservices................................$9,57618.8%$9,30320.1%Financialservices...........................................7,69315.16,37513.8Commercialservicesandsupplies...............................4,1448.14,64510.1Capitalgoods.............................................3,9827.83,8728.4Propertymanagementanddevelopment...........................3,2396.33,1046.7Agriculture...............................................2,7465.42,4365.3Healthcare...............................................2,5214.92,3285.0Paperandforestryproducts,miningandbasicmaterials.................2,2894.52,1904.7Consumerstaples..........................................2,1974.31,7493.8Transportation.............................................1,8973.71,6623.6Privateinvestors...........................................1,6853.31,5653.4Energy..................................................1,5763.11,1042.4Informationtechnology.......................................1,0852.18211.8Other...................................................6,44412.65,03610.9Total.................................................$51,074100.0%$46,190100.0%GeographyCalifornia................................................$5,09110.0%$4,1128.9%Colorado.................................................2,4904.92,9586.4Illinois..................................................2,8995.72,7896.0Minnesota................................................6,25412.26,84214.8Missouri.................................................1,6903.31,8624.0Ohio....................................................2,5545.02,6725.8Oregon..................................................2,0214.01,8704.0Washington...............................................2,3644.62,2124.8Wisconsin................................................2,3374.62,2955.0Iowa,Kansas,Nebraska,NorthDakota,SouthDakota..................5,15010.14,3089.3Arkansas,Indiana,Kentucky,Tennessee...........................2,0664.02,0704.5Idaho,Montana,Wyoming.....................................1,0332.01,0152.2Arizona,Nevada,Utah.......................................1,9473.81,6023.5Totalbankingregion.......................................37,89674.236,60779.2OutsidetheCompany’sbankingregion............................13,17825.89,58320.8Total.................................................$51,074100.0%$46,190100.0%conditionsinearly2007thatenabledcustomerrefinancingofprojects,amanagementdecisiontoreducecondominiumconstructionfinancinginselectedmarkets,andaslowdowninresidentialhomebuildingimpactingconstructionlending.Duringthefourthquarterof2007,theCompanyexperiencedgrowthof2.4percentincommercialrealestateloansasdeveloperssoughtbankfinancingasliquiditydisruptionsinthecapitalmarketsoccurred.Table9providesasummaryofcommercialrealestatebypropertytypeandgeographicallocations.TheCompanymaintainstherealestateconstructiondesignationuntilthecompletionoftheconstructionphaseand,ifretained,theloanisreclassifiedtothecommercialmortgagecategory.Approximately$107millionofconstructionloanswerepermanentlyfinancedandreclassifiedtothecommercialmortgageloancategoryin2007.AtDecember31,2007,$231millionoftax-exemptindustrialdevelopmentloansweresecuredbyrealestate.TheCompany’scommercialrealestatemortgagesandconstructionloanshadunfundedcommitmentsof$8.9billionatDecember31,2007and2006.TheCompanyalsofinancestheoperationsofrealestatedevelopersandotherentitieswithoperationsrelatedtorealestate.Theseloansarenotsecureddirectlybyrealestateandaresubjecttotermsandconditionssimilartocommercialloans.Theseloanswereincludedinthecommercialloancategoryandtotaled$1.8billionatDecember31,2007.ResidentialMortgagesResidentialmortgagesheldintheloanportfolioatDecember31,2007,increased$1.5billion(7.0percent)fromDecember31,2006.Thegrowthwasprincipallytheresultofanincreaseinconsumerfinanceoriginationsduringtheyear.Themajorityofloansretainedintheportfoliorepresentedoriginationstocustomerswithbetterthansub-primecreditriskratings.Averageresidentialmortgagesincreased1.0billion(4.9percent)in2007,comparedwith2006.Thegrowthinaverageresidentialmortgagesfromtheconsumerfinancedistributionchannelwasoffsetsomewhatbylowerbalancesfromtraditionalbranchandmortgagebankingchannels.RetailTotalretailloansoutstanding,whichincludecreditcard,retailleasing,homeequityandsecondmortgagesandotherretailloans,increased$3.3billion(6.9percent)atDecember31,2007,comparedwithDecember31,2006.U.S.BANCORP29Table9COMMERCIALREALESTATEBYPROPERTYTYPEANDGEOGRAPHYPropertyType(DollarsinMillions)LoansPercentLoansPercentDecember31,2007December31,2006Businessowneroccupied.....................................$10,34035.4%$10,02735.0%CommercialpropertyIndustrial..............................................8182.89393.3Office................................................2,4248.32,2267.8Retail.................................................2,97910.22,7329.5Othercommercial........................................3,18410.92,7459.6HomebuildersCondominiums..........................................1,0813.71,1173.9Otherresidential.........................................3,00810.33,44012.0Multi-family...............................................4,00113.73,85013.4Hotel/motel...............................................1,0513.61,1263.9Healthcarefacilities.........................................3211.14431.6Total.................................................$29,207100.0%$28,645100.0%GeographyCalifornia................................................$5,78319.8%$6,04421.1%Colorado.................................................1,5775.41,4044.9Illinois..................................................1,1103.81,0603.7Minnesota................................................1,7235.91,8336.4Missouri.................................................1,5775.41,4615.1Ohio....................................................1,3144.51,3754.8Oregon..................................................1,8406.31,7476.1Washington...............................................2,95010.13,06510.7Wisconsin................................................1,4605.01,5475.4Iowa,Kansas,Nebraska,NorthDakota,SouthDakota..................2,1037.21,9486.8Arkansas,Indiana,Kentucky,Tennessee...........................1,4024.81,4044.9Idaho,Montana,Wyoming.....................................1,2274.21,0603.7Arizona,Nevada,Utah.......................................2,6299.02,4068.4Totalbankingregion.......................................26,69591.426,35492.0OutsidetheCompany’sbankingregion............................2,5128.62,2918.0Total.................................................$29,207100.0%$28,645100.0%Theincreasewasprimarilydrivenbygrowthincreditcard,installmentandhomeequityloans,partiallyoffsetbydecreasesinretailleasingandstudentloanbalances.Averageretailloansincreased$3.5billion(7.7percent)in2007,principallyreflectinggrowthincreditcardandinstallmentloans.Stronggrowthincreditcardsoccurredinbranchoriginated,co-brandedandfinancialinstitutionpartnerportfolios.Ofthetotalretailloansandresidentialmortgagesoutstanding,approximately80.0percentweretocustomerslocatedintheCompany’sprimarybankingregion.Table10providesageographicsummaryofresidentialmortgagesandretailloansoutstandingasofDecember31,2007and2006.LoansHeldforSaleLoansheldforsale,consistingprimarilyofresidentialmortgagesandstudentloanstobesoldinthesecondarymarket,were$4.8billionatDecember31,2007,comparedwith$3.3billionatDecember31,2006.Theincreaseinloansheldforsalewasprincipallyduetoanincreaseinresidentialmortgageloanbalances.Averageloansheldforsalewere$4.3billionin2007,comparedwith$3.7billionin2006.During2007,certaincompaniesinthemortgagebankingindustryexperiencedsignificantdisruptionduetotheirinabilitytoaccessfinancingthroughthecapitalmarketsasinvestorconcernsincreasedrelatedtothequalityofsub-primeloanoriginationsandrelatedsecuritizations.TheCompany’sprimaryfocusoforiginatingconventionalmortgagespackagedthroughgovernmentagenciesenabledittoavoidtheseissuesimpactingothermortgagebankingfirms.GiventhesemarketconditionsandthenatureoftheCompany’smortgagebankingbusiness,residentialmortgageoriginationsincreasedin2007by21.2percentascustomerssoughtmorereliablefinancingalternatives.InvestmentSecuritiesTheCompanyusesitsinvestmentsecuritiesportfolioforseveralpurposes.Itservesasavehicletomanageinterestraterisk,generatesinterestanddividendincomefromtheinvestmentofexcessfundsdependingon30U.S.BANCORPTable10RESIDENTIALMORTGAGESANDRETAILLOANSBYGEOGRAPHY(DollarsinMillions)LoansPercentLoansPercentDecember31,2007December31,2006ResidentialMortgagesCalifornia................................................$1,4266.2%$1,3566.4%Colorado.................................................1,5666.91,4806.9Illinois..................................................1,4506.31,3596.4Minnesota................................................2,29210.12,28710.7Missouri.................................................1,5626.91,5167.1Ohio....................................................1,6057.01,5297.2Oregon..................................................9684.29524.5Washington...............................................1,2665.61,2736.0Wisconsin................................................1,1425.01,1005.2Iowa,Kansas,Nebraska,NorthDakota,SouthDakota..................1,5026.61,5127.1Arkansas,Indiana,Kentucky,Tennessee...........................1,8868.31,6767.9Idaho,Montana,Wyoming.....................................5212.34702.2Arizona,Nevada,Utah.......................................1,2675.61,1685.5Totalbankingregion.......................................18,45381.017,67883.1OutsidetheCompany’sbankingregion............................4,32919.03,60716.9Total.................................................$22,782100.0%$21,285100.0%RetailLoansCalifornia................................................$6,26112.3%$5,76912.1%Colorado.................................................2,4274.82,2844.8Illinois..................................................2,6145.12,4295.1Minnesota................................................5,24710.35,07510.7Missouri.................................................2,5225.02,4645.2Ohio....................................................3,2766.53,2246.8Oregon..................................................2,2444.42,0244.3Washington...............................................2,4924.92,2784.8Wisconsin................................................2,5295.02,4545.2Iowa,Kansas,Nebraska,NorthDakota,SouthDakota..................3,2036.33,0966.5Arkansas,Indiana,Kentucky,Tennessee...........................3,7487.43,5887.6Idaho,Montana,Wyoming.....................................1,5643.11,3392.8Arizona,Nevada,Utah.......................................2,2314.41,9644.1Totalbankingregion.......................................40,35879.537,98880.0OutsidetheCompany’sbankingregion............................10,40620.59,48920.0Total.................................................$50,764100.0%$47,477100.0%loandemand,providesliquidityandisusedascollateralforpublicdepositsandwholesalefundingsources.WhileitistheCompany’sintenttoholditsinvestmentsecuritiesindefinitely,theCompanymaytakeactionsinresponsetostructuralchangesinthebalancesheetandrelatedinterestrateriskandtomeetliquidityrequirements,amongotherfactors.AtDecember31,2007,investmentsecurities,bothavailable-for-saleandheld-to-maturity,totaled$43.1billion,comparedwith$40.1billionatDecember31,2006.The$3.0billion(7.5percent)increasereflectedsecuritiespurchasesof$9.7billionpartiallyoffsetbysecuritiessales,maturitiesandprepayments.Includedinpurchasesduring2007,wereapproximately$3.0billionofsecuritiesfromcertainmoneymarketfundsmanagedbyanaffiliateoftheCompany.ThesesecuritiesprimarilyrepresentbeneficialinterestsinstructuredinvestmentvehiclesorsimilarU.S.BANCORP31Table11INVESTMENTSECURITIESDecember31,2007(DollarsinMillions)AmortizedCostFairValueWeighted-AverageMaturityinYearsWeighted-AverageYield(d)AmortizedCostFairValueWeighted-AverageMaturityinYearsWeighted-AverageYield(d)Available-for-SaleHeld-to-MaturityU.S.TreasuryandAgenciesMaturinginoneyearorless..................$134$134.15.82%$–$–––%Maturingafteroneyearthroughfiveyears.........27273.26.54––––Maturingafterfiveyearsthroughtenyears........21216.25.52––––Maturingaftertenyears....................22522312.46.00––––Total............................$407$4057.55.95%$–$–––%Mortgage-BackedSecurities(a)Maturinginoneyearorless..................$261$258.65.91%$–$–––%Maturingafteroneyearthroughfiveyears.........15,80415,4763.44.72663.16.29Maturingafterfiveyearsthroughtenyears........12,11411,7656.75.31––––Maturingaftertenyears....................3,1213,10412.56.36––––Total............................$31,300$30,6035.65.12%$6$63.16.29%Asset-BackedSecurities(a)(e)Maturinginoneyearorless..................$5$5.15.63%$–$–––%Maturingafteroneyearthroughfiveyears.........1,6571,6634.85.73––––Maturingafterfiveyearsthroughtenyears........1,2601,2605.85.71––––Maturingaftertenyears....................––––––––Total............................$2,922$2,9285.25.72%$–$–––%ObligationsofStateandPoliticalSubdivisions(b)Maturinginoneyearorless..................$42$42.36.83%$4$4.55.77%Maturingafteroneyearthroughfiveyears.........25263.26.319102.76.29Maturingafterfiveyearsthroughtenyears........5,6035,5658.36.8616187.86.90Maturingaftertenyears....................1,4611,42220.46.49272815.85.45Total............................$7,131$7,05510.76.78%$56$6010.26.03%OtherDebtSecuritiesMaturinginoneyearorless..................$127$127.13.80%$4$4.54.88%Maturingafteroneyearthroughfiveyears.........46373.96.27882.45.43Maturingafterfiveyearsthroughtenyears........100909.26.32––––Maturingaftertenyears....................1,5671,34934.26.37––––Total............................$1,840$1,60329.86.19%$12$121.85.26%OtherInvestments.....................$506$448–7.16%$–$–––%Totalinvestmentsecurities(c)...................$44,106$43,0427.45.51%$74$788.35.92%(a)Informationrelatedtoassetandmortgage-backedsecuritiesincludedaboveispresentedbaseduponweighted-averagematuritiesanticipatingfutureprepayments.(b)Informationrelatedtoobligationsofstateandpoliticalsubdivisionsispresentedbaseduponyieldtofirstoptionalcalldateifthesecurityispurchasedatapremium,yieldtomaturityifpurchasedatparoradiscount.(c)Theweighted-averagematurityoftheavailable-for-saleinvestmentsecuritieswas6.6yearsatDecember31,2006,withacorrespondingweighted-averageyieldof5.32percent.Theweighted-averagematurityoftheheld-to-maturityinvestmentsecuritieswas8.4yearsatDecember31,2006,withacorrespondingweighted-averageyieldof6.03percent.(d)Averageyieldsarepresentedonafully-taxableequivalentbasisunderataxrateof35percent.Yieldsonavailable-for-saleandheld-to-maturitysecuritiesarecomputedbasedonhistoricalcostbalances.Averageyieldandmaturitycalculationsexcludeequitysecuritiesthathavenostatedyieldormaturity.(e)Primarilyincludesinvestmentsinstructuredinvestmentvehicleswithunderlyingcollateralthatincludesamixofvariousmortgageandotherasset-backedsecurities.December31(DollarsinMillions)AmortizedCostPercentofTotalAmortizedCostPercentofTotal20072006U.S.Treasuryandagencies.............................$407.9%$4721.2%Mortgage-backedsecurities.............................31,30670.934,47284.7Asset-backedsecurities................................2,9226.67–Obligationsofstateandpoliticalsubdivisions..................7,18716.34,53011.1Otherdebtsecuritiesandinvestments......................2,3585.31,2363.0Totalinvestmentsecurities............................$44,180100.0%$40,717100.0%structuresandareclassifiedasasset-backedsecuritieswithintheconsolidatedfinancialstatements.AtDecember31,2007,approximately39percentoftheinvestmentsecuritiesportfoliorepresentedadjustable-ratefinancialinstruments,comparedwith37percentatDecember31,2006.Adjustable-ratefinancialinstrumentsincludevariable-ratecollateralizedmortgageobligations,mortgage-backedsecurities,agencysecurities,adjustable-ratemoneymarketaccounts,asset-backedsecurities,corporatedebtsecuritiesandfloating-ratepreferredstock.Averageinvestmentsecuritieswere$1.4billion(3.4percent)higherin2007,comparedwith2006,drivenprimarilybyanincreaseinthemunicipalsecuritiesportfolio,partiallyoffsetbyareductioninmortgage-backedassets.Theweighted-averageyieldoftheavailable-for-saleportfoliowas5.51percentatDecember31,2007,comparedwith5.32percentatDecember31,2006.Theaveragematurityoftheavailable-for-saleportfolioincreasedto7.4yearsatDecember31,2007,upfrom6.6yearsatDecember31,2006.TherelativemixofthetypeofinvestmentsecuritiesmaintainedintheportfolioisprovidedinTable11.TheCompanyconductsaregularassessmentofitsinvestmentportfoliostodeterminewhetheranysecuritiesareother-than-temporarilyimpairedconsidering,amongotherfactors,thenatureoftheinvestments,creditratingsorfinancialconditionoftheissuer,theextentanddurationoftheunrealizedloss,expectedcashflowsofunderlyingcollateral,marketconditionsandtheCompany’sabilitytoholdthesecuritiesthroughtheanticipatedrecoveryperiod.AtDecember31,2007,theavailable-for-salesecuritiesportfolioincludeda$1.1billionnetunrealizedloss,comparedwithanetunrealizedlossof$600millionatDecember31,2006.Thesubstantialportionofsecuritieswithunrealizedlosseswereeithergovernmentsecurities,issuedbygovernment-backedagenciesorprivatelyissuedsecuritieswithhighinvestmentgradecreditratingsandlimited,ifany,creditexposure.Somesecuritiesclassifiedwithinobligationsofstateandpoliticalsubdivisionsaresupportedbymono-lineinsurersthathaverecentlyexperiencedcreditratingdowngrades.Basedonmanagement’sevaluation,theimpactofthesechangesisexpectedtobeminimaltotheCompany.Themajorityofasset-backedsecuritiesatDecember31,2007,representedstructuredinvestments.Thevaluationofthesesecuritiesisdeterminedthroughestimatesofexpectedcashflows,discountratesandmanagement’sassessmentofvarious32U.S.BANCORPTable12DEPOSITSThecompositionofdepositswasasfollows:December31(DollarsinMillions)AmountPercentofTotalAmountPercentofTotalAmountPercentofTotalAmountPercentofTotalAmountPercentofTotal20072006200520042003Noninterest-bearingdeposits.....$33,33425.4%$32,12825.7%$32,21425.8%$30,75625.5%$32,47027.3%Interest-bearingsavingsdepositsInterestchecking...........28,99622.024,93720.023,27418.723,18619.221,40418.0Moneymarketsavings.......24,30118.526,22021.027,93422.430,47825.234,02528.6Savingsaccounts..........5,0013.85,3144.25,6024.55,7284.85,6304.7Totalofsavingsdeposits...58,29844.356,47145.256,81045.659,39249.261,05951.3Timecertificatesofdepositlessthan$100,000............14,16010.813,85911.113,21410.612,54410.413,69011.5Timedepositsgreaterthan$100,000Domestic................15,35111.714,86811.914,34111.511,9569.95,9024.9Foreign.................10,3027.87,5566.18,1306.56,0935.05,9315.0Totalinterest-bearingdeposits............98,11174.692,75474.392,49574.289,98574.586,58272.7Totaldeposits.............$131,445100.0%$124,882100.0%$124,709100.0%$120,741100.0%$119,052100.0%Thematurityoftimedepositswasasfollows:December31,2007(DollarsinMillions)CertificatesLessThan$100,000TimeDepositsGreaterThan$100,000TotalThreemonthsorless.........................................$4,809$19,196$24,005Threemonthsthroughsixmonths.................................3,8273,5287,355Sixmonthsthroughoneyear....................................2,7281,5374,2652009....................................................1,6637462,4092010....................................................3862726582011....................................................5062427482012....................................................234129363Thereafter.................................................7310Total..................................................$14,160$25,653$39,813marketfactors,whicharejudgmentalinnature.Basedonmanagement’sreviewasofthereportingdate,theCompanyexpectedtoreceiveallprincipalandinterestrelatedtosecuritieswithinitsinvestmentportfolios.DuringJanuary2008,actionsbytheFederalReserveBankandarelatedrallyinthefixedincomemarketscausedthefairvalueofasubstantialportionofinvestmentsecuritiestorecoversomewhatfromtheirunrealizedlossposition.However,creditspreadsforcertainstructuredinvestmentsecuritieswidenedduringthemonthcausingtheirvaluestodecline.Giventhenatureofthesestructuredinvestments,theCompanyislikelytorecognizefurtherimpairmentoftheseinvestmentsduringthenextfewquarters.DepositsTotaldepositswere$131.4billionatDecember31,2007,comparedwith$124.9billionatDecember31,2006.The$6.5billion(5.3percent)increaseintotaldepositswasprimarilytheresultofincreasesininterestchecking,timedepositsandnoninterest-bearingdeposits,partiallyoffsetbyadecreaseinmoneymarketsavingsaccounts.Averagetotaldepositsincreased$.5billion(.4percent)from2006,reflectinganincreaseinaverageinterestcheckingandpersonalcertificatesofdeposit,partiallyoffsetbyadecreaseinaveragenoninterest-bearingdepositsandmoneymarketsavingsaccounts.Noninterest-bearingdepositsatDecember31,2007,increased$1.2billion(3.8percent)fromDecember31,2006.Theincreasewasprimarilyattributedtoanincreaseincorporatetrustdeposits,partiallyoffsetbyadeclineinconsumerandbusinessdemanddepositsasthesecustomersutilizeddepositbalancestofundbusinessgrowthandmeetotherliquidityrequirements.Averagenoninterest-bearingdepositsin2007decreased$1.4billion(4.8percent),comparedwith2006,dueprimarilytoadeclineinbusinessdemanddeposits.Interest-bearingsavingsdepositsincreased$1.8billion(3.2percent)atDecember31,2007,comparedwithDecember31,2006.Theincreaseinthesedepositbalanceswasprimarilyrelatedtohigherinterestcheckingaccountbalances,partiallyoffsetbyareductioninmoneymarketsavingsbalances.The$4.1billion(16.2percent)increaseininterestcheckingaccountbalanceswasduetohigherbroker-dealer,governmentandinstitutionaltrustbalances.The$1.9billion(7.3percent)decreaseinmoneymarketsavingsaccountbalancesreflectedtheCompany’sdepositpricingdecisionsformoneymarketproductsinrelationtofixed-ratetimedepositproductsandbusinesscustomerdecisionstoutilizedepositliquiditytofundbusinessrequirements.Averageinterest-bearingsavingsdepositsin2007increased$.9billion(1.7percent),comparedwith2006,primarilydrivenbyhigherinterestcheckingaccountbalancesof$2.6billion(10.9percent),partiallyoffsetbyareductioninmoneymarketsavingsaccountbalancesof$1.3billion(5.0percent).Interest-bearingtimedepositsatDecember31,2007,increased$3.5billion(9.7percent),comparedwithDecember31,2006,primarilydrivenbyanincreaseintimedepositsgreaterthan$100,000.Timedepositsgreaterthan$100,000increased$3.2billion(14.4percent),includinga$.4billion(8.9percent)increaseinpersonalcertificatesofdeposit,comparedwithDecember31,2006,ascustomersmigratedmoneymarketbalancestotheseproducts.Averagetimecertificatesofdepositlessthan$100,000increased$.9billion(6.5percent)andaveragetimedepositsgreaterthan$100,000werebasicallyunchangedin2007,comparedwith2006.Timedepositsgreaterthan$100,000arelargelyviewedaspurchasedfundsandaremanagedtolevelsdeemedappropriategivenalternativefundingsources.BorrowingsTheCompanyutilizesbothshort-termandlong-termborrowingstofundgrowthofassetsinexcessofdepositgrowth.Short-termborrowings,whichincludefederalfundspurchased,commercialpaper,repurchaseagreements,borrowingssecuredbyhigh-gradeassetsandothershort-termborrowings,were$32.4billionatDecember31,2007,comparedwith$26.9billionatDecember31,2006.Short-termfundingismanagedwithinapprovedliquiditypolicies.Theincreaseof$5.5billioninshort-termborrowingsreflectedwholesalefundingassociatedwiththeCompany’sassetgrowthandasset/liabilitymanagementactivities.Long-termdebtwas$43.4billionatDecember31,2007,comparedwith$37.6billionatDecember31,2006,reflectingtheissuancesof$3.0billionofconvertibleseniordebentures,$1.3billionofsubordinatednotes,$1.4billionofmedium-termnotesand$.5billionofjuniorsubordinateddebentures,andthenetadditionof$10.1billionofFederalHomeLoanBank(“FHLB”)advances,partiallyoffsetbylong-termdebtmaturitiesandrepayments.The$5.8billion(15.5percent)increaseinlong-termdebtreflectedwholesalefundingassociatedwiththeCompany’sassetgrowthandasset/liabilitymanagementactivities.RefertoNote12oftheNotestoConsolidatedFinancialStatementsforadditionalinformationregardinglong-termdebtandthe“LiquidityRiskManagement”sectionfordiscussionofliquiditymanagementoftheCompany.CORPORATERISKPROFILEOverviewManagingrisksisanessentialpartofsuccessfullyoperatingafinancialservicescompany.Themostprominentriskexposuresarecredit,residualvalue,operational,interestrate,marketandliquidityrisk.Creditriskistheriskofnotcollectingtheinterestand/ortheprincipalbalanceofaloanorinvestmentwhenitisdue.Residualvalueriskisthepotentialreductionintheend-of-termvalueofleasedassetsortheresidualcashflowsrelatedtoassetsecuritizationandotheroff-balancesheetstructures.OperationalriskincludesU.S.BANCORP33risksrelatedtofraud,legalandcompliancerisk,processingerrors,technology,breachesofinternalcontrolsandbusinesscontinuationanddisasterrecoveryrisk.Interestrateriskisthepotentialchangeofnetinterestincomeasaresultofchangesininterestrates,whichcanaffecttherepricingofassetsandliabilitiesdifferently,aswellastheirmarketvalue.Marketriskarisesfromfluctuationsininterestrates,foreignexchangerates,andsecuritypricesthatmayresultinchangesinthevaluesoffinancialinstruments,suchastradingandavailable-for-salesecuritiesthatareaccountedforonamark-to-marketbasis.Liquidityriskisthepossibleinabilitytofundobligationstodepositors,investorsorborrowers.Inaddition,corporatestrategicdecisions,aswellastherisksdescribedabove,couldgiverisetoreputationrisk.Reputationriskistheriskthatnegativepublicityorpress,whethertrueornot,couldresultincostlylitigationorcauseadeclineintheCompany’sstockvalue,customerbaseorrevenue.CreditRiskManagementTheCompany’sstrategyforcreditriskmanagementincludeswell-defined,centralizedcreditpolicies,uniformunderwritingcriteria,andongoingriskmonitoringandreviewprocessesforallcommercialandconsumercreditexposures.Thestrategyalsoemphasizesdiversificationonageographic,industryandcustomerlevel,regularcreditexaminationsandmanagementreviewsofloansexhibitingdeteriorationofcreditquality.Thecreditriskmanagementstrategyalsoincludesacreditriskassessmentprocess,independentofbusinesslinemanagers,thatperformsassessmentsofcompliancewithcommercialandconsumercreditpolicies,riskratings,andothercriticalcreditinformation.TheCompanystrivestoidentifypotentialproblemloansearly,recordanynecessarycharge-offspromptlyandmaintainadequatereservelevelsforprobableloanlossesinherentintheportfolio.Commercialbankingoperationsrelyonprudentcreditpoliciesandproceduresandindividuallenderandbusinesslinemanageraccountability.Lendersareassignedlendingauthoritybasedontheirlevelofexperienceandcustomerservicerequirements.Creditofficersreportingtoanindependentcreditadministrationfunctionhavehigherlevelsoflendingauthorityandsupportthebusinessunitsintheircreditdecisionprocess.Loandecisionsaredocumentedastotheborrower’sbusiness,purposeoftheloan,evaluationoftherepaymentsourceandtheassociatedrisks,evaluationofcollateral,covenantsandmonitoringrequirements,andriskratingrationale.TheCompanyutilizesacreditriskratingsystemtomeasurethecreditqualityofindividualcommercialloans,includingtheprobabilityofdefaultofanobligorandthelossgivendefaultofcreditfacilities.TheCompanyusestheriskratingsystemforregulatoryreporting,determiningthefrequencyofreviewofthecreditexposures,andevaluationanddeterminationofthespecificallowanceforcommercialcreditlosses.TheCompanyregularlyforecastspotentialchangesinriskratings,nonperformingstatusandpotentialforlossandtheestimatedimpactontheallowanceforcreditlosses.IntheCompany’sretailbankingoperations,standardcreditscoringsystemsareusedtoassesscreditrisksofconsumer,smallbusinessandsmall-ticketleasingcustomersandtopriceconsumerproductsaccordingly.TheCompanyconductstheunderwritingandcollectionsofitsretailproductsinloanunderwritingandservicingcentersspecializingincertainretailproducts.Forecastsofdelinquencylevels,bankruptciesandlossesinconjunctionwithprojectionofestimatedlossesbydelinquencycategoriesandvintageinformationareregularlypreparedandareusedtoevaluateunderwritingandcollectionanddeterminethespecificallowanceforcreditlossesfortheseproducts.Becausebusinessprocessesandcreditrisksassociatedwithunfundedcreditcommitmentsareessentiallythesameasforloans,theCompanyutilizessimilarprocessestoestimateitsliabilityforunfundedcreditcommitments.TheCompanyalsoengagesinnon-lendingactivitiesthatmaygiverisetocreditrisk,includinginterestrateswapandoptioncontractsforbalancesheethedgingpurposes,foreignexchangetransactions,depositoverdraftsandinterestrateswapcontractsforcustomers,andsettlementrisk,includingAutomatedClearingHousetransactions,andtheprocessingofcreditcardtransactionsformerchants.Theseactivitiesarealsosubjecttocreditreview,analysisandapprovalprocesses.EconomicandOtherFactorsInevaluatingitscreditrisk,theCompanyconsiderschanges,ifany,inunderwritingactivities,theloanportfoliocomposition(includingproductmixandgeographic,industryorcustomer-specificconcentrations),trendsinloanperformance,thelevelofallowancecoveragerelativetosimilarbankinginstitutionsandmacroeconomicfactors.During2005throughmid-2007,economicconditionssteadilyimprovedasreflectedinstrongexpansionofthegrossdomesticproductindex,relativelylowunemploymentrates,expandingretailsaleslevels,favorabletrendsrelatedtocorporateprofitsandconsumerspendingforretailgoodsandservices.Beginninginmid-2004throughthesecondquarterof2006,theFederalReserveBankpursuedameasuredapproachtoincreasingshort-termratesinanefforttopreventanaccelerationofinflationandmaintainamoderaterateofeconomicgrowth.Therisinginterestrateenvironmentcausedsomesofteningofresidentialhomeandcondominiumsales.Nationwidesalesofcondominiumunitsreachedapeakinmid-2005andhavedeclinedsincethattimeframe.During2007,economicconditionsweremixed.Whilegrossdomesticproductcontinuedtoexpandataslowerrate,unemploymentrateshaverisensomewhat,inflationcontinuestobeproblematic,retailsaleshaveslowedandvehiclesaleslevelscontinuetodecline.Bothconsumerandbusinessbankruptcieshavecontinuedtorisefromlevelsexperiencedin2006andindustrialproductionandcorporateprofitlevelshavebegantoslowordeclinesomewhatfromprioryears.In34U.S.BANCORPaddition,themortgagelendingandhomebuildingindustriescontinuedtoexperienceincreasedlevelsofstress.Withrespecttoresidentialhomes,inventorylevelsapproximateda9.5monthsupplyattheendof2007,upfrom4.5monthsinthethirdquarterof2005.Medianhomeprices,whichpeakedinmid-2006,havedeclinedacrossmostdomesticmarketswithmoreseverepricereductionsinCaliforniaandtheNortheastandSoutheastregions.ThedeclineinresidentialhomevaluesandrisinginterestratesthroughSeptember2007begantohaveasignificantadverseimpactonresidentialmortgageloans.Whileresidentialmortgagedelinquencieshavebeenincreasing,theseadversemarketconditionsparticularlyaffectedsub-primeborrowers.InAugust2007,thesecuritizationmarketsbegantoexperiencesignificantliquiditydisruptionsasinvestorconfidenceinthecreditqualityofasset-backedsecuritizationprogramsbegantodecline.Duringthefourthquarterof2007,certainasset-backedcommercialpaperprogramsandotherstructuredinvestmentvehicleshavebeenunabletoremarkettheircommercialpapercreatingfurtherdeteriorationinthecapitalmarkets.Inresponsetotheseeconomicfactors,theFederalReserveBank’smonetarypolicieschangedinSeptember2007.Sincethattime,theFederalReserveBankhasdecreasedthetargetFederalFundsinterestrateseveraltimesfromitshighof5.25percenttoarateof3.00percentatJanuary31,2008,inanefforttoimproveliquidityinthecapitalmarketsandinvestorconfidence.Currently,thereisheightenedconcernthatthedomesticeconomymayexperiencearecessionoverthenextseveralquarters.Asaresultofthisexpectation,theequitymarketshaveexperiencedsignificantvolatility.Inadditiontoeconomicfactors,changesinregulationsandlegislationcanhaveanimpactonthecreditperformanceoftheloanportfolios.Beginningin2005,theCompanyimplementedhigherminimumbalancepaymentrequirementsforitscreditcardcustomersinresponsetoindustryguidanceissuedbythebankingregulatoryagencies.Thisindustryguidancewasprovidedtominimizethelikelihoodthatminimumbalancepaymentswouldnotbesufficienttocoverinterest,feesandaportionoftheprincipalbalanceofacreditcardloanresultinginnegativeamortization,orincreasingaccountbalances.Also,newbankruptcylegislationwasenactedinOctober2005,makingitmoredifficultforborrowerstohavetheirdebtsforgivenduringbankruptcyproceedings.Asaresultofthechangesinbankruptcylaws,thelevelsofconsumerandbusinessbankruptcyfilingsincreaseddramaticallyinthefourthquarterof2005anddeclinedinearly2006tolevelsthatwereathirdofaveragebankruptcyfilingsduring2004andearly2005.Whileconsumerbankruptcieshaveincreasedsinceearly2006,bankruptcyfilingsinthefourthquarterof2007approximatedonly50percentto60percentofpre-2005levels.Inresponsetotherecentsub-primelendingandmarketdisruptionissues,regulatorsandlegislatorshaveencouragedmortgageservicerstoimplementrestructuringprogramstoenableborrowerstocontinueloanrepaymentsanddampentheimpactofinterestratesonhomeowners.CreditDiversificationTheCompanymanagesitscreditrisk,inpart,throughdiversificationofitsloanportfolio.Aspartofitsnormalbusinessactivities,itoffersabroadarrayoftraditionalcommerciallendingproductsandspecializedproductssuchasasset-basedlending,commercialleasefinancing,agriculturalcredit,warehousemortgagelending,commercialrealestate,healthcareandcorrespondentbanking.TheCompanyalsooffersanarrayofretaillendingproductsincludingcreditcards,retailleases,homeequity,revolvingcredit,lendingtostudentsandotherconsumerloans.Theseretailcreditproductsareprimarilyofferedthroughthebranchofficenetwork,homemortgageandloanproductionoffices,indirectdistributionchannels,suchasautomobiledealers,andaconsumerfinancedivision.TheCompanymonitorsandmanagestheportfoliodiversificationbyindustry,customerandgeography.Table6providesinformationwithrespecttotheoverallproductdiversificationandchangesinthemixduring2007.ThecommercialportfolioreflectstheCompany’sfocusonservingsmallbusinesscustomers,middlemarketandlargercorporatebusinessesthroughoutits24-statebankingregion,aswellaslargenationalcustomers.Thecommercialloanportfolioisdiversifiedamongvariousindustrieswithsomewhathigherconcentrationsinconsumerproductsandservices,financialservices,commercialservicesandsupplies,capitalgoods(includingmanufacturingandcommercialconstruction-relatedbusinesses),propertymanagementanddevelopmentandagriculturalindustries.Additionally,thecommercialportfolioisdiversifiedacrosstheCompany’sgeographicalmarketswith74.2percentoftotalcommercialloanswithinthe24-statebankingregion.CreditrelationshipsoutsideoftheCompany’sbankingregionarereflectedwithinthecorporatebanking,mortgagebanking,autodealerandleasingbusinessesfocusingonlargenationalcustomersandspecificallytargetedindustries.Loanstomortgagebankingcustomersareprimarilywarehouselineswhicharecollateralizedwiththeunderlyingmortgages.TheCompanyregularlymonitorsitsmortgagecollateralpositiontomanageitsriskexposure.Table8providesasummaryofsignificantindustrygroupsandgeographiclocationsofcommercialloansoutstandingatDecember31,2007and2006.ThecommercialrealestateportfolioreflectstheCompany’sfocusonservingbusinessownerswithinitsgeographicfootprintaswellasregionalandnationalinvestment-basedrealestateowners.AtDecember31,2007,theCompanyhadcommercialrealestateloansofU.S.BANCORP35$29.2billion,or19.0percentoftotalloans,comparedwith$28.6billionatDecember31,2006.Withincommercialrealestateloans,differentpropertytypeshavevaryingdegreesofcreditrisk.Table9providesasummaryofthesignificantpropertytypesandgeographicallocationsofcommercialrealestateloansoutstandingatDecember31,2007and2006.AtDecember31,2007,approximately35.4percentofthecommercialrealestateloanportfoliorepresentedbusinessowner-occupiedpropertiesthattendtoexhibitcreditriskcharacteristicssimilartothemiddlemarketcommercialloanportfolio.Generally,theinvestment-basedrealestatemortgagesarediversifiedamongvariouspropertytypeswithsomewhathigherconcentrationsinofficeandretailproperties.Whileinvestment-basedcommercialrealestatecontinuestoperformwellwithrelativelystrongoccupancylevelsandcashflows,thesecategoriesofloanscanbeadverselyimpactedduringarisingrateenvironment.During2007,theCompanycontinuedtoreduceitslevelofexposuretohomebuilders,giventhestressinthehomebuildingindustrysector.Beginninginmid-2006,constructionfinancingofcondominiumprojectswassignificantlycurtailed,giventhedeteriorationinunitpricinginseveralregionsofthecountry.Fromageographicalperspective,theCompany’scommercialrealestateportfolioisgenerallywelldiversified.However,atDecember31,2007,theCompanyhad19.8percentofitsportfoliowithinCalifornia,whichhasexperiencedhigherdelinquencylevelsandcreditqualitydeteriorationduetoexcesshomeinventorylevelsanddecliningvaluations.Creditlossesmayincreasewithinthisportfolio.Includedincommercialrealestateatyearend2007wasapproximately$.9billioninloansrelatedtolandheldfordevelopmentand$2.6billionofloansrelatedtoresidentialandcommercialacquisitionanddevelopmentproperties.Theseloansaresubjecttoquarterlymonitoringforchangesinlocalmarketconditionsduetoahighercreditriskprofile.Acquisitionanddevelopmentloanscontinuedtoperformwell,despiteaslowdowninthehousingmarketandsofteningofdemand.ThecommercialrealestateportfolioisdiversifiedacrosstheCompany’sgeographicalmarketswith91.4percentoftotalcommercialrealestateloansoutstandingatDecember31,2007,withinthe24-statebankingregion.TheCompany’sretaillendingbusinessutilizesseveraldistinctbusinessprocessesandchannelstooriginateretailcredit,includingtraditionalbranchlending,indirectlending,portfolioacquisitionsandaconsumerfinancedivision.Eachdistinctunderwritingandoriginationactivitymanagesuniquecreditriskcharacteristicsandpricesitsloanproductioncommensuratewiththedifferingriskprofiles.WithinConsumerBanking,U.S.BankConsumerFinance(“USBCF”),adivisionoftheCompany,participatesinsubstantiallyallfacetsoftheCompany’sconsumerlendingactivities.USBCFspecializesinservingchannel-specificandalternativelendingmarketsinresidentialmortgages,homeequityandinstallmentloanfinancing.USBCFmanagesloansoriginatedthroughabrokernetwork,correspondentrelationshipsandU.S.Bankbranchoffices.Generally,loansmanagedbytheCompany’sconsumerfinancedivisionexhibithighercreditriskcharacteristics,butarepricedcommensuratewiththedifferingriskprofile.ResidentialmortgagesrepresentanimportantfinancialproductforconsumercustomersoftheCompanyandareoriginatedthroughtheCompany’sbranches,loanproductionoffices,awholesalenetworkoforiginatorsandtheconsumerfinancedivision.Withrespecttoresidentialmortgagesoriginatedthroughthesechannels,theCompanymayeitherretaintheloansonitsbalancesheetorsellitsinterestinthebalancesintothesecondarymarketwhileretainingtheservicingrightsandcustomerrelationships.UtilizingthesecondarymarketsenablestheCompanytoeffectivelyreduceitscreditandotherasset/liabilityrisks.ForresidentialmortgagesthatareretainedintheCompany’sportfolio,creditriskisalsodiversifiedbygeographyandbymonitoringloan-to-valuesduringtheunderwritingprocess.Thefollowingtableprovidessummaryinformationoftheloan-to-valuesofresidentialmortgagesbydistributionchannelandtypeatDecember31,2007:(DollarsinMillions)InterestOnlyAmortizingTotalPercentofTotalConsumerFinanceLessthanorequalto80%..$730$2,279$3,00930.9%Over80%through90%....8191,6372,45625.2Over90%through100%...8313,3544,18542.9Over100%............–97971.0Total..............$2,380$7,367$9,747100.0%OtherRetailLessthanorequalto80%..$2,164$9,335$11,49988.2%Over80%through90%....2736379107.0Over90%through100%...1324946264.8Over100%............––––Total..............$2,569$10,466$13,035100.0%TotalCompanyLessthanorequalto80%..$2,894$11,614$14,50863.7%Over80%through90%....1,0922,2743,36614.8Over90%through100%...9633,8484,81121.1Over100%............–9797.4Total..............$4,949$17,833$22,782100.0%Note:loan-to-valuesdeterminedasofthedateoforiginationandconsidermortgageinsurance,asapplicable.Withintheconsumerfinancedivisionapproximately$3.3billion,or33.5percentofthatdivision,representsresidentialmortgagestocustomersthatmaybedefinedassub-primeborrowers.Oftheseloans,34.0percenthadaloan-to-valueoflessthanorequalto80percentoftheoriginationamount,while24.9percenthadloan-to-valuesofover80percentthrough90percentand39.1percenthadloan-to-valuesofover90percentthrough100percent.36U.S.BANCORPThefollowingtableprovidesfurtherinformationonresidentialmortgagesfortheconsumerfinancedivision:(DollarsinMillions)InterestOnlyAmortizingTotalPercentofDivisionSub-PrimeBorrowersLessthanorequalto80%..$4$1,108$1,11211.4%Over80%through90%....68098158.4Over90%through100%....251,2521,27713.1Over100%............–6666.7Total..............$35$3,235$3,27033.6%OtherBorrowersLessthanorequalto80%..$726$1,171$1,89719.5%Over80%through90%....8138281,64116.8Over90%through100%....8062,1022,90829.8Over100%............–3131.3Total..............$2,345$4,132$6,47766.4%TotalConsumerFinance...$2,380$7,367$9,747100.0%Inadditiontoresidentialmortgages,theconsumerfinancedivisionhad$.9billionofhomeequityandsecondmortgageloanstocustomersthatmaybedefinedassub-primeborrowersatDecember31,2007.Includingresidentialmortgages,andhomeequityandsecondmortgageloans,thetotalamountofloanstocustomersthatmaybedefinedassub-primeborrowers,representedonly1.7percentoftotalassetsoftheCompanyatDecember31,2007.TheCompanydoesnothaveanyresidentialmortgageswhosepaymentschedulewouldcausebalancestoincreaseovertime.TheretailloanportfolioprincipallyreflectstheCompany’sfocusonconsumerswithinitsfootprintofbranchesandcertainnichelendingactivitiesthatarenationallyfocused.WithintheCompany’sretailloanportfolioapproximately77.4percentofthecreditcardbalancesrelatetobankbranch,co-brandedandaffinityprogramsthatgenerallyexperiencebettercreditqualityperformancethanportfoliosgeneratedthroughnationaldirectmailprograms.Table10providesageographicalsummaryoftheresidentialmortgageandretailloanportfolios.U.S.BANCORP37Table13DELINQUENTLOANRATIOSASAPERCENTOFENDINGLOANBALANCESAtDecember31,90daysormorepastdueexcludingnonperformingloans20072006200520042003CommercialCommercial......................................08%.06%.06%.05%.06%Leasefinancing...................................–––.02.04Totalcommercial.................................07.05.05.05.06CommercialRealEstateCommercialmortgages...............................02.01––.02Constructionanddevelopment..........................02.01––.03Totalcommercialrealestate.........................02.01––.02ResidentialMortgages...............................86.42.32.46.61RetailCreditcard......................................1.941.751.261.741.68Retailleasing.....................................10.03.04.08.14Otherretail.......................................37.24.23.30.43Totalretail.....................................68.49.37.49.58Totalloans..................................38%.24%.19%.24%.28%AtDecember31,90daysormorepastdueincludingnonperformingloans20072006200520042003Commercial.........................................43%.57%.69%.99%1.97%Commercialrealestate................................1.02.53.55.73.82Residentialmortgages(a)...............................1.10.59.55.74.91Retail.............................................73.59.52.53.65Totalloans.......................................74%.57%.58%.75%1.16%(a)DelinquentloanratiosexcludeadvancesmadepursuanttoservicingagreementstoGovernmentNationalMortgageAssociation(“GNMA”)mortgagepoolswhoserepaymentsareinsuredbytheFederalHousingAdministrationorguaranteedbytheDepartmentofVeteransAffairs.Includingtheguaranteedamounts,theratioofresidentialmortgages90daysormorepastduewas3.78percent,3.08percent,4.35percent,5.19percentand6.07percentatDecember31,2007,2006,2005,2004and2003,respectively.LoanDelinquenciesTrendsindelinquencyratiosrepresentanindicator,amongotherconsiderations,ofcreditriskwithintheCompany’sloanportfolios.Theentirebalanceofanaccountisconsidereddelinquentiftheminimumpaymentcontractuallyrequiredtobemadeisnotreceivedbythespecifieddateonthebillingstatement.TheCompanymeasuresdelinquencies,bothincludingandexcludingnonperformingloans,toenablecomparabilitywithothercompanies.AdvancesmadepursuanttoservicingagreementstoGovernmentNationalMortgageAssociation(“GNMA”)mortgagepoolswhoserepaymentsofprincipalandinterestaresubstantiallyinsuredbytheFederalHousingAdministrationorguaranteedbytheDepartmentofVeteransAffairsareexcludedfromdelinquencystatistics.Inaddition,undercertainsituations,aretailcustomer’saccountmaybere-agedtoremoveitfromdelinquentstatus.Generally,theintentofare-agedaccountistoassistcustomerswhohaverecentlyovercometemporaryfinancialdifficulties,andhavedemonstratedboththeabilityandwillingnesstoresumeregularpayments.Toqualifyforre-aging,theaccountmusthavebeenopenforatleastoneyearandcannothavebeenre-agedduringthepreceding365days.Anaccountmaynotbere-agedmorethantwotimesinafive-yearperiod.Toqualifyforre-aging,thecustomermustalsohavemadethreeregularminimummonthlypaymentswithinthelast90days.Inaddition,theCompanymayre-agetheretailaccountofacustomerwhohasexperiencedlonger-termfinancialdifficultiesandapplymodified,concessionarytermsandconditionstotheaccount.Suchadditionalre-agesarelimitedtooneinafive-yearperiodandmustmeetthequalificationsforre-agingdescribedabove.Allre-agingstrategiesmustbeindependentlyapprovedbytheCompany’screditadministrationfunctionandarelimitedtocreditcardandcreditlineaccounts.Commercialloansarenotsubjecttore-agingpolicies.Accruingloans90daysormorepastduetotaled$584millionatDecember31,2007,comparedwith$349millionatDecember31,2006,and$253millionatDecember31,2005.Theincreasein90daydelinquentloansfromDecember31,2006,toDecember31,2007,wasprimarilyrelatedtoresidentialmortgages,creditcardsandhomeequityloans.Theseloanswerenotincludedinnonperformingassetsandcontinuetoaccrueinterestbecausetheyareadequatelysecuredbycollateral,and/orareintheprocessofcollectionandarereasonablyexpectedtoresultinrepaymentorrestorationtocurrentstatus.Theratioof90daydelinquentloanstototalloanswas.38percentatDecember31,2007,comparedwith.24percentatDecember31,2006.Tomonitorcreditriskassociatedwithretailloans,theCompanyalsomonitorsdelinquencyratiosinthevariousstagesofcollection,includingnonperformingstatus.Thefollowingtableprovidessummarydelinquencyinformationforresidentialmortgagesandretailloans:December31,(DollarsinMillions)2007200620072006AmountAsaPercentofEndingLoanBalancesResidentialMortgages30-89days...........$233$1401.02%.66%90daysormore.......19689.86.42Nonperforming.........5436.24.17Total............$483$2652.12%1.25%RetailCreditcard30-89days...........$268$2042.44%2.35%90daysormore.......2121521.941.75Nonperforming.........1431.13.36Total............$494$3874.51%4.46%Retailleasing30-89days...........$39$34.65%.49%90daysormore.......62.10.03Nonperforming.........––––Total............$45$36.75%.52%Homeequityandsecondmortgages30-89days...........$107$93.65%.60%90daysormore.......6434.39.22Nonperforming.........1114.07.09Total............$182$1411.11%.91%Otherretail30-89days...........$177$1311.02%.80%90daysormore.......6244.36.27Nonperforming.........43.02.02Total............$243$1781.40%1.09%38U.S.BANCORPWhiledelinquencyratioshaveincreased,theacceleratingtrendinresidentialandretaildelinquencyratioshasoccurredprimarilywithintheportfoliosoriginatedbytheconsumerfinancedivision.Withintheseproductcategories,thefollowingtableprovidesinformationondelinquentandnonperformingloansasapercentofendingloanbalances,bychannel:December31,2007200620072006ConsumerFinanceOtherRetailResidentialMortgages30-89days............1.58%.83%.61%.55%90daysormore.........1.33.64.51.28Nonperforming...........31.19.18.16Total.............3.22%1.66%1.30%.99%RetailCreditcard30-89days............–%–%2.44%2.35%90daysormore.........––1.941.75Nonperforming..........––.13.36Total.............–%–%4.51%4.46%Retailleasing30-89days............–%–%.65%.49%90daysormore.........––.10.03Nonperforming..........––––Total.............–%–%.75%.52%Homeequityandsecondmortgages30-89days............2.53%1.64%.41%.35%90daysormore.........1.78.79.21.14Nonperforming...........11.11.06.09Total.............4.42%2.54%.68%.58%Otherretail30-89days............6.38%4.30%.88%.71%90daysormore.........1.66.76.33.26Nonperforming..........––.02.02Total.............8.04%5.06%1.23%.99%WithintheconsumerfinancedivisionatDecember31,2007,approximately$227millionand$89millionofthesedelinquentandnonperformingresidentialmortgagesandotherretailloans,respectively,weretocustomersthatmaybedefinedassub-primeborrowers,comparedwith$105millionand$50million,respectivelyatDecember31,2006.TheCompanyexpectstheacceleratingtrendsindelinquenciestocontinueduring2008asresidentialhomevaluationscontinuetodeclineandeconomicfactorsaffecttheconsumersectors.RestructuredLoansAccruingInterestOnacase-by-casebasis,managementdetermineswhetheranaccountthatexperiencesfinancialdifficultiesshouldbemodifiedastoitsinterestrateorrepaymenttermstomaximizetheCompany’scollectionofitsbalance.Loansrestructuredatarateequaltoorgreaterthanthatofanewloanwithcomparableriskatthetimethecontractismodifiedareexcludedfromrestructuredloansoncerepaymentperformance,inaccordancewiththemodifiedagreement,hasbeendemonstratedoverseveralpaymentcycles.Loansthathaveinterestratesreducedbelowcomparablemarketratesremainclassifiedasrestructuredloans;however,interestincomeisaccruedatthereducedrateaslongasthecustomercomplieswiththerevisedtermsandconditions.Inlate2007,theCompanybeganimplementingamortgageloanrestructuringprogramforcertainqualifyingborrowers.Ingeneral,borrowerswithsub-primecreditquality,thatarecurrentintheirrepaymentstatus,willbeallowedtoretaintheloweroftheirexistinginterestrateorthemarketinterestrateasoftheirinterestresetdate.Thefollowingtableprovidesasummaryofrestructuredloansthatcontinuetoaccrueinterest:December31(DollarsinMillions)2007200620072006AmountAsaPercentofEndingLoanBalancesCommercial.............$21$18.04%.04%Commercialrealestate......–1––Residentialmortgages......15780.69.38Creditcard..............3242672.963.08Otherretail..............4939.12.10Total...............$551$405.36%.28%RestructuredloansthataccrueinterestwerehigheratDecember31,2007,comparedwithDecember31,2006,reflectingtheimpactofrestructuringsforcertainresidentialmortgagecustomersinlightofcurrenteconomicconditions.TheCompanyexpectsthistrendtocontinueduring2008asresidentialhomevaluationscontinuetodeclineandcertainborrowerstakeadvantageoftheCompany’smortgageloanrestructuringprograms.NonperformingAssetsThelevelofnonperformingassetsrepresentsanotherindicatorofthepotentialforfuturecreditlosses.Nonperformingassetsincludenonaccrualloans,restructuredloansnotperforminginaccordancewithmodifiedterms,otherrealestateandothernonperformingassetsownedbytheCompany.Interestpaymentscollectedfromassetsonnonaccrualstatusaretypicallyappliedagainsttheprincipalbalanceandnotrecordedasincome.U.S.BANCORP39AtDecember31,2007,totalnonperformingassetswere$690million,comparedwith$587millionatyear-end2006and$644millionatyear-end2005.Theratiooftotalnonperformingassetstototalloansandotherrealestatewas.45percentatDecember31,2007,comparedwith.41percentand.47percentattheendof2006and2005,respectively.The$103millionincreaseintotalnonperformingassetsin2007primarilyreflectedhigherlevelsofnonperformingloansresultingfromstressinresidentialconstruction,associatedhomebuildingindustriesandfinancialservicescompanies.Partiallyoffsettingtheincreaseintotalnonperformingloans,wasadecreaseinnonperformingloansinmanufacturingandtransportationindustrysectorswithinthecommercialloanportfolio.Otherrealestateincludedinnonperformingassetswas$111millionatDecember31,2007,comparedwith$95millionatDecember31,2006,andwasprimarilyrelatedtopropertiesthattheCompanyhastakenownershipofthatoncesecuredresidentialmortgagesandhomeequityandsecondmortgageloanbalances.Otherrealestateassetswerealsohigherin2007duetohigherresidentialmortgageloanforeclosuresasconsumersexperiencedfinancialdifficultiesgiveninflationaryfactors,changinginterestratesandothercurrenteconomicconditions.Thefollowingtableprovidesananalysisofotherrealestateowned(“OREO”)asapercentoftheirrelatedloanbalances,includingfurtherdetailfor40U.S.BANCORPTable14NONPERFORMINGASSETS(a)AtDecember31,(DollarsinMillions)20072006200520042003CommercialCommercial...................................$128$196$231$289$624Leasefinancing................................53404291113Totalcommercial.............................181236273380737CommercialRealEstateCommercialmortgages...........................84112134175178Constructionanddevelopment......................20938232540Totalcommercialrealestate......................293150157200218ResidentialMortgages...........................5436484340RetailCreditcard....................................143149––Retailleasing..................................–––––Otherretail...................................1517171725Totalretail..................................2948661725Totalnonperformingloans.....................5574705446401,020OtherRealEstate(b).............................11195717273OtherAssets...................................2222293655Totalnonperformingassets....................$690$587$644$748$1,148Accruingloans90daysormorepastdue.................$584$349$253$294$329Nonperformingloanstototalloans.......................36%.33%.40%.51%.87%Nonperformingassetstototalloansplusotherrealestate(b).....45%.41%.47%.60%.98%Netinterestlostonnonperformingloans..................$41$39$30$42$67ChangesInNonperformingAssets(DollarsinMillions)CommercialandCommercialRealEstateRetailandResidentialMortgages(d)TotalBalanceDecember31,2006..........................$406$181$587AdditionstononperformingassetsNewnonaccrualloansandforeclosedproperties............57265637Advancesonloans................................12–12Totaladditions.................................58465649ReductionsinnonperformingassetsPaydowns,payoffs................................(176)(23)(199)Netsales......................................(95)–(95)Returntoperformingstatus..........................(49)(3)(52)Charge-offs(c)..................................(185)(15)(200)Totalreductions................................(505)(41)(546)Netadditionstononperformingassets..............7924103BalanceDecember31,2007..........................$485$205$690(a)Throughoutthisdocument,nonperformingassetsandrelatedratiosdonotincludeaccruingloans90daysormorepastdue.(b)Excludes$102millionand$83millionatDecember31,2007and2006,respectively,offoreclosedGNMAloanswhichcontinuetoaccrueinterest.(c)Charge-offsexcludeactionsforcertaincardproductsandloansalesthatwerenotclassifiedasnonperformingatthetimethecharge-offoccurred.(d)Residentialmortgageinformationexcludeschangesrelatedtoresidentialmortgagesservicedbyothers.residentialmortgagesandhomeequityandsecondmortgageloanbalancesbygeographicallocation:December31,(DollarsinMillions)2007200620072006AmountAsaPercentofEndingLoanBalancesResidentialMichigan...............$22$173.47%2.90%Minnesota..............1211.23.21Ohio..................1012.40.48Colorado...............77.25.28Missouri................66.22.25Allotherstates...........5338.21.16Totalresidential.........11091.28.25Commercial..............14–.01TotalOREO...........$111$95.07%.07%Withinotherrealestateinthetableabove,approximately$61millionatDecember31,2007,and$41millionatDecember31,2006,werefromportfoliosdefinedassub-prime.TheCompanyexpectsnonperformingassetstoincreasemoderatelyoverthenextseveralquartersduetocontinuedstressinresidentialmortgagesandresidentialconstruction.The$57milliondecreaseintotalnonperformingassetsin2006,ascomparedwith2005,reflecteddecreasesinnonperformingcommercial,residentialmortgagesandretailloans,partiallyoffsetbyanincreaseinotherrealestateassetsasaresultoftakingmoreownershipofresidentialproperties.Thedecreaseinnonperformingcommercialloansin2006wasalsobroad-basedacrossmostindustrysectorswithinthecommercialloanportfolio.Thedecreaseinnonperformingretailloansduring2006wasprimarilyduetotherun-offofnonaccrualaccountsfromadiscontinuedworkoutprogramforcustomershavingfinancialdifficultiesmeetingrecentminimumbalancepaymentrequirements.Includedinnonperformingloanswererestructuredloansof$17millionand$38millionatDecember31,2007and2006,respectively.AtDecember31,2007and2006,theCompanyhadnocommitmentstolendadditionalfundsunderrestructuredloans.Restructuredloansperformingundertherestructuredtermsbeyondaspecifiedtimeframearereportedas“RestructuredLoansAccruingInterest.”AnalysisofLoanNetCharge-OffsTotalloannetcharge-offswere$792millionin2007,comparedwith$544millionin2006and$685millionin2005.Theratiooftotalloannetcharge-offstoaverageloanswas.54percentin2007,comparedwith.39percentin2006and.52percentin2005.Theyear-over-yearincreaseinnetcharge-offsin2007,comparedwith2006,wasdueprimarilytoananticipatedincreaseinconsumercharge-offs,primarilyrelatedtocreditcards,andsomewhathighercommercialloannetcharge-offs.Inaddition,netcharge-offsduring2006reflectedthebeneficialimpactofbankruptcylegislationthatwentintoeffectinthefourthquarterof2005.Commercialandcommercialrealestateloannetcharge-offsfor2007were$159million(.21percentofaverageloansoutstanding),comparedwith$88million(.12percentofaverageloansoutstanding)in2006and$90million(.13percentofaverageloansoutstanding)in2005.Theyear-over-yearincreaseinnetcharge-offsprimarilyreflectedhigherlevelsofnonperformingloansanddelinquencieswithintheseportfolios,especiallyresidentialhomebuildingandrelatedindustrysectors.Giventhecontinuingstressinthehomebuildingandcommercialhomesupplierindustry,theCompanyexpectscommercialandcommercialrealestatenetcharge-offstocontinuetoincreasemoderatelyoverthenextseveralquarters.Thedecreaseincommercialandcommercialrealestateloannetcharge-offsin2006comparedwith2005,reflectedlowergrosscharge-offs,partiallyoffsetbyalowerlevelofrecoveries.Retailloannetcharge-offsin2007were$572million(1.17percentofaverageloansoutstanding),comparedwith$415million(.92percentofaverageloansoutstanding)in2006and$559million(1.30percentofaverageloansoutstanding)in2005.Theincreaseinretailloannetcharge-offsin2007,comparedwith2006,reflectedgrowthinthecreditcardandinstallmentloanportfoliosof25.4percentand11.2percent,respectively.Italsoreflectedhigherretailloandelinquencyratios,comparedwiththeprioryear.Inaddition,netcharge-offsfor2006reflectedthebeneficialimpactofbankruptcylegislationchangesthatoccurredinthefourthquarterof2005.TheCompanyanticipateshigherdelinquencylevelsintheretailportfoliosandthatthetrendinretailnetcharge-offswillaccelerate,butremaininamanageablerangeduring2008.Thedecreaseinretailloannetcharge-offsin2006,comparedwith2005,reflectedtheimpactofthebankruptcylegislationenactedinthefourthquarterof2005andimprovedretailportfolioperformance.U.S.BANCORP41Thefollowingtableprovidesananalysisofnetcharge-offsasapercentofaverageloansoutstandingmanagedbytheconsumerfinancedivision,comparedwithotherretailloans:YearEndedDecember31(DollarsinMillions)2007200620072006AverageLoansPercentofAverageLoansConsumerFinance(a)Residentialmortgages...$9,129$7,414.58%.51%Homeequityandsecondmortgages.........1,8501,9712.701.42Otherretail...........4143993.384.76OtherRetailResidentialmortgages...$12,956$13,639.06%.02%Homeequityandsecondmortgages.........14,07313,175.17.17Otherretail...........16,43715,057.90.74TotalCompanyResidentialmortgages...$22,085$21,053.28%.19%Homeequityandsecondmortgages.........15,92315,146.46.33Otherretail...........16,85015,456.96.85(a)ConsumerFinancecategoryincludedcreditoriginatedandmanagedbyUSBCF,aswellashomeequityandsecondmortgageswithaloan-to-valuegreaterthan100percentthatwereoriginatedinthebranches.Withintheconsumerfinancedivision,theCompanyoriginatesloanstocustomersthatmaybedefinedassub-primeborrowers.Thefollowingtableprovidesfurtherinformationonnetcharge-offsasapercentofaverageloansoutstandingforthisdivision:YearEndedDecember31(DollarsinMillions)2007200620072006AverageLoansPercentofAverageLoansResidentialMortgagesSub-primeborrowers......$3,158$2,6021.17%.95%Otherborrowers.........5,9714,812.27.27Total..............$9,129$7,414.58%.51%HomeEquityAndSecondMortgagesSub-primeborrowers......$908$8423.41%1.72%Otherborrowers.........9421,1292.021.20Total..............$1,850$1,9712.70%1.42%AnalysisandDeterminationoftheAllowanceforCreditLossesTheallowanceforloanlossesprovidescoverageforprobableandestimablelossesinherentintheCompany’sloanandleaseportfolio.Managementevaluatestheallowanceeachquartertodeterminethatitisadequatetocovertheseinherentlosses.Theevaluationofeachelementandtheoverallallowanceisbasedonacontinuingassessmentofproblemloans,recentlossexperienceandotherfactors,includingregulatoryguidanceandeconomicconditions.Becausebusinessprocessesandcreditrisksassociatedwithunfundedcreditcommitmentsareessentiallythesameasforloans,theCompanyutilizessimilarprocessestoestimateitsliabilityforunfundedcreditcommitments,whichisincludedinotherliabilitiesintheConsolidatedBalanceSheet.BoththeallowanceforloanlossesandtheliabilityforunfundedcreditcommitmentsareincludedintheCompany’sanalysisofcreditlosses.AtDecember31,2007,theallowanceforcreditlosseswas$2,260million(1.47percentofloans),comparedwithanallowanceof$2,256million(1.57percentofloans)atDecember31,2006,and$2,251million(1.65percentofloans)atDecember31,2005.Theratiooftheallowanceforcreditlossestononperformingloanswas406percentatDecember31,2007,comparedwith480percentand414percentatDecember31,2006and2005,respectively.Theratiooftheallowanceforcreditlossestoloannetcharge-offsatDecember31,2007,was285percent,comparedwith415percentand329percentatDecember31,2006and2005,respectively.ManagementdeterminedthattheallowanceforcreditlosseswasadequateatDecember31,2007.SeveralfactorsweretakenintoconsiderationinevaluatingtheallowanceforcreditlossesatDecember31,2007,includingtheriskprofileoftheportfolios,loannetcharge-offsduringtheperiod,thelevelofnonperforming42U.S.BANCORPTable15NETCHARGE-OFFSASAPERCENTOFAVERAGELOANSOUTSTANDINGYearEndedDecember3120072006200520042003CommercialCommercial....................................24%.15%.12%.29%1.34%Leasefinancing..................................61.46.851.421.65Totalcommercial...............................29.18.20.431.38CommercialRealEstateCommercialmortgages.............................06.01.03.09.14Constructionanddevelopment........................11.01(.04).13.16Totalcommercialrealestate.......................08.01.01.10.14ResidentialMortgages.............................28.19.20.20.23RetailCreditcard....................................3.342.884.204.144.62Retailleasing...................................25.20.35.59.86Homeequityandsecondmortgages....................46.33.46.54.70Otherretail.....................................96.851.331.351.79Totalretail..................................1.17.921.301.361.68Totalloans.................................54%.39%.52%.64%1.07%assets,accruingloans90daysormorepastdue,delinquencyratiosandchangesinrestructuredloanbalancescomparedwithDecember31,2006.Managementalsoconsideredtheuncertaintyrelatedtocertainindustrysectors,andtheextentofcreditexposuretospecificborrowerswithintheportfolio.Inaddition,concentrationrisksassociatedwithcommercialU.S.BANCORP43Table16SUMMARYOFALLOWANCEFORCREDITLOSSES(DollarsinMillions)20072006200520042003Balanceatbeginningofyear...................................$2,256$2,251$2,269$2,369$2,422Charge-OffsCommercialCommercial.........................................154121140244556Leasefinancing.......................................635176110139Totalcommercial....................................217172216354695CommercialrealestateCommercialmortgages..................................1611162944Constructionanddevelopment.............................10131313Totalcommercialrealestate............................2612194257Residentialmortgages.....................................6343393330RetailCreditcard..........................................389256313282282Retailleasing........................................2325384957Homeequityandsecondmortgages..........................82628389105Otherretail..........................................232193241225268Totalretail........................................726536675645712Totalcharge-offs..................................1,0327639491,0741,494RecoveriesCommercialCommercial.........................................52619514470Leasefinancing.......................................2827344155Totalcommercial....................................8088129185125CommercialrealestateCommercialmortgages..................................48101116Constructionanddevelopment.............................––642Totalcommercialrealestate............................48161518Residentialmortgages.....................................22343RetailCreditcard..........................................6936353027Retailleasing........................................71112107Homeequityandsecondmortgages.........................812151312Otherretail..........................................7062545050Totalretail........................................15412111610396Totalrecoveries..................................240219264307242NetCharge-OffsCommercialCommercial.........................................1026045100486Leasefinancing.......................................3524426984Totalcommercial....................................1378487169570CommercialrealestateCommercialmortgages..................................12361828Constructionanddevelopment.............................101(3)911Totalcommercialrealestate............................22432739Residentialmortgages.....................................6141362927RetailCreditcard..........................................320220278252255Retailleasing........................................1614263950Homeequityandsecondmortgages.........................7450687693Otherretail..........................................162131187175218Totalretail........................................572415559542616Totalnetcharge-offs...............................7925446857671,252Provisionforcreditlosses.....................................7925446666691,254Acquisitionsandotherchanges.................................451(2)(55)Balanceatendofyear.......................................$2,260$2,256$2,251$2,269$2,369ComponentsAllowanceforloanlosses...................................$2,058$2,022$2,041$2,080$2,184Liabilityforunfundedcreditcommitments........................202234210189185Totalallowanceforcreditlosses..........................$2,260$2,256$2,251$2,269$2,369AllowanceforcreditlossesasapercentageofPeriod-endloans........................................1.47%1.57%1.65%1.82%2.03%Nonperformingloans......................................406480414355232Nonperformingassets.....................................328384350303206Netcharge-offs.........................................285415329296189realestateandthemixofloans,includingcreditcards,loansoriginatedthroughtheconsumerfinancedivisionandresidentialmortgagesbalances,andtheirrelativecreditriskswereevaluated.Finally,theCompanyconsideredcurrenteconomicconditionsthatmightimpacttheportfolio.Managementdeterminestheallowancethatisrequiredforspecificloancategoriesbasedonrelativeriskcharacteristicsoftheloanportfolio.Onanongoingbasis,managementevaluatesitsmethodsfordeterminingtheallowanceforeachelementoftheportfolioandmakesenhancementsconsideredappropriate.Table17showstheamountoftheallowanceforcreditlossesbyportfoliocategory.RegardlessoftheextentoftheCompany’sanalysisofcustomerperformance,portfoliotrendsorriskmanagementprocesses,certaininherentbutundetectedlossesareprobablewithintheloanportfolios.Thisisduetoseveralfactors,includinginherentdelaysinobtaininginformationregardingacustomer’sfinancialconditionorchangesintheiruniquebusinessconditions,thejudgmentalnatureofindividualloanevaluations,collateralassessmentsandtheinterpretationofeconomictrends.Volatilityofeconomicorcustomer-specificconditionsaffectingtheidentificationandestimationoflossesfromlargernon-homogeneouscreditsandthesensitivityofassumptionsutilizedtoestablishallowancesforhomogeneousgroupsofloans,loanportfolioconcentrations,andothersubjectiveconsiderationsareamongotherfactors.Becauseofthesesubjectivefactors,theprocessutilizedtodetermineeachelementoftheallowanceforcreditlossesbyspecificloancategoryhassomeimprecision.Assuch,theCompanyestimatesarangeofinherentlossesintheportfoliobasedonstatisticalanalysesandmanagementjudgment.Astatisticalanalysisattemptstomeasuretheextentofimprecisionandotheruncertaintybydeterminingthevolatilityoflossesovertime,acrossloancategories.Also,managementjudgmentallyconsidersloanconcentrations,risksassociatedwithspecificindustries,thestageofthebusinesscycle,economicconditionsandotherqualitativefactors.In2007,thiselementoftheallowancewasspecificallyassignedtoeachportfoliotypetobetterreflecttheCompany’sriskinthespecificportfolios.Inprioryears,thiselementoftheallowancewasseparatelydisclosedas“allowanceavailableforotherfactors”.Theallowancerecordedforcommercialandcommercialrealestateloansisbased,inpart,onaregularreviewofindividualcreditrelationships.TheCompany’sriskratingprocessisanintegralcomponentofthemethodologyutilizedtodeterminetheseelementsoftheallowanceforcreditlosses.Anallowanceforcreditlossesisestablishedforpoolsofcommercialandcommercialrealestateloansandunfundedcommitmentsbasedontheriskratingsassigned.Ananalysisofthemigrationofcommercialandcommercialrealestateloansandactuallossexperiencethroughoutthebusinesscycleisconductedquarterlytoassesstheexposureforcreditswithsimilarriskcharacteristics.Inadditiontoitsriskratingprocess,theCompanyseparatelyanalyzesthecarryingvalueofimpairedloanstodeterminewhetherthecarryingvalueislessthanorequaltotheappraisedcollateralvalueorthepresentvalueofexpectedcashflows.Basedonthisanalysis,anallowanceforcreditlossesmaybespecificallyestablishedforimpairedloans.Theallowanceestablishedforcommercial44U.S.BANCORPTable17ELEMENTSOFTHEALLOWANCEFORCREDITLOSSESDecember31(DollarsinMillions)2007200620052004200320072006200520042003AllowanceAmountAllowanceasaPercentofLoansCommercialCommercial.................$860$665$656$664$6961.92%1.64%1.73%1.89%2.08%Leasefinancing..............14690105106902.341.622.062.141.80Totalcommercial...........1,0067557617707861.971.631.771.922.04CommercialRealEstateCommercialmortgages.........150126115131170.74.64.57.64.82Constructionanddevelopment....108745340591.19.83.65.55.89Totalcommercialrealestate....258200168171229.88.70.59.62.84ResidentialMortgages.........13158393333.58.27.19.21.25RetailCreditcard..................4872982842832684.453.443.984.294.52Retailleasing................1715244447.28.22.33.61.78Homeequityandsecondmortgages..114526288101.69.33.41.59.76Otherretail..................2471771881952351.421.081.261.481.89Totalretail................8655425586106511.701.141.261.461.73Totalallocatedallowance......2,2601,5551,5261,5841,6991.471.081.121.271.46Availableforotherfactors......–701725685670–.49.53.55.57Totalallowance.................$2,260$2,256$2,251$2,269$2,3691.47%1.57%1.65%1.82%2.03%andcommercialrealestateloanportfolios,includingimpairedcommercialandcommercialrealestateloans,was$1,264millionatDecember31,2007,comparedwith$955millionand$929millionatDecember31,2006and2005,respectively.Theincreaseintheallowanceforcommercialandcommercialrealestateloansof$309millionatDecember31,2007,comparedwithDecember31,2006,reflectedtheimpactofgrowthintheportfoliosandthechangeintheprocessofallocatingtheallowanceforcreditlossestothespecificloanportfoliosduring2007,partiallyoffsetbyareductioninnetinherentlossrates.Theallowancerecordedfortheresidentialmortgagesandretailloanportfoliosisbasedonananalysisofproductmix,creditscoringandriskcompositionoftheportfolio,lossandbankruptcyexperiences,economicconditionsandhistoricalandexpecteddelinquencyandcharge-offstatisticsforeachhomogenousgroupofloans.Basedonthisinformationandanalysis,anallowancewasestablishedapproximatingarollingtwelve-monthestimateofnetcharge-offs.Theallowanceestablishedforresidentialmortgageswas$131millionatDecember31,2007,comparedwith$58millionand$39millionatDecember31,2006and2005,respectively.Theincreaseintheallowancefortheresidentialmortgagesportfolioyear-over-yearwasdrivenbyportfoliogrowth,deteriorationintheresalevalueofrealestatecollateralduetothehousingmarketandthechangeintheprocessofallocatingtheallowanceforcreditlossestothespecificloanportfoliosduring2007.Theallowanceestablishedforretailloanswas$865millionatDecember31,2007,comparedwith$542millionand$558millionatDecember31,2006and2005,respectively.Theincreaseintheallowancefortheretailportfolioin2007reflectedforeclosuresinthehomeequityportfolio,growthinthecreditcardandotherretailportfoliosandthechangeintheprocessofallocatingtheallowanceforcreditlossestothespecificloanportfoliosduring2007.AlthoughtheCompanydeterminestheamountofeachelementoftheallowanceseparatelyandthisprocessisanimportantcreditmanagementtool,theentireallowanceforcreditlossesisavailablefortheentireloanportfolio.Theactualamountoflossesincurredcanvarysignificantlyfromtheestimatedamounts.ResidualValueRiskManagementTheCompanymanagesitsrisktochangesintheresidualvalueofleasedassetsthroughdisciplinedresidualvaluationsettingattheinceptionofalease,diversificationofitsleasedassets,regularresidualassetvaluationreviewsandmonitoringofresidualvaluegainsorlossesuponthedispositionofassets.Commercialleaseoriginationsaresubjecttothesamewell-definedunderwritingstandardsreferredtointhe“CreditRiskManagement”sectionwhichincludesanevaluationoftheresidualrisk.Retailleaseresidualriskismitigatedfurtherbyoriginatinglonger-termvehicleleasesandeffectiveend-of-termmarketingofoff-leasevehicles.Also,toreducethefinancialriskofpotentialchangesinvehicleresidualvalues,theCompanymaintainsresidualvalueinsurance.ThecatastrophicinsurancemaintainedbytheCompanyprovidesforthepotentialrecoveryoflossesonindividualvehiclesalesinanamountequaltothedifferencebetween:(a)105percentor110percentoftheaveragewholesaleauctionpriceforthevehicleatthetimeofsaleand(b)thevehicleresidualvaluespecifiedbytheAutomotiveLeaseGuide(anauthoritativeindustrysource)attheinceptionofthelease.Thepotentialrecoveryiscalculatedforeachindividualvehiclesoldinaparticularpolicyyearandisreducedbyanygainsrealizedonvehiclessoldduringthesameperiod.TheCompanywillreceiveclaimproceedsunderthisinsuranceprogramif,intheaggregate,thereisanetlossforsuchperiod.Inaddition,theCompanyobtainsseparateresidualvalueinsuranceforallvehiclesatleaseinceptionwhereendofleasetermsettlementisbasedsolelyontheresidualvalueoftheindividualleasedvehicles.Underthisprogram,thepotentialrecoveryiscomputedforeachindividualvehiclesoldanddoesnotallowtheinsurancecarriertooffsetindividualdeterminedlosseswithgainsfromotherleases.Thisindividualvehiclecoverageisincludedinthecalculationofminimumleasepaymentswhenmakingthecapitalleaseassessment.Toreducetheriskassociatedwithcollectinginsuranceclaims,theCompanymonitorsthefinancialviabilityoftheinsurancecarrierbasedoninsuranceindustryratingsandavailablefinancialinformation.Includedintheretailleasingportfoliowasapproximately$3.8billionofretailleasingresidualsatDecember31,2007,comparedwith$4.3billionatDecember31,2006.TheCompanymonitorsconcentrationsofleasesbymanufacturerandvehicle“makeandmodel.”AsofDecember31,2007,vehicleleaseresidualsrelatedtosportutilityvehicleswere42.2percentoftheportfoliowhileupscaleandmid-rangevehicleclassesrepresentedapproximately23.1percentand13.9percent,respectively.Atyear-end2007,thelargestvehicle-typeconcentrationrepresentedapproximately7.8percentoftheaggregateresidualvalueofthevehiclesintheportfolio.Noothervehicle-typeexceededfivepercentoftheaggregateresidualvalueoftheportfolio.Becauseretailresidualvaluationstendtobelessvolatileforlonger-termleases,relativetotheestimatedresidualatinceptionofthelease,theCompanyactivelymanagesleaseoriginationproductiontoachievealonger-termportfolio.AtDecember31,2007,theweighted-averageoriginationtermoftheportfoliowas49months,comparedwith50monthsatDecember31,2006.Duringthepastseveralyears,newvehiclessalesvolumesexperiencedstronggrowthdrivenbymanufacturerincentives,consumerspendinglevelsandstrongeconomicconditions.In2007,salesofnewcarshavesoftenedU.S.BANCORP45somewhatrelativetoayearago.Inpart,thisisduetomanufacturersreducingsalesincentivestoconsumers,aswellastheoverallgeneralweakeningoftheeconomy.Currentexpectationsarethatsalesofnewvehicleswilltrenddownwardin2008.Giventhatmanufacturers’inventoriesofvehicleshavedeclinedsomewhatduringthisperiod,thistrendinsalesshouldprovidesupportofresidualvaluations.Withrespecttousedvehicles,wholesalevaluesforautomobilesduring2004and2005performedbetterthanwholesalevaluesfortrucksresultingincarpricesbecomingsomewhatinflatedandtruckpricesdecliningoverthisperiod.Thishasledtoashiftinthecomparativeperformanceofthesetwosegments,resultingincarvaluesexperiencingadecreaseof.9percentin2007,whiletruckvalueshaveexperiencedanimprovementof1.1percentoverthesametimeframe.TheoverallstabilityintheusedcarmarketplacecombinedwiththemixoftheCompany’sleaseresidualportfoliohavecausedtheexposuretoretailleaseresidualimpairmentstoberelativelystablerelativetoayearago.AtDecember31,2007,thecommercialleasingportfoliohad$660millionofresiduals,comparedwith$636millionatDecember31,2006.Atyear-end2007,leaseresidualsrelatedtotrucksandothertransportationequipmentwere26.6percentofthetotalresidualportfolio.Railcarsrepresented17.5percentoftheaggregateportfolio,whilebusinessandofficeequipmentandaircraftwere16.7percentand12.9percent,respectively.Noothersignificantconcentrationsofmorethan10percentexistedatDecember31,2007.In2007,residualvaluesingeneralremainedstableorwerefavorable.Thetransportationindustryresidualvaluesimprovedformarine,railandaircraft.OperationalRiskManagementOperationalriskrepresentstheriskoflossresultingfromtheCompany’soperations,including,butnotlimitedto,theriskoffraudbyemployeesorpersonsoutsidetheCompany,theexecutionofunauthorizedtransactionsbyemployees,errorsrelatingtotransactionprocessingandtechnology,breachesoftheinternalcontrolsystemandcompliancerequirementsandbusinesscontinuationanddisasterrecovery.Thisriskoflossalsoincludesthepotentiallegalactionsthatcouldariseasaresultofanoperationaldeficiencyorasaresultofnoncompliancewithapplicableregulatorystandards,adversebusinessdecisionsortheirimplementation,andcustomerattritionduetopotentialnegativepublicity.TheCompanyoperatesinmanydifferentbusinessesindiversemarketsandreliesontheabilityofitsemployeesandsystemstoprocessahighnumberoftransactions.Operationalriskisinherentinallbusinessactivities,andthemanagementofthisriskisimportanttotheachievementoftheCompany’sobjectives.Intheeventofabreakdownintheinternalcontrolsystem,improperoperationofsystemsorimproperemployees’actions,theCompanycouldsufferfinancialloss,faceregulatoryactionandsufferdamagetoitsreputation.TheCompanymanagesoperationalriskthroughariskmanagementframeworkanditsinternalcontrolprocesses.Withinthisframework,theCorporateRiskCommittee(“RiskCommittee”)providesoversightandassessesthemostsignificantoperationalrisksfacingtheCompanywithinitsbusinesslines.UndertheguidanceoftheRiskCommittee,enterpriseriskmanagementpersonnelestablishpoliciesandinteractwithbusinesslinestomonitorsignificantoperatingrisksonaregularbasis.Businesslineshavedirectandprimaryresponsibilityandaccountabilityforidentifying,controlling,andmonitoringoperationalrisksembeddedintheirbusinessactivities.Businessmanagersmaintainasystemofcontrolswiththeobjectiveofprovidingpropertransactionauthorizationandexecution,propersystemoperations,safeguardingofassetsfrommisuseortheft,andensuringthereliabilityoffinancialandotherdata.Businessmanagersensurethatthecontrolsareappropriateandareimplementedasdesigned.EachbusinesslinewithintheCompanyhasdesignatedriskmanagers.Theseriskmanagersareresponsiblefor,amongotherthings,coordinatingthecompletionofongoingriskassessmentsandensuringthatoperationalriskmanagementisintegratedintobusinessdecision-makingactivities.Businesscontinuationanddisasterrecoveryplanningisalsocriticaltoeffectivelymanagingoperationalrisks.EachbusinessunitoftheCompanyisrequiredtodevelop,maintainandtesttheseplansatleastannuallytoensurethatrecoveryactivities,ifneeded,cansupportmissioncriticalfunctionsincludingtechnology,networksanddatacenterssupportingcustomerapplicationsandbusinessoperations.TheCompany’sinternalauditfunctionvalidatesthesystemofinternalcontrolsthroughrisk-based,regularandongoingauditproceduresandreportsontheeffectivenessofinternalcontrolstoexecutivemanagementandtheAuditCommitteeoftheBoardofDirectors.Customer-relatedbusinessconditionsmayalsoincreaseoperationalrisk,orthelevelofoperationallossesincertaintransactionprocessingbusinessunits,includingmerchantprocessingactivities.Ongoingriskmonitoringofcustomeractivitiesandtheirfinancialconditionandoperationalprocessesservetomitigatecustomer-relatedoperationalrisk.RefertoNote21oftheNotestoConsolidatedFinancialStatementsforfurtherdiscussiononmerchantprocessing.WhiletheCompanybelievesthatithasdesignedeffectivemethodstominimizeoperationalrisks,thereisnoabsoluteassurancethatbusinessdisruptionoroperationallosseswouldnotoccurintheeventofadisaster.Onanongoingbasis,managementmakesprocesschangesandinvestmentstoenhanceitssystemsofinternalcontrolsandbusinesscontinuityanddisasterrecoveryplans.InterestRateRiskManagementInthebankingindustry,changesininterestratesareasignificantriskthatcan46U.S.BANCORPimpactearnings,marketvaluationsandsafetyandsoundnessofanentity.Tominimizethevolatilityofnetinterestincomeandthemarketvalueofassetsandliabilities,theCompanymanagesitsexposuretochangesininterestratesthroughassetandliabilitymanagementactivitieswithinguidelinesestablishedbyitsAssetLiabilityPolicyCommittee(“ALPC”)andapprovedbytheBoardofDirectors.ALPChastheresponsibilityforapprovingandensuringcompliancewithALPCmanagementpolicies,includinginterestrateriskexposure.TheCompanyusesNetInterestIncomeSimulationAnalysisandMarketValueofEquityModelingformeasuringandanalyzingconsolidatedinterestraterisk.NetInterestIncomeSimulationAnalysisOneoftheprimarytoolsusedtomeasureinterestrateriskandtheeffectofinterestratechangesonnetinterestincomeissimulationanalysis.ThemonthlyanalysisincorporatessubstantiallyalloftheCompany’sassetsandliabilitiesandoff-balancesheetinstruments,togetherwithforecastedchangesinthebalancesheetandassumptionsthatreflectthecurrentinterestrateenvironment.Throughthissimulation,managementestimatestheimpactonnetinterestincomeofa200basispointupwardordownwardgradualchangeofmarketinterestratesoveraone-yearperiod.Thesimulationalsoestimatestheeffectofimmediateandsustainedparallelshiftsintheyieldcurveof50basispointsaswellastheeffectofimmediateandsustainedflatteningorsteepeningoftheyieldcurve.Thissimulationincludesassumptionsabouthowthebalancesheetislikelytobeaffectedbychangesinloananddepositgrowth.Assumptionsaremadetoprojectinterestratesfornewloansanddepositsbasedonhistoricalanalysis,management’soutlookandrepricingstrategies.Theseassumptionsarevalidatedonaperiodicbasis.Asensitivityanalysisisprovidedforkeyvariablesofthesimulation.TheresultsarereviewedbyALPCmonthlyandareusedtoguideasset/liabilitymanagementstrategies.Thetablebelowsummarizestheinterestrateriskofnetinterestincomebasedonforecastsoverthesucceeding12months.AtDecember31,2007,basedontherateenvironmentatthattime,theCompany’soverallinterestrateriskpositionwasliabilitysensitivetochangesininterestrates.InJanuary2008,theFederalReserveBankloweredtheFederalFundsrateby125basispointsto3.00percent,whichresultedintheoverallinterestrateriskpositionoftheCompanybeingslightlyliabilitysensitive.TheCompanymanagesitsinterestrateriskpositionbyholdingassetsonthebalancesheetwithdesiredinterestrateriskcharacteristics,implementingcertainpricingstrategiesforloansanddepositsandthroughtheselectionofderivativesandvariousfundingandinvestmentportfoliostrategies.TheCompanymanagestheoverallinterestrateriskprofilewithinpolicylimits.ALPCpolicylimitstheestimatedchangeinnetinterestincometo4.0percentofforecastednetinterestincomeoverthesucceeding12months.AtDecember31,2007,and2006,theCompanywaswithinitsALPCpolicy.MarketValueofEquityModelingTheCompanyalsoutilizesthemarketvalueofequityasameasurementtoolinmanaginginterestratesensitivity.ThemarketvalueofequitymeasuresthedegreetowhichthemarketvaluesoftheCompany’sassetsandliabilitiesandoff-balancesheetinstrumentswillchangegivenachangeininterestrates.ALPCpolicylimitsthechangeinmarketvalueofequityina200basispointparallelrateshockto15percentofthemarketvalueofequityassuminginterestratesatDecember31,2007.Theup200basispointscenarioresultedina7.6percentdecreaseinthemarketvalueofequityatDecember31,2007,comparedwitha6.7percentdecreaseatDecember31,2006.Thedown200basispointscenarioresultedina3.5percentdecreaseinthemarketvalueofequityatDecember31,2007,comparedwitha1.8percentdecreaseatDecember31,2006.AtDecember31,2007and2006,theCompanywaswithinitsALPCpolicy.Thevaluationanalysisisdependentuponcertainkeyassumptionsaboutthenatureofassetsandliabilitieswithnon-contractualmaturities.Managementestimatestheaveragelifeandratecharacteristicsofassetandliabilityaccountsbaseduponhistoricalanalysisandmanagement’sexpectationofratebehavior.Theseassumptionsarevalidatedonaperiodicbasis.AsensitivityanalysisofkeyvariablesofthevaluationanalysisisprovidedtoALPCmonthlyandisusedtoguideasset/liabilitymanagementstrategies.TheCompanyalsousesdurationofequityasameasureofinterestraterisk.Thedurationofequityisameasureofthenetmarketvaluesensitivityoftheassets,liabilitiesandderivativepositionsoftheCompany.Thedurationofassetswas1.8yearsatDecember31,2007and2006.Thedurationofliabilitieswas1.9yearsatDecember31,2007and2006.AtDecember31,2007,thedurationofequitywas1.2years,comparedwith1.6yearsatDecember31,2006.ThedurationofequitymeasuresshowsthatsensitivityofthemarketvalueofequityoftheCompanywasliabilitysensitivetochangesininterestrates.UseofDerivativestoManageInterestRateandOtherRisksIntheordinarycourseofbusiness,theCompanyentersintoU.S.BANCORP47SENSITIVITYOFNETINTERESTINCOMEDown50ImmediateUp50ImmediateDown200GradualUp200GradualDown50ImmediateUp50ImmediateDown200GradualUp200GradualDecember31,2007December31,2006Netinterestincome..........54%(1.01)%1.28%(2.55)%.42%(1.43)%.92%(2.95)%derivativetransactionstomanageitsinterestrate,prepayment,credit,priceandforeigncurrencyrisks(“assetandliabilitymanagementpositions”)andtoaccommodatethebusinessrequirementsofitscustomers(“customer-relatedpositions”).Tomanageitsinterestraterisk,theCompanymayenterintointerestrateswapagreementsandinterestrateoptionssuchascapsandfloors.Interestrateswapsinvolvetheexchangeoffixed-rateandvariable-ratepaymentswithouttheexchangeoftheunderlyingnotionalamountonwhichtheinterestpaymentsarecalculated.Interestratecapsprotectagainstrisinginterestrateswhileinterestratefloorsprotectagainstdeclininginterestrates.Inconnectionwithitsmortgagebankingoperations,theCompanyentersintoforwardcommitmentstosellmortgageloansrelatedtofixed-ratemortgageloansheldforsaleandfixed-ratemortgageloancommitments.TheCompanyalsoactsasasellerandbuyerofinterestratecontractsandforeignexchangeratecontractsonbehalfofcustomers.TheCompanyminimizesitsmarketandliquidityrisksbytakingsimilaroffsettingpositions.Allinterestratederivativesthatqualifyforhedgeaccountingarerecordedatfairvalueasotherassetsorliabilitiesonthebalancesheetandaredesignatedaseither“fairvalue”or“cashflow”hedges.TheCompanyperformsanassessment,bothatinceptionandquarterlythereafter,whenrequired,todeterminewhetherthesederivativesarehighlyeffectiveinoffsettingchangesinthevalueofthehedgeditems.Hedgeineffectivenessforbothcashflowandfairvaluehedgesisrecordedinnoninterestincome.Changesinthefairvalueofderivativesdesignatedasfairvaluehedges,andchangesinthefairvalueofthehedgeditems,arerecordedinearnings.Changesinthefairvalueofderivativesdesignatedascashflowhedgesarerecordedinothercomprehensiveincomeuntilincomefromthecashflowsofthehedgeditemsisrealized.Customer-relatedinterestrateswaps,foreignexchangeratecontracts,andallotherderivativecontractsthatdonotqualifyforhedgeaccountingarerecordedatfairvalueandresultinggainsorlossesarerecordedintradingaccountgainsorlossesormortgagebankingrevenue.Gainsorlossesoncustomer-relatedderivativepositionswerenotmaterialin2007.Bytheirnature,derivativeinstrumentsaresubjecttomarketrisk.TheCompanydoesnotutilizederivativeinstrumentsforspeculativepurposes.OftheCompany’s$57.5billionoftotalnotionalamountofassetandliabilitymanagementpositionsatDecember31,2007,$24.4billionwasdesignatedaseitherfairvalueorcashflowhedgesornetinvestmenthedgesofforeignoperations.Thecashflowhedgederivativepositionsareinterestrateswapsthathedgetheforecastedcashflowsfromtheunderlyingvariable-ratedebt.Thefairvaluehedgesareprimarilyinterestrateswapsthathedgethechangeinfairvaluerelatedtointerestratechangesofunderlyingfixed-ratedebtandsubordinatedobligations.TheCompanyusesforwardcommitmentstosellresidentialmortgageloanstohedgeitsinterestrateriskrelatedtoresidentialmortgageloansheld-for-sale.TheCompanycommitstoselltheloansatspecifiedpricesinafutureperiod,typicallywithin90days.TheCompanyisexposedtointerestrateriskduringtheperiodbetweenissuingaloancommitmentandthesaleoftheloanintothesecondarymarket.Inconnectionwithitsmortgagebankingoperations,theCompanyheld$2.8billionofforwardcommitmentstosellmortgageloansand$3.7billionofunfundedmortgageloancommitmentsatDecember31,2007,thatwerederivativesinaccordancewiththeprovisionsoftheStatementofFinancialAccountingStandardsNo.133,“AccountingforDerivativeInstrumentsandHedgeActivities.”TheunfundedmortgageloancommitmentsarereportedatfairvalueasoptionsinTable18.TheCompanyalsoutilizesU.S.Treasuryfutures,optionsonU.S.Treasuryfuturescontracts,interestrateswapsandforwardcommitmentstobuyresidentialmortgageloanstoeconomicallyhedgethechangeinfairvalueofitsresidentialMSRs.Derivativeinstrumentsarealsosubjecttocreditriskassociatedwithcounterpartiestothederivativecontracts.CreditriskassociatedwithderivativesismeasuredbasedonthereplacementcostshouldthecounterpartieswithcontractsinagainpositiontotheCompanyfailtoperformunderthetermsofthecontract.TheCompanymanagesthisriskthroughdiversificationofitsderivativepositionsamongvariouscounterparties,requiringcollateralagreementswithcredit-ratingthresholds,enteringintomasternettingagreementsincertaincasesandenteringintointerestrateswapriskparticipationagreements.TheseagreementstransferthecreditriskrelatedtointerestrateswapsfromtheCompanytoanunaffiliatedthird-party.TheCompanyalsoprovidescreditprotectiontothird-partieswithriskparticipationagreements,forafee,aspartofaloansyndicationtransaction.AtDecember31,2007,theCompanyhad$219millioninaccumulatedothercomprehensiveincomerelatedtorealizedandunrealizedlossesonderivativesclassifiedascashflowhedges.Unrealizedgainsandlossesarereflectedinearningswhentherelatedcashflowsorhedgedtransactionsoccurandoffsettherelatedperformanceofthehedgeditems.Theestimatedamounttobereclassifiedfromaccumulatedothercomprehensiveincomeintoearningsduringthenext12monthsisalossof$106million.Thechangeinthefairvalueofallotherassetandliabilitymanagementderivativepositionsattributedtohedgeineffectivenessrecordedinnoninterestincomewasnotmaterialfor2007.48U.S.BANCORPTheCompanyentersintoderivativestoprotectitsnetinvestmentincertainforeignoperations.TheCompanyusesforwardcommitmentstosellspecifiedamountsofcertainforeigncurrenciestohedgefluctuationsinforeigncurrencyexchangerates.ThenetamountofgainsorlossesincludedU.S.BANCORP49Table18DERIVATIVEPOSITIONSASSETANDLIABILITYMANAGEMENTPOSITIONSDecember31,2007(DollarsinMillions)20082009201020112012ThereafterTotalFairValueWeighted-AverageRemainingMaturityInYearsMaturingInterestRateContractsReceivefixed/payfloatingswapsNotionalamount..................$–$–$–$–$–$3,750$3,750$1740.87Weighted-averageReceiverate...................–%–%–%–%–%6.32%6.32%Payrate......................–––––5.415.41Payfixed/receivefloatingswapsNotionalamount..................$7,550$4,000$–$–$–$4,429$15,979$(307)3.00Weighted-averageReceiverate...................5.15%5.11%–%–%–%5.08%5.12%Payrate......................5.134.49–––5.224.99FuturesandforwardsBuy...........................$12,459$–$–$–$–$–$12,459$(51).12Sell...........................11,427–––––11,427(33).16OptionsWritten.........................$10,689$–$–$–$–$–$10,689$10.12ForeignExchangeContractsCross-currencyswapsNotionalamount..................$–$–$–$–$–$1,913$1,913$1968.80Weighted-averageReceiverate...................–%–%–%–%–%4.24%4.24%Payrate......................–––––4.874.87Forwards..........................$1,111$–$–$–$–$–$1,111$(15).03EquityContracts.....................$–$40$–$33$–$–$73$(3)2.33CreditDefaultSwaps.................$5$5$–$25$21$–$56$13.60CUSTOMER-RELATEDPOSITIONSDecember31,2007(DollarsinMillions)20082009201020112012ThereafterTotalFairValueWeighted-AverageRemainingMaturityInYearsMaturingInterestRateContractsReceivefixed/payfloatingswapsNotionalamount...................$1,647$2,212$2,230$1,349$1,696$5,126$14,260$3865.10Payfixed/receivefloatingswapsNotionalamount...................1,6472,2042,2141,3581,6955,13514,253(309)5.08OptionsPurchased......................572621284201861751,93912.25Written.........................565621284201861751,93212.25RiskparticipationagreementsPurchased......................33413179420937016.23Written.........................251121455184211628(1)4.98ForeignExchangeRateContractsForwards,spotsandswapsBuy...........................$3,113$274$78$18$3$–$3,486$109.44Sell...........................3,05826877203–3,426(95).44OptionsPurchased......................252848–––308(6).68Written.........................237848–––2936.71inthecumulativetranslationadjustmentfor2007wasnotmaterial.Table18summarizesinformationontheCompany’sderivativepositionsatDecember31,2007.RefertoNotes1and19oftheNotestoConsolidatedFinancialStatementsforsignificantaccountingpoliciesandadditionalinformationregardingtheCompany’suseofderivatives.MarketRiskManagementInadditiontointerestraterisk,theCompanyisexposedtootherformsofmarketriskasaconsequenceofconductingnormaltradingactivities.ThesetradingactivitiesprincipallysupporttheriskmanagementprocessesoftheCompany’scustomersincludingtheirmanagementofforeigncurrencyandinterestraterisks.TheCompanyalsomanagesmarketriskofnon-tradingbusinessactivities,includingitsMSRsandloansheld-for-sale.ValueatRisk(“VaR”)isakeymeasureofmarketriskfortheCompany.Theoretically,VaRrepresentsthemaximumamountthattheCompanyhasplacedatriskofloss,withaninety-ninthpercentiledegreeofconfidence,toadversemarketmovementsinthecourseofitsrisktakingactivities.VaRmodelingoftradingactivitiesissubjecttocertainlimitations.Additionally,itshouldberecognizedthatthereareassumptionsandestimatesassociatedwithVaRmodeling,andactualresultscoulddifferfromthoseassumptionsandestimates.TheCompanymitigatestheseuncertaintiesthroughregularmonitoringoftradingactivitiesbymanagementandotherriskmanagementpractices,includingstop-lossandpositionlimitsrelatedtoitstradingactivities.Stress-testmodelsareusedtoprovidemanagementwithperspectivesonmarketeventsthatVaRmodelsdonotcapture.TheCompanyestablishesmarketrisklimits,subjecttoapprovalbytheCompany’sBoardofDirectors.TheCompany’smarketvaluationriskfortradingandnon-tradingpositions,asestimatedbytheVaRanalysis,was$1millionand$15million,respectively,atDecember31,2007,comparedwith$1millionand$30million,respectively,atDecember31,2006.TheCompany’sVaRlimitwas$45millionatDecember31,2007.Duringthesecondhalfof2007,thefinancialmarketsexperiencedsignificantturbulenceastheimpactofmortgagedelinquencies,defaultsandforeclosuresadverselyaffectedinvestorconfidenceinabroadrangeofinvestmentsectorsandassetclasses.GiventhattheCompany’sownedinvestmentsareprincipallyU.S.Treasurysecurities,notesissuedbygovernment-sponsoredagenciesorprivatelyissuedsecuritieswithhighinvestmentgradecreditratings,theCompanybelievesthesesecuritiesarenotother-than-temporarilyimpairedasofDecember31,2007,despitebeingsubjecttochangesinmarketvaluations.Asproblemsinthesub-primemortgagemarketemerged,certainsecuritiesbackedbymortgagesexperiencedbothcreditandliquidityissues,andinvestorsbecamehesitanttopurchasemanytypesofasset-backedsecurities,eventhosewithlittleornoexposuretosub-primemortgages.ThemoneymarketfundsmanagedbyanaffiliateoftheCompany,FAFAdvisors,heldcertaininvestmentswithexposuretotheliquidityandcreditissuesoftheasset-backedsecuritiesmarkets.Inthefourthquarterof2007,theCompanypurchasedcertainsecuritiesatamortizedcostfromcertainmoneymarketfundsmanagedbyFAFAdvisorstomaintaininvestorconfidenceinthefunds.Giventhenatureandcreditratingsoftheremainingholdingsofthesemoneymarketfunds,theCompanydoesnotintendtopurchaseadditionalinvestmentsfromthefunds.Asaresultofpurchasingthesestructuredinvestments,theCompanyrecognizedvaluationlossesof$107millioninitsfinancialstatementsinthefourthquarterof2007.TheCompanycontinuestomonitorchangesinmarketconditions,includingtheunderlyingcreditqualityandperformanceofassetscollateralizingthesestructuredinvestments.Giventhenatureofthesesecuritiesandwideningcreditspreadsforsimilarassets,furtherdeteriorationinvalueislikelytooccuroverthenextfewquartersandmayresultintherecognitionoffurtherimpairmentbytheCompany.LiquidityRiskManagementALPCestablishespolicies,aswellasanalyzesandmanagesliquidity,toensurethatadequatefundsareavailabletomeetnormaloperatingrequirementsinadditiontounexpectedcustomerdemandsforfunds,suchashighlevelsofdepositwithdrawalsorloandemand,inatimelyandcost-effectivemanner.Themostimportantfactorinthepreservationofliquidityismaintainingpublicconfidencethatfacilitatestheretentionandgrowthofalarge,stablesupplyofcoredepositsandwholesalefunds.Ultimately,publicconfidenceisgeneratedthroughprofitableoperations,soundcreditqualityandastrongcapitalposition.TheCompany’sperformanceintheseareashasenabledittodevelopalargeandreliablebaseofcorefundingwithinitsmarketareasandindomesticandglobalcapitalmarkets.Liquiditymanagementisviewedfromlong-termandshort-termperspectives,aswellasfromanassetandliabilityperspective.Managementmonitorsliquiditythrougharegularreviewofmaturityprofiles,fundingsources,andloananddepositforecaststominimizefundingrisk.TheCompanymaintainsstrategicliquidityandcontingencyplansthataresubjecttotheavailabilityofassetliquidityinthebalancesheet.Monthly,ALPCreviewstheCompany’sabilitytomeetfundingrequirementsduetoadversebusinessevents.Thesefundingneedsarethenmatchedwithspecificasset-basedsourcestoensuresufficientfundsareavailable.Also,strategicliquiditypoliciesrequirediversificationofwholesalefundingsourcestoavoidconcentrationsinanyonemarketsource.SubsidiarycompaniesaremembersofvariousFederalHomeLoanBanks50U.S.BANCORP(“FHLB”)thatprovideasourceoffundingthroughFHLBadvances.TheCompanymaintainsaGrandCaymanbranchforissuingeurodollartimedeposits.TheCompanyalsoissuescommercialpaperthroughitsCanadianbranch.Inaddition,theCompanyestablishesrelationshipswithdealerstoissuenationalmarketretailandinstitutionalsavingscertificatesandshort-termandmedium-termbanknotes.TheCompany’ssubsidiarybanksalsohavesignificantcorrespondentbankingnetworksandcorporateaccounts.Accordingly,theCompanyhasaccesstonationalfedfunds,fundingthroughrepurchaseagreementsandsourcesofstable,regionally-basedcertificatesofdepositandcommercialpaper.TheCompany’sabilitytoraisenegotiatedfundingatcompetitivepricesisinfluencedbyratingagencies’viewsoftheCompany’screditquality,liquidity,capitalandearnings.OnFebruary14,2007,Standard&Poor’sRatingsServicesupgradedtheCompany’screditratingstoAA/A-1+.AtDecember31,2007,thecreditratingsoutlookfortheCompanywasconsidered“Positive”byFitchand“Stable”byStandard&Poor’sRatingsServices,Moody’sInvestorsServiceandDominionBondRatingsService.ThedebtratingsnotedinTable19reflecttheratingagencies’recognitionoftheCompany’ssector-leadingcoreearningsperformanceandlowercreditriskprofile.Theparentcompany’sroutinefundingrequirementsconsistprimarilyofoperatingexpenses,dividendspaidtoshareholders,debtservice,repurchasesofcommonstockandfundsusedforacquisitions.Theparentcompanyobtainsfundingtomeetitsobligationsfromdividendscollectedfromitssubsidiariesandtheissuanceofdebtsecurities.UnderUnitedStatesSecuritiesandExchangeCommissionrules,theparentcompanyisclassifiedasa“well-knownseasonedissuer,”whichallowsittofilearegistrationstatementthatdoesnothavealimitonissuancecapacity.“Well-knownseasonedissuers”generallyincludethosecompanieswithoutstandingcommonsecuritieswithamarketvalueofatleast$700millionheldbynon-affiliatedpartiesorthosecompaniesthathaveissuedatleast$1billioninaggregateprincipalamountofnon-convertiblesecurities,otherthancommonequity,inthelastthreeyears.However,theparentcompany’sabilitytoissuedebtandothersecuritiesunderaregistrationstatementfiledwiththeUnitedStatesSecuritiesandExchangeCommissionundertheserulesislimitedbythedebtissuanceauthoritygrantedbytheCompany’sBoardofDirectorsand/orALPCpolicy.AtDecember31,2007,parentcompanylong-termdebtoutstandingwas$10.7billion,comparedwith$11.4billionatDecember31,2006.The$.7billiondecreasewasprimarilyduetorepaymentsof$2.6billionofconvertibleseniordebenturesand$1.4billionofmaturitiesofsubordinatedandmedium-termnotes,partiallyoffsetbytheissuancesof$3.0billionofconvertibleseniordebenturesand$.5billionofjuniorsubordinateddebentures.Totalparentcompanydebtscheduledtomaturein2008is$.5billion.Thesedebtobligationsmaybemetthroughmedium-termnoteandcapitalsecurityissuancesanddividendsfromsubsidiaries,aswellasfromparentcompanycashandcashequivalents.Federalbankinglawsregulatetheamountofdividendsthatmaybepaidbybankingsubsidiarieswithoutpriorapproval.Theamountofdividendsavailabletotheparentcompanyfromitsbankingsubsidiariesaftermeetingtheregulatorycapitalrequirementsforwell-capitalizedbankswasapproximately$1.1billionatDecember31,2007.Forfurtherinformation,seeNote22oftheNotestoConsolidatedFinancialStatements.Off-BalanceSheetArrangementsOff-balancesheetarrangementsincludeanycontractualarrangementtowhichanunconsolidatedentityisaparty,underwhichtheCompanyhasanobligationtoprovidecreditorliquidityenhancementsormarketrisksupport.Off-balancesheetarrangementsincludeU.S.BANCORP51Table19DEBTRATINGSMoody’sStandard&Poor’sFitchDominionBondRatingServiceU.S.BancorpShort-termborrowings.....................................F1+R-1(middle)Seniordebtandmedium-termnotes............................Aa2AAAA-AASubordinateddebt........................................Aa3AA-A+AA(low)Preferredstock..........................................A1A+A+Commercialpaper........................................P-1A-1+F1+R-1(middle)U.S.BankNationalAssociationShort-termtimedeposits....................................P-1A-1+F1+R-1(high)Long-termtimedeposits....................................Aa1AA+AAAA(high)Banknotes.............................................Aa1/P-1AA+/A-1+AA-/F1+AA(high)Subordinateddebt........................................Aa2AAA+AACommercialpaper........................................P-1A-1+F1+R-1(high)certaindefinedguarantees,assetsecuritizationtrustsandconduits.Off-balancesheetarrangementsalsoincludeanyobligationunderavariableinterestheldbyanunconsolidatedentitythatprovidesfinancing,liquidity,creditenhancementormarketrisksupport.Intheordinarycourseofbusiness,theCompanyentersintoanarrayofcommitmentstoextendcredit,lettersofcreditandvariousformsofguaranteesthatmaybeconsideredoff-balancesheetarrangements.ThenatureandextentofthesearrangementsareprovidedinNote21oftheNotestoConsolidatedFinancialStatements.AssetsecuritizationsandconduitsmayrepresentasourceoffundingfortheCompanythroughoff-balancesheetstructures.Credit,liquidity,operationalandlegalstructuralrisksexistduetothenatureandcomplexityofassetsecuritizationsandotheroff-balancesheetstructures.ALPCregularlymonitorstheperformanceofeachoff-balancesheetstructureinanefforttominimizetheserisksandensurecompliancewiththerequirementsofthestructures.TheCompanyusesitscreditriskmanagementprocessestoevaluatethecreditqualityofunderlyingassetsandregularlyforecastscashflowstoevaluateanypotentialimpairmentofretainedinterests.Also,regulatoryguidelinesrequireconsiderationofassetsecuritizationsinthedeterminationofrisk-basedcapitalratios.TheCompanydoesnotrelysignificantlyonoff-balancesheetarrangementsforliquidityorcapitalresources.TheCompanysponsorsanoff-balancesheetconduit,aqualifiedspecialpurposeentity(“QSPE”),towhichittransferredhigh-gradeinvestmentsecurities,fundedbytheissuanceofcommercialpaper.BecauseQSPEsareexemptfromconsolidationundertheprovisionsofFinancialAccountingStandardsBoardInterpretationNo.46R(“FIN46R”),“ConsolidationofVariableInterestEntities”,theCompanydoesnotconsolidatetheconduitstructureinitsfinancialstatements.Theconduitheldassetsof$1.2billionatDecember31,2007,and$2.2billionatDecember31,2006.Theseinvestmentsecuritiesincludeprimarily(i)privatelabelasset-backedsecurities,whichareinsurance“wrapped”bymono-lineinsurancecompaniesand(ii)governmentagencymortgage-backedsecuritiesandcollateralizedmortgageobligations.Theconduithadcommercialpaperliabilitiesof$1.2billionatDecember31,2007,and$2.2billionatDecember31,2006.TheCompanyprovidesaliquidityfacilitytotheconduit.Utilizationoftheliquidityfacilitywouldbetriggerediftheconduitisunableto,ordoesnot,issuecommercialpapertofunditsassets.AliabilityfortheestimateofthepotentialriskoflossfortheCompanyastheliquidityfacilityproviderisrecordedonthebalancesheetinotherliabilities.Theliabilityisadjusteddownwardovertimeastheunderlyingassetspaydownwiththeoffsetrecognizedasothernoninterestincome.Theliabilityfortheliquidityfacilitywas$2millionand$10millionatDecember31,2007and2006,respectively.Inaddition,theCompanyrecordeditsretainedresidualinterestintheinvestmentsecuritiesconduitof$2millionand$13millionatDecember31,2007and2006,respectively.CapitalManagementTheCompanyiscommittedtomanagingcapitalformaximumshareholderbenefitandmaintainingstrongprotectionfordepositorsandcreditors.TheCompanyhastargetedreturning80percentofearningstoitscommonshareholdersthroughacombinationofdividendsandsharerepurchases.During2007,theCompanyreturned111percentofearnings.TheCompanycontinuallyassessesitsbusinessrisksandcapitalposition.TheCompanyalsomanagesitscapitaltoexceedregulatorycapitalrequirementsforwell-capitalizedbankholdingcompanies.Toachievethesecapitalgoals,theCompanyemploysavarietyofcapitalmanagementtools,includingdividends,commonsharerepurchases,andtheissuanceofsubordinateddebtandothercapitalinstruments.Totalshareholders’equitywas$21.0billionatDecember31,52U.S.BANCORPTable20CONTRACTUALOBLIGATIONSDecember31,2007(DollarsinMillions)OneYearorLessOverOneThroughThreeYearsOverThreeThroughFiveYearsOverFiveYearsTotalPaymentsDueByPeriodContractualObligations(a)Long-termdebt(b)............................$10,486$9,401$5,887$17,666$43,440Capitalleases...............................1120183483Operatingleases.............................1682972263581,049Purchaseobligations...........................143141351320Benefitobligations(c)..........................397882209408Total...................................$10,847$9,937$6,248$18,268$45,300(a)Unrecognizedtaxpositionsof$296millionatDecember31,2007,areexcludedastheCompanycannotmakeareasonablyreliableestimateoftheperiodofcashsettlementwiththerespectivetaxingauthority.(b)Inthebankingindustry,interest-bearingobligationsareprincipallyutilizedtofundinterest-bearingassets.Assuch,interestchargesonrelatedcontractualobligationswereexcludedfromreportedamountsasthepotentialcashoutflowswouldhavecorrespondingcashinflowsfrominterest-bearingassets.(c)Amountsonlyincludeobligationsrelatedtotheunfundednon-qualifiedpensionplansandpost-retirementmedicalplan.2007,comparedwith$21.2billionatDecember31,2006.Thedecreasewastheresultofsharerepurchasesanddividends,partiallyoffsetbycorporateearnings.OnDecember11,2007,theCompanyincreaseditsdividendratepercommonshareby6.25percent,from$.40perquarterto$.425perquarter.OnDecember12,2006,theCompanyincreaseditsdividendratepercommonshareby21.2percent,from$.33perquarterto$.40perquarter.OnDecember21,2004,theBoardofDirectorsapprovedandannouncedanauthorizationtorepurchase150millionsharesofcommonstockduringthenext24months.OnAugust3,2006,theCompanyannouncedthattheBoardofDirectorsapprovedanauthorizationtorepurchase150millionsharesofcommonstockthroughDecember31,2008.ThisnewauthorizationreplacedtheDecember21,2004,sharerepurchaseprogram.During2006,theCompanyrepurchased62millionsharesunderthe2004authorizationand28millionsharesunderthe2006authorization.Theaveragepricepaidforallsharesrepurchasedin2006was$31.35pershare.In2007,theCompanyrepurchased58millionsharesunderthe2006authorization.Theaveragepricepaidforsharesrepurchasedin2007was$34.84pershare.Foracompleteanalysisofactivitiesimpactingshareholders’equityandcapitalmanagementprograms,refertoNote14oftheNotestoConsolidatedFinancialStatements.Thefollowingtableprovidesadetailedanalysisofallsharesrepurchasedunderthe2006authorizationduringthefourthquarterof2007:TimePeriodTotalNumberofSharesPurchasedasPartoftheProgramAveragePricePaidperShareMaximumNumberofSharesthatMayYetBePurchasedUndertheProgramOctober......168,766$32.7464,320,188November.....27231.0464,319,916December.....58,43931.9764,261,477Total......227,477$32.5464,261,477U.S.BANCORP53Table21REGULATORYCAPITALRATIOSAtDecember31(DollarsinMillions)20072006U.S.BancorpTier1capital.....................................................................$17,539$17,036Asapercentofrisk-weightedassets...................................................8.3%8.8%Asapercentofadjustedquarterlyaverageassets(leverageratio)...............................7.9%8.2%Totalrisk-basedcapital..............................................................$25,925$24,495Asapercentofrisk-weightedassets...................................................12.2%12.6%Tangiblecommonequity.............................................................$11,820$11,703Asapercentoftangibleassets......................................................5.1%5.5%BankSubsidiariesU.S.BankNationalAssociationTier1capital................................................................6.5%6.5%Totalrisk-basedcapital.........................................................10.410.8Leverage...................................................................6.26.1U.S.BankNationalAssociationNDTier1capital................................................................13.3%12.9%Totalrisk-basedcapital.........................................................16.816.7Leverage...................................................................11.711.3BankRegulatoryCapitalRequirementsMinimumWell-CapitalizedTier1capital................................................................4.0%6.0%Totalrisk-basedcapital.........................................................8.010.0Leverage...................................................................4.05.0Bankingregulatorsdefineminimumcapitalrequirementsforbanksandfinancialservicesholdingcompanies.TheserequirementsareexpressedintheformofaminimumTier1capitalratio,totalrisk-basedcapitalratio,andTier1leverageratio.Theminimumrequiredlevelfortheseratiosis4.0percent,8.0percent,and4.0percent,respectively.TheCompanytargetsitsregulatorycapitallevels,atboththebankandbankholdingcompanylevel,toexceedthe“well-capitalized”thresholdfortheseratiosof6.0percent,10.0percent,and5.0percent,respectively.Allregulatoryratios,atboththebankandbankholdingcompanylevel,continuetobeinexcessofstated“well-capitalized”requirements.Table21providesasummaryofcapitalratiosasofDecember31,2007and2006,includingTier1andtotalrisk-basedcapitalratios,asdefinedbytheregulatoryagencies.During2008,theCompanyexpectstotargetcapitallevelratiosof8.5percentTier1capitaland12.0percenttotalrisk-basedcapitalonaconsolidatedbasis.FOURTHQUARTERSUMMARYTheCompanyreportednetincomeof$942millionforthefourthquarterof2007,or$.53perdilutedcommonshare,comparedwith$1,194million,or$.66perdilutedcommonshare,forthefourthquarterof2006.Returnonaverageassetsandreturnonaveragecommonequitywere1.63percentand18.3percent,respectively,forthefourthquarterof2007,comparedwithreturnsof2.18percentand23.2percent,respectively,forthefourthquarterof2006.SeveralsignificantitemsimpactedtheCompany’squarterlyresults,includinga$215millionVisaChargeand$107millionforvaluationlossesrelatedtosecuritiespurchasedfromcertainmoneymarketfundsmanagedbyanaffiliate.Thecumulativeimpactofthesechargesinthefourthquarterof2007wasapproximately$.13perdilutedcommonshare.TheCompany’sresultsforthefourthquarterof2006includeda$52milliongainrelatedtothesaleofa401(k)recordkeepingbusiness,a$22milliondebtprepaymentchargeandareductionintaxliabilitiesrelatedtotheresolutionofvariousincometaxexaminations.54U.S.BANCORPTable22FOURTHQUARTERRESULTS(Inmillions,ExceptPerShareData)20072006ThreeMonthsEndedDecember31,CondensedIncomeStatementNetinterestincome(taxable-equivalentbasis)(a).............................................$1,763$1,695Noninterestincome.................................................................1,7731,718Securitiesgains(losses),net...........................................................411Totalnetrevenue................................................................3,5403,424Noninterestexpense................................................................1,9341,612Provisionforcreditlosses.............................................................225169Incomebeforetaxes..............................................................1,3811,643Taxable-equivalentadjustment..........................................................2215Applicableincometaxes..............................................................417434Netincome....................................................................$942$1,194Netincomeapplicabletocommonequity.................................................$927$1,179PerCommonShareEarningspershare.................................................................$.54$.67Dilutedearningspershare.............................................................53.66Dividendsdeclaredpershare...........................................................425.400Averagecommonsharesoutstanding.....................................................1,7261,761Averagedilutedcommonsharesoutstanding................................................1,7461,789FinancialRatiosReturnonaverageassets.............................................................1.63%2.18%Returnonaveragecommonequity.......................................................18.323.2Netinterestmargin(taxable-equivalentbasis)(a).............................................3.513.56Efficiencyratio(b)..................................................................54.747.2(a)Interestandratesarepresentedonafullytaxable-equivalentbasisutilizingataxrateof35percent.(b)Computedasnoninterestexpensedividedbythesumofnetinterestincomeonataxable-equivalentbasisandnoninterestincomeexcludingsecuritiesgains(losses),net.Totalnetrevenue,onataxable-equivalentbasisforthefourthquarterof2007,was$116million(3.4percent)higherthanthefourthquarterof2006,reflectinga4.0percentincreaseinnetinterestincomeanda2.8percentincreaseinnoninterestincome.Netinterestincomeincreasedfromayearago,drivenbygrowthinearningassets,somewhathighercreditspreads,anincreaseinyield-relatedloanfeesandlowerfundingrates.Noninterestincomegrowthwasdrivenprimarilybyorganicgrowthinfee-basedrevenueof12.3percent,mutedsomewhatbythe$107millionmarketvaluationlossesrecordedinthefourthquarterof2007anda$52milliongainrecognizedinthefourthquarterof2006relatedtotheCompany’ssaleofa401(k)recordkeepingbusiness.Fourthquarternetinterestincome,onataxable-equivalentbasiswas$1,763million,comparedwith$1,695millioninthefourthquarterof2006.Averageearningassetsfortheperiodincreasedoverthefourthquarterof2006by$10.6billion(5.6percent),primarilydrivenbya$7.8billion(5.4percent)increaseinaverageloans.Thepositiveimpacttonetinterestincomefromthegrowthinearningassetswaspartiallyoffsetbyalowernetinterestmargin.Thenetinterestmargininthefourthquarterof2007was3.51percent,comparedwith3.56percentinthefourthquarterof2006,reflectingthecompetitiveenvironmentinearly2007anddecliningnetfreefundsrelativetoayearago.Thereductioninnetfreefundswasprimarilyduetoadeclineinnoninterest-bearingdeposits,aninvestmentinbank-ownedlifeinsurance,sharerepurchasesthroughmid-thirdquarterof2007andtheimpactofacquisitions.Anincreaseinloanfeesfromayearagoandimprovedwholesalefundingratespartiallyoffsetthesefactors.Noninterestincomeinthefourthquarterof2007was$1,777million,comparedwith$1,729millioninthesameperiodof2006.The$48million(2.8percent)increasewasdrivenbystrongorganicfee-basedrevenuegrowth,offsetsomewhatbythe$107millionvaluationlossesrelatedtosecuritiespurchasedfromcertainmoneymarketfundsmanagedbyanaffiliate,recognizedinthefourthquarterof2007,andthe$52milliongainonthesaleofa401(k)recordkeepingbusinessrecordedinthefourthquarterof2006.Afterconsiderationofthesefactors,noninterestincomegrewbyapproximately12.3percentyear-over-year.Creditanddebitcardrevenueandcorporatepaymentproductsrevenuewerehigherinthefourthquarterof2007thanthefourthquarterof2006by$71million(33.8percent)and$24million(17.0percent),respectively.Thestronggrowthincreditanddebitcardrevenuewasprimarilydrivenbyanincreaseincustomeraccountsandhighercustomertransactionvolumesfromayearago.Approximately7.6percentofthegrowthincreditcardrevenueswastheresultofthefullyearimpactofafavorableratechangefromrenegotiatingacontractwithacardholderassociation.Corporatepaymentproductsrevenuegrowthreflectedorganicgrowthinsalesvolumesandcardusageandtheimpactofanacquiredbusiness.Merchantprocessingservicesrevenuewashigherinthefourthquarterof2007thanthesamequarterayearagoby$35million(14.3percent),primarilyreflectinganincreaseincustomersandsalesvolumes.Trustandinvestmentmanagementfeesincreased$25million(7.8percent)year-over-year,duetocoreaccountgrowthandfavorableequitymarketconditions.Depositservicechargesgrewyear-over-yearby$13million(5.0percent)drivenbyincreasedtransaction-relatedfeesandtheimpactofcontinuedgrowthinnetnewcheckingaccounts.Additionally,depositaccount-relatedrevenue,traditionallyreflectedinthisfeecategory,continuedtomigratetoyield-relatedloanfeesascustomersutilizenewconsumerproducts.Treasurymanagementfeesincreased$10million(9.3percent)due,inpart,tonewcustomeraccountgrowth,newproductofferingsandhighertransactionvolumes.Commercialproductsrevenueincreased$17million(16.3percent)year-over-yearduetohighersyndicationfeesandforeignexchangeandcommercialleasingrevenue.Mortgagebankingrevenuegrew$23million(92.0percent)overtheprioryearduetoanincreaseinmortgageservicingincomeandproductiongains.Thesefavorablechangesinfee-basedrevenuewerepartiallyoffsetbyadeclineinotherincomeof$167million(78.4percent)comparedwiththefourthquarterof2006.Thedeclineinotherincomewasprimarilyduetothe$107millioninvaluationlossesrelatedtosecuritiespurchasedinthefourthquarterof2007fromcertainmoneymarketfundsmanagedbyanaffiliateandthe$52milliongainonthesaleofa401(k)definedcontributionrecordkeepingbusinessrecordedinthefourthquarterof2006.Thisdeclinewaspartiallyoffsetbyincreasedrevenuefrominvestmentinbank-ownedlifeinsuranceprograms.Securitiesgains(losses)wereloweryear-over-yearby$7million.Noninterestexpensewas$1,934millioninthefourthquarterof2007,anincreaseof$322million(20.0percent)fromthefourthquarterof2006.Theincreaseincludedthe$215millionVisaChargeinthefourthquarterof2007and$22millionofdebtprepaymentchargesrecordedinthefourthquarterof2006.Compensationexpensewashigheryear-over-yearby$69million(11.1percent),duetogrowthinongoingbankoperationsandacquiredbusinesses.Employeebenefitsexpenseincreased$17million(16.7percent)year-over-yearashighermedicalcostswerepartiallyoffsetbylowerpensioncosts.Netoccupancyandequipmentexpenseincreased$9million(5.4percent)fromthefourthquarterof2006primarilyduetoacquisitionsandbranch-basedbusinessinitiatives.Postage,printingandU.S.BANCORP55suppliesexpenseincreased$6million(9.0percent)fromthefourthquarterof2006,dueprimarilytochangesinpostagerates.Otherexpenseincreasedinthefourthquarterof2007fromthesamequarterof2006by$236million(84.6percent),dueprimarilytotheVisaChargeandhighercredit-relatedcostsforotherrealestateownedandloancollectionactivities.Theseincreaseswerepartiallyoffsetbydebtprepaymentchargesrecordedinthefourthquarterof2006.Theprovisionforcreditlossesforthefourthquarterof2007was$225million,anincreaseof$56million(33.1percent)fromthefourthquarterof2006.Theincreaseintheprovisionforcreditlossesfromayearagoreflectedgrowthincreditcardaccounts,increasingretailloandelinquenciesandhighercommerciallosses.Netcharge-offsinthefourthquarterof2007were$225million,comparedwithnetcharge-offsof$169millionduringthefourthquarterof2006.Theprovisionforincometaxesforthefourthquarterof2007increasedtoaneffectivetaxrateof30.7percentfromaneffectivetaxrateof26.7percentinthefourthquarterof2006.Thelowertaxrateinthefourthquarteroftheprioryearcomparedwiththecurrentquarterwasprimarilyduetotheresolutionoffederalincometaxexaminationsforallyearsthrough2004andcertainstatetaxexaminationsduringthefourthquarterof2006,whichreducedtheCompany’staxliabilities.LINEOFBUSINESSFINANCIALREVIEWWithintheCompany,financialperformanceismeasuredbymajorlinesofbusiness,whichincludeWholesaleBanking,ConsumerBanking,WealthManagement&SecuritiesServices,PaymentServices,andTreasuryandCorporateSupport.TheseoperatingsegmentsarecomponentsoftheCompanyaboutwhichfinancialinformationisavailableandisevaluatedregularlyindecidinghowtoallocateresourcesandassessperformance.BasisforFinancialPresentationBusinesslineresultsarederivedfromtheCompany’sbusinessunitprofitabilityreportingsystemsbyspecificallyattributingmanagedbalancesheetassets,depositsandotherliabilitiesandtheirrelatedincomeorexpense.Goodwillandotherintangibleassetsareassignedtothelinesofbusinessbasedonthemixofbusinessoftheacquiredentity.WithintheCompany,capitallevelsareevaluatedandmanagedcentrally;however,capitalisallocatedtotheoperatingsegmentstosupportevaluationofbusinessperformance.Businesslinesareallocatedcapitalonarisk-adjustedbasisconsideringeconomicandregulatorycapitalrequirements.Generally,thedeterminationoftheamountofcapitalallocatedtoeachbusinesslineincludescreditandoperationalcapitalallocationsfollowingaBaselIIregulatoryframeworkadjustedforregulatoryTier1leveragerequirements.Interestincomeandexpenseisdeterminedbasedontheassetsandliabilitiesmanagedbythebusinessline.Becausefundingandassetliabilitymanagementisacentralfunction,fundstransfer-pricingmethodologiesareutilizedtoallocateacostoffundsusedorcreditforfundsprovidedtoallbusinesslineassetsandliabilities,respectively,usingamatchedfundingconcept.Also,eachbusinessunitisallocatedthetaxable-equivalentbenefitoftax-exemptproducts.Theresidualeffectonnetinterestincomeofasset/liabilitymanagementactivitiesisincludedinTreasuryandCorporateSupport.Noninterestincomeandexpensesdirectlymanagedbyeachbusinessline,includingfees,servicecharges,salariesandbenefits,andotherdirectrevenuesandcostsareaccountedforwithineachsegment’sfinancialresultsinamannersimilartotheconsolidatedfinancialstatements.Occupancycostsareallocatedbasedonutilizationoffacilitiesbythelinesofbusiness.Generally,operatinglossesarechargedtothelineofbusinesswhenthelosseventisrealizedinamannersimilartoaloancharge-off.Noninterestexpensesincurredbycentrallymanagedoperationsorbusinesslinesthatdirectlysupportanotherbusinessline’soperationsarechargedtotheapplicablebusinesslinebasedonitsutilizationofthoseservicesprimarilymeasuredbythevolumeofcustomeractivities,numberofemployeesorotherrelevantfactors.Theseallocatedexpensesarereportedasnetsharedservicesexpensewithinnoninterestexpense.Certainactivitiesthatdonotdirectlysupporttheoperationsofthelinesofbusinessorforwhichthelineofbusinessisnotconsideredfinanciallyaccountableinevaluatingtheirperformancearenotchargedtothelinesofbusiness.TheincomeorexpensesassociatedwiththesecorporateactivitiesisreportedwithintheTreasuryandCorporateSupportlineofbusiness.TheprovisionforcreditlosseswithintheWholesaleBanking,ConsumerBanking,WealthManagement&SecuritiesServicesandPaymentServiceslinesofbusinessisbasedonnetcharge-offs,whileTreasuryandCorporateSupportreflectstheresidualcomponentoftheCompany’stotalconsolidatedprovisionforcreditlossesdeterminedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStates.IncometaxesareassessedtoeachlineofbusinessatastandardtaxratewiththeresidualtaxexpenseorbenefittoarriveattheconsolidatedeffectivetaxrateincludedinTreasuryandCorporateSupport.Designations,assignmentsandallocationschangefromtimetotimeasmanagementsystemsareenhanced,methodsofevaluatingperformanceorproductlineschangeorbusinesssegmentsarerealignedtobetterrespondtotheCompany’sdiversecustomerbase.During2007,certainorganizationandmethodologychangesweremadeand,56U.S.BANCORPaccordingly,2006resultswererestatedandpresentedonacomparablebasis.Duetoorganizationalandmethodologychanges,theCompany’sbasisoffinancialpresentationdifferedin2005.Thepresentationofcomparativebusinesslineresultsfor2005isnotpracticalandhasnotbeenprovided.WholesaleBankingWholesaleBankingofferslending,equipmentfinanceandsmall-ticketleasing,depository,treasurymanagement,capitalmarkets,foreignexchange,internationaltradeservicesandotherfinancialservicestomiddlemarket,largecorporate,commercialrealestate,andpublicsectorclients.WholesaleBankingcontributed$1,093millionoftheCompany’snetincomein2007,adecreaseof$100million(8.4percent),comparedwith2006.Thedecreasewasprimarilydrivenbylowertotalnetrevenue,highertotalnoninterestexpenseandanincreaseintheprovisionforcreditlosses.Totalnetrevenuedecreased$72million(2.6percent)in2007,comparedwith2006.Netinterestincome,onataxable-equivalentbasis,decreased$81million(4.2percent)in2007,comparedwith2006,drivenbytightercreditspreadsandadeclineinaveragenoninterest-bearingdepositbalancesasbusinesscustomersmanagedtheirliquiditytofundbusinessgrowthortogeneratehigherreturnsbyinvestingexcessfundsininterest-bearingdepositandsweepproducts.Thedecreasewaspartiallyoffsetbygrowthinaverageloanbalancesof$1.3billion(2.6percent)andthemarginbenefitofdeposits.Theincreaseinaverageloanswasprimarilydrivenbycommercialloangrowthduring2007offsetsomewhatbydecliningcommercialrealestateloanbalances.The$9million(1.0percent)increaseinnoninterestincomein2007,comparedwith2006,wasduetoincreasesintreasurymanagementandcommercialproductsrevenue.Thesefavorableincreasesinwholesalebankingfeeswerepartiallyoffsetbymarket-relatedvaluationlossesinthesecondhalfof2007.Noninterestexpenseincreased$39million(4.2percent)in2007comparedwith2006,primarilyasaresultofincreasesinpersonnelexpensesrelatedtoinvestmentsinselectbusinessunits.Theprovisionforcreditlossesincreased$47millionto$51millionin2007,comparedwith$4millionin2006.Theunfavorablechangewasduetoanincreaseingrosscharge-offsdrivenbyhigherlevelsofnonperformingloansfromayearago.Nonperformingassetswere$334millionatDecember31,2007,comparedwith$241millionatDecember31,2006,representing.60percentofloansoutstandingatDecember31,2007,comparedwith.47percentofloansoutstandingatDecember31,2006.Theincreaseinnonperformingloansduringtheyearisprincipallyrelatedtocontinuedstressinresidentialhomebuildingandrelatedindustrysectors.Refertothe“CorporateRiskProfile”sectionforfurtherinformationonfactorsimpactingthecreditqualityofthecommercialandcommercialrealestateloanportfolios.ConsumerBankingConsumerBankingdeliversproductsandservicesthroughbankingoffices,telephoneservicingandsales,on-lineservices,directmailandATMs.Itencompassescommunitybanking,metropolitanbanking,in-storebanking,smallbusinessbanking,consumerlending,mortgagebanking,consumerfinance,workplacebanking,studentbankingand24-hourbanking.ConsumerBankingcontributed$1,746millionoftheCompany’snetincomein2007,adecreaseof$45million(2.5percent),comparedwith2006.WithintheConsumerBankingbusiness,theretailbankingdivisioncontributed$1,641millionofthetotalnetincomein2007,oradecreaseof4.7percent,comparedwith2006.Mortgagebankingcontributed$105millionofthebusinessline’snetincomein2007,anincreaseof52.2percentfromtheprioryear.Totalnetrevenueincreased$148million(2.7percent)in2007,comparedwith2006.Netinterestincome,onataxable-equivalentbasis,increased$24million(.6percent)in2007,comparedwith2006.Theyear-over-yearincreaseinnetinterestincomewasduetogrowthinaverageloansof$3.1billion(4.3percent),higherloanfeesandthefundingbenefitofdeposits.PartiallyoffsettingtheseincreaseswerereducedspreadsoncommercialandretailloansduetocompetitivepricingwithintheCompany’smarketsandlowernoninterestbearingdepositbalances.Theincreaseinaverageloanbalancesreflectedstronggrowthinallloancategories,withthelargestincreaseinretailloans.Thefavorablechangeinretailloanswasprincipallydrivenbyanincreaseininstallmentandhomeequityloans,partiallyoffsetbyareductioninretailleasingbalancesduetocustomerdemandforinstallmentloanproductsandpricingcompetition.Theyear-over-yeardecreaseinaveragedepositsreflectedareductioninsavingsandnoninterest-bearingdepositproducts,offsetsomewhatbygrowthintimedepositsandinterestchecking.Averagetimedepositbalancesgrew$1.5billion(7.8percent)in2007,comparedwiththeprioryear,asaportionofnoninterest-bearingandmoneymarketbalancesmigratedtofixed-ratetimedepositproducts.Averagesavingsbalancesdeclined$1.7billion(8.0percent)in2007,comparedwith2006,principallyrelatedtoadecreaseinmoneymarketaccountbalances.Fee-basednoninterestincomeincreased$124million(7.3percent)in2007,comparedwith2006,drivenbygrowthinmortgagebankingrevenueandanincreaseindepositservicecharges.Mortgagebankingrevenuegrewduetogainsfromstrongerloanproductionandhigherservicingincomein2007,aswellastheimpactofadoptingfairvalueaccountingforMSRsinthefirstquarterof2006.Thegrowthindepositserviceschargeswasmutedsomewhatfrompastexperienceasdepositaccount-relatedrevenuetraditionallyreflectedinU.S.BANCORP57depositservicecharges,continuedtomigratetoyield-relatedloanfeesascustomersutilizednewconsumerproducts.Totalnoninterestexpenseincreased$138million(5.5percent)in2007,comparedwiththeprioryear.Theincreasewasprimarilyattributabletohighercompensationandemployeebenefitsexpensewhichreflectedbusinessinvestmentsincustomerserviceandvariouspromotionalactivities,includingfurtherdeploymentofthePowerBankinitiative.Additionally,theincreaseincludedthenetadditionof23in-storeand23traditionalbranchesduring2007andhighercreditrelatedcostsassociatedwithcollectionactivitiesandotherrealestateowned.Theprovisionforcreditlossesincreased$82million(33.1percent)in2007,comparedwith2006.Theincreasewasattributabletohighernetcharge-offsdrivenbyanincreaseinnonperformingassetsof15.5percentfromayearago.Asapercentageofaverageloansoutstanding,netcharge-offsincreasedto.44percentin2007,comparedwith.35percentin2006.Commercialandcommercialrealestateloannetcharge-offsincreased$13millionandretailloanandresidentialmortgagecharge-offsincreased$69millionin2007,comparedwith2006.Nonperformingassetswere$327millionatDecember31,2007,comparedwith$283millionatDecember31,2006,representing.45percentofloansoutstandingatDecember31,2007,comparedwith.40percentofloansoutstandingatDecember31,2006.Refertothe“CorporateRiskProfile”sectionforfurtherinformationonfactorsimpactingthecreditqualityoftheloanportfolios.WealthManagement&SecuritiesServicesWealthManagement&SecuritiesServicesprovidestrust,private58U.S.BANCORPTable23LINEOFBUSINESSFINANCIALPERFORMANCEYearEndedDecember31(DollarsinMillions)20072006PercentChange20072006PercentChangeWholesaleBankingConsumerBankingCondensedIncomeStatementNetinterestincome(taxable-equivalentbasis)....................$1,830$1,911(4.2)%$3,905$3,881.6%Noninterestincome......................................9018812.31,8201,6987.2Securitiesgains(losses),net...............................–11*2–*Totalnetrevenue.....................................2,7312,803(2.6)5,7275,5792.7Noninterestexpense.....................................9459064.32,6012,4665.5Otherintangibles.......................................1616–51486.3Totalnoninterestexpense...............................9619224.22,6522,5145.5Incomebeforeprovisionandincometaxes..................1,7701,881(5.9)3,0753,065.3Provisionforcreditlosses..................................514*33024833.1Incomebeforeincometaxes................................1,7191,877(8.4)2,7452,817(2.6)Incometaxesandtaxable-equivalentadjustment..................626684(8.5)9991,026(2.6)Netincome...........................................$1,093$1,193(8.4)$1,746$1,791(2.5)AverageBalanceSheetCommercial...........................................$35,013$33,3545.0%$6,420$6,3571.0%Commercialrealestate...................................16,78817,196(2.4)11,06410,7972.5Residentialmortgages....................................755633.921,55220,5345.0Retail...............................................684551.135,78034,0675.0Totalloans.........................................51,94450,6512.674,81671,7554.3Goodwill.............................................1,3291,329–2,2152,1313.9Otherintangibleassets...................................3853(28.3)1,6361,45012.8Assets..............................................57,08556,0761.885,54981,5974.8Noninterest-bearingdeposits................................10,52911,698(10.0)12,01412,654(5.1)Interestchecking.......................................5,2783,52349.817,71817,597.7Savingsproducts.......................................5,5165,498.319,41021,101(8.0)Timedeposits.........................................11,26212,402(9.2)20,09818,6387.8Totaldeposits.......................................32,58533,121(1.6)69,24069,990(1.1)Shareholders’equity.....................................5,7905,6901.86,4116,451(.6)*Notmeaningfulbanking,financialadvisory,investmentmanagement,retailbrokerageservices,insurance,custodyandmutualfundservicingthroughfivebusinesses:WealthManagement,CorporateTrust,FAFAdvisors,InstitutionalTrustandCustodyandFundServices.During2007,WealthManagement&SecuritiesServicescontributed$592millionoftheCompany’snetincome,adecreaseof$5million(.8percent)comparedwith2006.ThedecreasewasprimarilyattributedtovaluationlossesrelatedtosecuritiespurchasedfromcertainmoneymarketfundsmanagedbyFAFAdvisors.Thedecreasewaspartiallyoffsetbycoreaccountfeegrowthandimprovedequitymarketconditionsrelativetoayearago.Totalnetrevenueincreased$4million(.2percent)in2007,comparedwith2006.Netinterestincome,onataxable-equivalentbasis,decreased$6million(1.2percent)fromtheprioryear.Thedecreaseinnetinterestincomewasduetotheunfavorableimpactsofdepositpricingandtighteningcreditspreads,partiallyoffsetbyearningsfromdepositgrowth.Theincreaseintotaldepositswasattributabletogrowthinnoninterest-bearingdeposits,interestcheckingandtimedeposits,principallyduetoacquiredbusinessesandgrowthrelatedtobroker-dealerandinstitutionaltrustcustomers.Noninterestincomeincreased$10million(.7percent)in2007,comparedwith2006,primarilydrivenbycoreaccountfeegrowthandfavorableequitymarketconditions.Strongorganicgrowthof8.1percentwassubstantiallyoffsetbythe$107millionofvaluationlossesrealizedbythislineofbusinessin2007.Totalnoninterestexpenseincreased$9million(.9percent)in2007,comparedwith2006,primarilyduetothecompletionofcertainacquisitionintegrationactivities.U.S.BANCORP5920072006PercentChange20072006PercentChange20072006PercentChange20072006PercentChangeWealthManagement&SecuritiesServicesPaymentServicesTreasuryandCorporateSupportConsolidatedCompany$501$507(1.2)%$738$65812.2%$(210)$(167)(25.7)%$6,764$6,790(.4)%1,4561,446.72,9362,57913.844228(80.7)7,1576,8324.8––––––133*15147.11,9571,953.23,6743,23713.5(153)64*13,93613,6362.2932926.61,3621,23210.6646295*6,4865,82511.391883.42182037.4–––3763555.91,0231,014.91,5801,43510.1646295*6,8626,18011.0934939(.5)2,0941,80216.2(799)(231)*7,0747,456(5.1)23(33.3)40428442.355–79254445.6932936(.4)1,6901,51811.3(804)(236)*6,2826,912(9.1)340339.361555211.4(622)(440)(41.4)1,9582,161(9.4)$592$597(.8)$1,075$96611.3$(182)$204*$4,324$4,751(9.0)$2,027$1,79612.9%$4,216$3,80010.9%$136$1332.3%$47,812$45,4405.2%678702(3.4)–––6265(4.6)28,59228,760(.6)454459(1.1)–––44–22,08521,0534.92,3562,413(2.4)10,6168,77920.93944(11.4)48,85945,3487.75,5155,3702.714,83212,57917.9241246(2.0)147,348140,6014.81,5541,40011.02,4942,4262.883*7,6007,2894.3414472(12.3)1,0931,125(2.8)123*3,1933,1032.98,0577,8063.220,38917,45616.852,54150,5773.9223,621213,5124.74,3173,9908.241334121.1917226.427,36428,755(4.8)3,1062,42628.0124*3250.026,11723,55210.95,6385,618.4211910.5533076.730,63832,266(5.0)3,7792,90130.34333.31,8132,072(12.5)36,95636,0162.616,84014,93512.845036722.61,9602,176(9.9)121,075120,589.42,4672,3694.14,8744,6774.21,4551,523(4.5)20,99720,7101.4PaymentServicesPaymentServicesincludesconsumerandbusinesscreditcards,stored-valuecards,debitcards,corporateandpurchasingcardservices,consumerlinesofcredit,ATMprocessingandmerchantprocessing.PaymentServicesarehighlyinter-relatedwithbankingproductsandservicesoftheotherlinesofbusinessandrelyonaccesstothebanksubsidiary’ssettlementnetwork,lowercostfundingavailabletotheCompany,cross-sellingopportunitiesandoperatingefficiencies.PaymentServicescontributed$1,075millionoftheCompany’snetincomein2007,oranincreaseof$109million(11.3percent),comparedwith2006.Theincreasewasduetogrowthintotalnetrevenue,drivenbyloangrowthandhighertransactionvolumes,partiallyoffsetbyanincreaseintotalnoninterestexpenseandahigherprovisionforcreditlosses.Totalnetrevenueincreased$437million(13.5percent)in2007,comparedwith2006.The2007increaseinnetinterestincomeof$80million(12.2percent),comparedwiththeprioryear,wasduetogrowthinhigheryieldingretailcreditcardloanbalances,partiallyoffsetbythemarginimpactofmerchantreceivablesandgrowthincorporatepaymentcardbalances.Theincreaseinfee-basedrevenueof$357million(13.8percent)in2007wasdrivenbyorganicaccountgrowth,highersalestransactionvolumesandbusinessexpansioninitiatives.Creditanddebitcardrevenuewashigherduetoanincreaseincustomeraccountsandbalancetransfers,highercustomertransactionvolumes,afavorableratechangefromrenegotiatingacontractwithacardholderassociationandanincreaseincashadvanceandprepaidcardfeesfromayearago.Corporatepaymentproductsrevenueincreased,reflectingorganicgrowthinsalesvolumesandcardusage,andtheimpactofanacquiredbusiness.Merchantprocessingservicesrevenuegrew14.1percentdomesticallyand17.6percentintheEuropeanbusinessdivisioncomparedwithayearago.Thisorganicgrowthwasduetoanincreaseinthenumberofmerchantsserviced,salestransactionsandrelatedsalesvolumesandmerchantequipmentandotherrelatedfees.Totalnoninterestexpenseincreased$145million(10.1percent)in2007,comparedwith2006,dueprimarilytooperatingcoststosupportorganicgrowth,highercollectioncostsandinvestmentsinnewbusinessinitiatives,includingcostsassociatedwithmarketingprogramsandacquisitions.Theprovisionforcreditlossesincreased$120million(42.3percent)in2007,comparedwith2006,duetohighernetcharge-offs,whichreflectedaverageretailcreditcardportfoliogrowthof25.4percentandsomewhathigherdelinquencyratesfromayearago.Asapercentageofaverageloansoutstanding,netcharge-offswere2.72percentin2007,comparedwith2.26percentin2006.TreasuryandCorporateSupportTreasuryandCorporateSupportincludestheCompany’sinvestmentportfolios,funding,capitalmanagementandassetsecuritizationactivities,interestrateriskmanagement,theneteffectoftransferpricingrelatedtoaveragebalancesandtheresidualaggregateofthoseexpensesassociatedwithcorporateactivitiesthataremanagedonaconsolidatedbasis.During2007,TreasuryandCorporateSupportrecordedanetlossof$182million,comparedwithnetincomein2006of$204million.Totalnetrevenuedecreased$217millionin2007,comparedwith2006,primarilyduetoadecreaseinbothnetinterestincomeandnoninterestincomefromayearago.Thedeclineinnetinterestincomereflectedtheimpactofissuinghighercostwholesalefundingtosupportearningassetgrowth.Thedecreaseinnoninterestincomewasprimarilyduetogainsrecognizedin2006relatedtotheinitialpublicofferingandsubsequentsaleofequityinterestsinacardholderassociation,tradinggainsrealizedrelatedtoterminatingcertaininterestratederivatives,andagainrelatedtothesaleofa401(k)recordkeepingbusiness.Totalnoninterestexpenseincreased$351millionin2007,comparedwith2006.Theyear-over-yearincreasewasprimarilydrivenbya$330millionchargerelatedtoacontingentobligationforcertainVisaU.S.A.Inc.litigation,includingthesettlementbetweenVisaU.S.A.IncandAmericanExpressannouncedinthethirdquarterof2007.TheprovisionforcreditlossesforthisbusinessunitrepresentstheresidualaggregateofthenetcreditlossesallocatedtothereportablebusinessunitsandtheCompany’srecordedprovisiondeterminedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStates.Refertothe“CorporateRiskProfile”sectionforfurtherinformationontheprovisionforcreditlosses,nonperformingassetsandfactorsconsideredbytheCompanyinassessingthecreditqualityoftheloanportfolioandestablishingtheallowanceforcreditlosses.Incometaxesareassessedtoeachlineofbusinessatamanagerialtaxrateof36.4percentwiththeresidualtaxexpenseorbenefittoarriveattheconsolidatedeffectivetaxrateincludedinTreasuryandCorporateSupport.TheconsolidatedeffectivetaxrateoftheCompanywas30.3percentin2007,comparedwith30.8percentin2006.Thedecreaseintheeffectivetaxratefrom2006primarilyreflectedhighertaxexemptincomefrominvestmentsecuritiesandinsuranceproductsaswellasincrementaltaxcreditsfromaffordablehousingandothertax-advantagedinvestments.60U.S.BANCORPACCOUNTINGCHANGESNote2oftheNotestoConsolidatedFinancialStatementsdiscussesaccountingstandardsadoptedinthecurrentyear,aswellas,accountingstandardsrecentlyissuedbutnotyetrequiredtobeadoptedandtheexpectedimpactofthesechangesinaccountingstandards.TotheextenttheadoptionofnewaccountingstandardsaffectstheCompany’sfinancialcondition,resultsofoperationsorliquidity,theimpactsarediscussedintheapplicablesection(s)oftheManagement’sDiscussionandAnalysisandtheNotestoConsolidatedFinancialStatements.CRITICALACCOUNTINGPOLICIESTheaccountingandreportingpoliciesoftheCompanycomplywithaccountingprinciplesgenerallyacceptedintheUnitedStatesandconformtogeneralpracticeswithinthebankingindustry.Thepreparationoffinancialstatementsinconformitywithgenerallyacceptedaccountingprinciplesrequiresmanagementtomakeestimatesandassumptions.Thefinancialpositionandresultsofoperationscanbeaffectedbytheseestimatesandassumptions,whichareintegraltounderstandingtheCompany’sfinancialstatements.CriticalaccountingpoliciesarethosepoliciesthatmanagementbelievesarethemostimportanttotheportrayaloftheCompany’sfinancialconditionandresults,andrequiremanagementtomakeestimatesthataredifficult,subjectiveorcomplex.Mostaccountingpoliciesarenotconsideredbymanagementtobecriticalaccountingpolicies.Severalfactorsareconsideredindeterminingwhetherornotapolicyiscriticalinthepreparationoffinancialstatements.Thesefactorsinclude,amongotherthings,whethertheestimatesaresignificanttothefinancialstatements,thenatureoftheestimates,theabilitytoreadilyvalidatetheestimateswithotherinformationincludingthird-partiesoravailableprices,andsensitivityoftheestimatestochangesineconomicconditionsandwhetheralternativeaccountingmethodsmaybeutilizedundergenerallyacceptedaccountingprinciples.ManagementhasdiscussedthedevelopmentandtheselectionofcriticalaccountingpolicieswiththeCompany’sAuditCommittee.SignificantaccountingpoliciesarediscussedinNote1oftheNotestoConsolidatedFinancialStatements.Thosepoliciesconsideredtobecriticalaccountingpoliciesaredescribedbelow.AllowanceforCreditLossesTheallowanceforcreditlossesisestablishedtoprovideforprobablelossesinherentintheCompany’screditportfolio.Themethodsutilizedtoestimatetheallowanceforcreditlosses,keyassumptionsandquantitativeandqualitativeinformationconsideredbymanagementindeterminingtheadequacyoftheallowanceforcreditlossesarediscussedinthe“CreditRiskManagement”section.Management’sevaluationoftheadequacyoftheallowanceforcreditlossesisoftenthemostcriticalofaccountingestimatesforabankinginstitution.ItisaninherentlysubjectiveprocessimpactedbymanyfactorsasdiscussedthroughouttheManagement’sDiscussionandAnalysissectionoftheAnnualReport.Althoughriskmanagementpractices,methodologiesandothertoolsareutilizedtodetermineeachelementoftheallowance,degreesofimprecisionexistinthesemeasurementtoolsdueinparttosubjectivejudgmentsinvolvedandaninherentlaggingofcreditqualitymeasurementsrelativetothestageofthebusinesscycle.Evendeterminingthestageofthebusinesscycleishighlysubjective.Asdiscussedinthe“AnalysisandDeterminationofAllowanceforCreditLosses”section,managementconsiderstheeffectofimprecisionandmanyotherfactorsindeterminingtheallowanceforcreditlosses.Ifnotconsidered,inherentlossesintheportfoliorelatedtoimprecisionandothersubjectivefactorscouldhaveadramaticadverseimpactontheliquidityandfinancialviabilityofabank.Giventhemanysubjectivefactorsaffectingthecreditportfolio,changesintheallowanceforcreditlossesmaynotdirectlycoincidewithchangesintheriskratingsofthecreditportfolioreflectedintheriskratingprocess.Thisisinpartduetothetimingoftheriskratingprocessinrelationtochangesinthebusinesscycle,theexposureandmixofloanswithinriskratingcategories,levelsofnonperformingloansandthetimingofcharge-offsandrecoveries.Forexample,theamountofloanswithinspecificriskratingsmaychange,providingaleadingindicatorofimprovingcreditquality,whilenonperformingloansandnetcharge-offscontinueatelevatedlevels.Also,inherentlossratios,determinedthroughmigrationanalysisandhistoricallossperformanceovertheestimatedbusinesscycleofaloan,maynotchangetothesamedegreeasnetcharge-offs.Becauseriskratingsandinherentlossratiosprimarilydrivetheallowancespecificallyallocatedtocommercialloans,theamountoftheallowanceforcommercialandcommercialrealestateloansmightdecline;however,thedegreeofchangedifferssomewhatfromthelevelofchangesinnonperformingloansandnetcharge-offs.Also,managementwouldmaintainanadequateallowanceforcreditlossesbyincreasingtheallowanceduringperiodsofeconomicuncertaintyorchangesinthebusinesscycle.Somefactorsconsideredindeterminingtheadequacyoftheallowanceforcreditlossesarequantifiablewhileotherfactorsrequirequalitativejudgment.Managementconductsananalysiswithrespecttotheaccuracyofriskratingsandthevolatilityofinherentlosses,andutilizesU.S.BANCORP61thisanalysisalongwithqualitativefactors,includinguncertaintyintheeconomyfromchangesinunemploymentrates,thelevelofbankruptciesandconcentrationrisks,includingrisksassociatedwiththeweakenedhousingmarketandhighlyleveragedenterprise-valuecredits,indeterminingtheoverallleveloftheallowanceforcreditlosses.TheCompany’sdeterminationoftheallowanceforcommercialandcommercialrealestateloansissensitivetotheassignedcreditriskratingsandinherentlossratesatDecember31,2007.Intheeventthat10percentofloanswithintheseportfoliosexperienceddowngradesoftworiskcategories,theallowanceforcommercialandcommercialrealestatewouldincreasebyapproximately$168millionatDecember31,2007.Intheeventthatinherentlossorestimatedlossratesfortheseportfoliosincreasedby10percent,theallowancedeterminedforcommercialandcommercialrealestatewouldincreasebyapproximately$95millionatDecember31,2007.TheCompany’sdeterminationoftheallowanceforresidentialandretailloansissensitivetochangesinestimatedlossrates.Intheeventthatestimatedlossratesincreasedby10percent,theallowanceforresidentialmortgagesandretailloanswouldincreasebyapproximately$82millionatDecember31,2007.Becauseseveralquantitativeandqualitativefactorsareconsideredindeterminingtheallowanceforcreditlosses,thesesensitivityanalysesdonotnecessarilyreflectthenatureandextentoffuturechangesintheallowanceforcreditlosses.Theyareintendedtoprovideinsightsintotheimpactofadversechangesinriskratingandinherentlossesanddonotimplyanyexpectationoffuturedeteriorationintheriskratingorlossrates.GivencurrentprocessesemployedbytheCompany,managementbelievestheriskratingsandinherentlossratescurrentlyassignedareappropriate.Itispossiblethatothers,giventhesameinformation,mayatanypointintimereachdifferentreasonableconclusionsthatcouldbesignificanttotheCompany’sfinancialstatements.Refertothe“AnalysisandDeterminationoftheAllowanceforCreditLosses”sectionforfurtherinformation.EstimationsofFairValueAportionoftheCompany’sassetsandliabilitiesarecarriedatfairvalueontheConsolidatedBalanceSheet,withchangesinfairvaluerecordedeitherthroughearningsorothercomprehensiveincomeinaccordancewithapplicableaccountingprinciplesgenerallyacceptedintheUnitedStates.TheseincludealloftheCompany’stradingsecurities,available-for-salesecurities,derivativesandMSRs.Theestimationoffairvaluealsoaffectsloansheld-for-sale,whicharerecordedatthelowerofcostorfairvalue.Thedeterminationoffairvalueisimportantforcertainotherassets,includinggoodwillandotherintangibleassets,impairedloans,otherrealestateownedandotherrepossessedassets,thatarerecordedateitherfairvalueorfairvaluelesscosts-to-sellwhenacquired,andareperiodicallyevaluatedforimpairmentusingfairvalueestimates.Fairvalueisgenerallydefinedastheamountatwhichanassetorliabilitycouldbeexchangedinacurrenttransactionbetweenwilling,unrelatedparties,otherthaninaforcedorliquidationsale.Fairvalueisbasedonquotedmarketpricesinanactivemarket,orifmarketpricesarenotavailable,isestimatedusingmodelsemployingtechniquessuchasmatrixpricingordiscountingexpectedcashflows.Thesignificantassumptionsusedinthemodels,whichincludeassumptionsforinterestrates,discountrates,prepaymentsandcreditlosses,areindependentlyverifiedagainstobservablemarketdatawherepossible.Whereobservablemarketdataisnotavailable,theestimateoffairvaluebecomesmoresubjectiveandinvolvesahighdegreeofjudgment.Inthiscircumstance,fairvalueisestimatedbasedonmanagement’sjudgmentregardingthevaluethatmarketparticipantswouldassigntotheassetorliability.Thisvaluationprocesstakesintoconsiderationfactorssuchasmarketilliquidity.Imprecisioninestimatingthesefactorscanimpacttheamountrecordedonthebalancesheetforaparticularassetorliabilitywithrelatedimpactstoearningsorothercomprehensiveincome.Tradingandavailable-for-salesecuritiesaregenerallyvaluedbasedonquotedmarketprices.However,certainsecuritiesaretradedlessactivelyandtherefore,maynotbeabletobevaluedbasedonquotedmarketprices.Thedeterminationoffairvaluemayrequirebenchmarkingtosimilarinstrumentsorperformingadiscountedcashflowanalysisusingestimatesoffuturecashflowsandprepayment,interestanddefaultrates.Anexampleisinterestsheldinentitiescollateralizedbymortgageand/ordebtobligationsaspartofastructuredinvestment.Formoreinformationoninvestmentsecurities,refertoNote4oftheNotestoConsolidatedFinancialStatements.Asfewderivativecontractsarelistedonanexchange,themajorityoftheCompany’sderivativepositionsarevaluedusingvaluationtechniquesthatusereadilyobservablemarketparameters.Certainderivatives,however,mustbevaluedusingtechniquesthatincludeunobservableparameters.Fortheseinstruments,thesignificantassumptionsmustbeestimatedandtherefore,aresubjecttojudgment.Theseinstrumentsarenormallytradedlessactively.Anexampleincludescertainlong-datedinterestrateswaps.Table18providesasummaryoftheCompany’sderivativepositions.MortgageServicingRightsMortgageservicingrightsarecapitalizedasseparateassetswhenloansaresoldandservicingisretainedormaybepurchasedfromothers.MSRsareinitiallyrecordedatfairvalueandateachsubsequentreportingdate.BecauseMSRsdonottradeinanactive62U.S.BANCORPmarketwithreadilyobservableprices,theCompanydeterminesthefairvaluebyestimatingthepresentvalueoftheasset’sfuturecashflowsutilizingmarket-basedprepaymentrates,discountrates,andotherassumptionsvalidatedthroughcomparisontotradeinformation,industrysurveysandindependentthirdpartyappraisals.ChangesinthefairvalueofMSRsarerecordedinearningsduringtheperiodinwhichtheyoccur.RisksinherentintheMSRsvaluationincludehigherthanexpectedprepaymentratesand/ordelayedreceiptofcashflows.TheCompanymayutilizederivatives,includingfuturesandoptionscontractstomitigatethevaluationrisk.TheestimatedsensitivitytochangesininterestratesofthefairvalueoftheMSRsportfolioandtherelatedderivativeinstrumentsatDecember31,2007,toanimmediate25and50basispointdownwardmovementininterestrateswouldbeanincreaseofapproximately$1millionandadecreaseofapproximately$8million,respectively.AnupwardmovementininterestratesatDecember31,2007,of25and50basispointswoulddecreasethevalueoftheMSRsandrelatedderivativeinstrumentsbyapproximately$14millionand$49million,respectively.RefertoNote9oftheNotestoConsolidatedFinancialStatementsforadditionalinformationregardingMSRs.GoodwillandOtherIntangiblesTheCompanyrecordsallassetsandliabilitiesacquiredinpurchaseacquisitions,includinggoodwillandotherintangibles,atfairvalue.Goodwillandindefinite-livedassetsarenotamortizedbutaresubject,ataminimum,toannualtestsforimpairment.Undercertainsituations,interimimpairmenttestsmayberequiredifeventsoccurorcircumstanceschangethatwouldmorelikelythannotreducethefairvalueofareportingsegmentbelowitscarryingamount.Otherintangibleassetsareamortizedovertheirestimatedusefullivesusingstraight-lineandacceleratedmethodsandaresubjecttoimpairmentifeventsorcircumstancesindicateapossibleinabilitytorealizethecarryingamount.Theinitialrecognitionofgoodwillandotherintangibleassetsandsubsequentimpairmentanalysisrequiremanagementtomakesubjectivejudgmentsconcerningestimatesofhowtheacquiredassetswillperforminthefutureusingvaluationmethodsincludingdiscountedcashflowanalysis.Additionally,estimatedcashflowsmayextendbeyondtenyearsand,bytheirnature,aredifficulttodetermineoveranextendedtimeframe.Eventsandfactorsthatmaysignificantlyaffecttheestimatesinclude,amongothers,competitiveforces,customerbehaviorsandattrition,changesinrevenuegrowthtrends,coststructures,technology,changesindiscountratesandspecificindustryandmarketconditions.Indeterminingthereasonablenessofcashflowestimates,theCompanyreviewshistoricalperformanceoftheunderlyingassetsorsimilarassetsinanefforttoassessandvalidateassumptionsutilizedinitsestimates.Inassessingthefairvalueofreportingunits,theCompanymayconsiderthestageofthecurrentbusinesscycleandpotentialchangesinmarketconditionsinestimatingthetimingandextentoffuturecashflows.Also,managementoftenutilizesotherinformationtovalidatethereasonablenessofitsvaluationsincludingpublicmarketcomparables,andmultiplesofrecentmergersandacquisitionsofsimilarbusinesses.Valuationmultiplesmaybebasedonrevenue,price-to-earningsandtangiblecapitalratiosofcomparablepubliccompaniesandbusinesssegments.Thesemultiplesmaybeadjustedtoconsidercompetitivedifferencesincludingsize,operatingleverageandotherfactors.Thecarryingamountofareportingunitisdeterminedbasedonthecapitalrequiredtosupportthereportingunit’sactivitiesincludingitstangibleandintangibleassets.Thedeterminationofareportingunit’scapitalallocationrequiresmanagementjudgmentandconsidersmanyfactorsincludingtheregulatorycapitalregulationsandcapitalcharacteristicsofcomparablepubliccompaniesinrelevantindustrysectors.Incertaincircumstances,managementwillengageathird-partytoindependentlyvalidateitsassessmentofthefairvalueofitsbusinesssegments.TheCompany’sannualassessmentofpotentialgoodwillimpairmentwascompletedduringthesecondquarterof2007.Basedontheresultsofthisassessment,nogoodwillimpairmentwasrecognized.IncomeTaxesTheCompanyestimatesincometaxexpensebasedonamountsexpectedtobeowedtovarioustaxjurisdictions.Currently,theCompanyfilestaxreturnsinapproximately144federal,stateandlocaldomesticjurisdictionsand13foreignjurisdictions.TheestimatedincometaxexpenseisreportedintheConsolidatedStatementofIncome.AccruedtaxesrepresentthenetestimatedamountdueortobereceivedfromtaxingjurisdictionseithercurrentlyorinthefutureandarereportedinotherassetsorotherliabilitiesontheConsolidatedBalanceSheet.Inestimatingaccruedtaxes,theCompanyassessestherelativemeritsandrisksoftheappropriatetaxtreatmentconsideringstatutory,judicialandregulatoryguidanceinthecontextofthetaxposition.Becauseofthecomplexityoftaxlawsandregulations,interpretationcanbedifficultandsubjecttolegaljudgmentgivenspecificfactsandcircumstances.Itispossiblethatothers,giventhesameinformation,mayatanypointintimereachdifferentreasonableconclusionsregardingtheestimatedamountsofaccruedtaxes.Changesintheestimateofaccruedtaxesoccurperiodicallyduetochangesintaxrates,interpretationsoftaxlaws,thestatusofexaminationsbeingconductedbyU.S.BANCORP63varioustaxingauthorities,andnewlyenactedstatutory,judicialandregulatoryguidancethatimpacttherelativemeritsandrisksoftaxpositions.Thesechanges,whentheyoccur,affectaccruedtaxesandcanbesignificanttotheoperatingresultsoftheCompany.RefertoNote18oftheNotestoConsolidatedFinancialStatementsforadditionalinformationregardingincometaxes.CONTROLSANDPROCEDURESUnderthesupervisionandwiththeparticipationoftheCompany’smanagement,includingitsprincipalexecutiveofficerandprincipalfinancialofficer,theCompanyhasevaluatedtheeffectivenessofthedesignandoperationofitsdisclosurecontrolsandprocedures(asdefinedinRules13a-15(e)and15d-15(e)undertheSecuritiesExchangeActof1934(the“ExchangeAct”)).Baseduponthisevaluation,theprincipalexecutiveofficerandprincipalfinancialofficerhaveconcludedthat,asoftheendoftheperiodcoveredbythisreport,theCompany’sdisclosurecontrolsandprocedureswereeffective.Duringthemostrecentlycompletedfiscalquarter,therewasnochangemadeintheCompany’sinternalcontrolsoverfinancialreporting(asdefinedinRules13a-15(f)and15d-15(f)undertheExchangeAct)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theCompany’sinternalcontroloverfinancialreporting.TheannualreportoftheCompany’smanagementoninternalcontroloverfinancialreportingisprovidedonpage65.TheattestationreportofErnst&YoungLLP,theCompany’sindependentaccountants,regardingtheCompany’sinternalcontroloverfinancialreportingisprovidedonpage67.64U.S.BANCORPReportofManagementResponsibilityforthefinancialstatementsandotherinformationpresentedthroughoutthisAnnualReportrestswiththemanagementofU.S.Bancorp.TheCompanybelievesthattheconsolidatedfinancialstatementshavebeenpreparedinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesandpresentthesubstanceoftransactionsbasedonthecircumstancesandmanagement’sbestestimatesandjudgment.Inmeetingitsresponsibilitiesforthereliabilityofthefinancialstatements,managementisresponsibleforestablishingandmaintaininganadequatesystemofinternalcontroloverfinancialreportingasdefinedbyRules13a-15(f)and15d-15(f)undertheSecuritiesExchangeActof1934.TheCompany’ssystemofinternalcontrolsisdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationofpubliclyfiledfinancialstatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStates.Totestcompliance,theCompanycarriesoutanextensiveauditprogram.Thisprogramincludesareviewforcompliancewithwrittenpoliciesandproceduresandacomprehensivereviewoftheadequacyandeffectivenessoftheinternalcontrolsystem.Althoughcontrolproceduresaredesignedandtested,itmustberecognizedthattherearelimitsinherentinallsystemsofinternalcontroland,therefore,errorsandirregularitiesmayneverthelessoccur.Also,estimatesandjudgmentsarerequiredtoassessandbalancetherelativecostandexpectedbenefitsofthecontrols.Projectionofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.TheBoardofDirectorsoftheCompanyhasanAuditCommitteecomposedofdirectorswhoareindependentofU.S.Bancorp.Thecommitteemeetsperiodicallywithmanagement,theinternalauditorsandtheindependentaccountantstoconsiderauditresultsandtodiscussinternalaccountingcontrol,auditingandfinancialreportingmatters.ManagementassessedtheeffectivenessoftheCompany’sinternalcontrolsoverfinancialreportingasofDecember31,2007.Inmakingthisassessment,managementusedthecriteriasetforthbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissioninitsInternalControl-IntegratedFramework.Basedonourassessmentandthosecriteria,managementbelievesthattheCompanydesignedandmaintainedeffectiveinternalcontroloverfinancialreportingasofDecember31,2007.TheCompany’sindependentaccountants,Ernst&YoungLLP,havebeenengagedtorenderanindependentprofessionalopiniononthefinancialstatementsandissueanattestationreportontheCompany’ssystemofinternalcontroloverfinancialreporting.Theiropiniononthefinancialstatementsappearingonpage66andtheirattestationonthesystemofinternalcontrolsoverfinancialreportingappearingonpage67arebasedonproceduresconductedinaccordancewithauditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).U.S.BANCORP65ReportofIndependentRegisteredPublicAccountingFirmontheConsolidatedFinancialStatementsTheBoardofDirectorsandShareholdersofU.S.Bancorp:WehaveauditedtheaccompanyingconsolidatedbalancesheetsofU.S.BancorpasofDecember31,2007and2006,andtherelatedconsolidatedstatementsofincome,shareholders’equity,andcashflowsforeachofthethreeyearsintheperiodendedDecember31,2007.ThesefinancialstatementsaretheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.Inouropinion,thefinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,theconsolidatedfinancialpositionofU.S.BancorpatDecember31,2007and2006,andtheconsolidatedresultsofitsoperationsanditscashflowsforeachofthethreeyearsintheperiodendedDecember31,2007,inconformitywithU.S.generallyacceptedaccountingprinciples.Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),U.S.Bancorp’sinternalcontroloverfinancialreportingasofDecember31,2007,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissionandourreportdatedFebruary20,2008expressedanunqualifiedopinionthereon.Minneapolis,MinnesotaFebruary20,200866U.S.BANCORPReportofIndependentRegisteredPublicAccountingFirmonInternalControlOverFinancialReportingTheBoardofDirectorsandShareholdersofU.S.Bancorp:WehaveauditedU.S.Bancorp’sinternalcontroloverfinancialreportingasofDecember31,2007,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(theCOSOcriteria).U.S.Bancorp’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreporting,andforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreportingincludedintheaccompanyingReportofManagement.OurresponsibilityistoexpressanopinionontheCompany’sinternalcontroloverfinancialreportingbasedonouraudit.WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinion.Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.Inouropinion,U.S.Bancorpmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2007,basedontheCOSOcriteria.Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theconsolidatedbalancesheetsofU.S.BancorpasofDecember31,2007and2006,andtherelatedconsolidatedstatementsofincome,shareholders’equity,andcashflowsforeachofthethreeyearsintheperiodendedDecember31,2007andourreportdatedFebruary20,2008,expressedanunqualifiedopinionthereon.Minneapolis,MinnesotaFebruary20,2008U.S.BANCORP67U.S.BancorpConsolidatedBalanceSheetAtDecember31(DollarsinMillions)20072006AssetsCashandduefrombanks...........................................................$8,884$8,639InvestmentsecuritiesHeld-to-maturity(fairvalue$78and$92,respectively)......................................7487Available-for-sale...............................................................43,04240,030Loansheldforsale................................................................4,8193,256LoansCommercial..................................................................51,07446,190Commercialrealestate...........................................................29,20728,645Residentialmortgages...........................................................22,78221,285Retail.......................................................................50,76447,477Totalloans.................................................................153,827143,597Lessallowanceforloanlosses.................................................(2,058)(2,022)Netloans...............................................................151,769141,575Premisesandequipment............................................................1,7791,835Goodwill.......................................................................7,6477,538Otherintangibleassets.............................................................3,0433,227Otherassets....................................................................16,55813,045Totalassets................................................................$237,615$219,232LiabilitiesandShareholders’EquityDepositsNoninterest-bearing.............................................................$33,334$32,128Interest-bearing................................................................72,45870,330Timedepositsgreaterthan$100,000.................................................25,65322,424Totaldeposits...............................................................131,445124,882Short-termborrowings..............................................................32,37026,933Long-termdebt..................................................................43,44037,602Otherliabilities...................................................................9,3148,618Totalliabilities...............................................................216,569198,035Shareholders’equityPreferredstock,parvalue$1.00ashare(liquidationpreferenceof$25,000pershare)—authorized:50,000,000shares;issuedandoutstanding:2007and2006—40,000shares....................1,0001,000Commonstock,parvalue$0.01ashare—authorized:4,000,000,000shares;issued:2007and2006—1,972,643,007shares.........................................................2020Capitalsurplus................................................................5,7495,762Retainedearnings..............................................................22,69321,242Lesscostofcommonstockintreasury:2007—244,786,039shares;2006—207,928,756shares........(7,480)(6,091)Othercomprehensiveincome.......................................................(936)(736)Totalshareholders’equity.......................................................21,04621,197Totalliabilitiesandshareholders’equity..............................................$237,615$219,232SeeNotestoConsolidatedFinancialStatements.68U.S.BANCORPU.S.BancorpConsolidatedStatementofIncomeYearEndedDecember31(DollarsandSharesinMillions,ExceptPerShareData)200720062005InterestIncomeLoans..............................................................$10,627$9,873$8,306Loansheldforsale.....................................................277236181Investmentsecurities....................................................2,0952,0011,954Otherinterestincome...................................................137153110Totalinterestincome................................................13,13612,26310,551InterestExpenseDeposits............................................................2,7542,3891,559Short-termborrowings...................................................1,4331,203690Long-termdebt........................................................2,2601,9301,247Totalinterestexpense...............................................6,4475,5223,496Netinterestincome.....................................................6,6896,7417,055Provisionforcreditlosses.................................................792544666Netinterestincomeafterprovisionforcreditlosses................................5,8976,1976,389NoninterestIncomeCreditanddebitcardrevenue..............................................949800713Corporatepaymentproductsrevenue.........................................631557488ATMprocessingservices.................................................245243229Merchantprocessingservices..............................................1,101963770Trustandinvestmentmanagementfees.......................................1,3391,2351,009Depositservicecharges..................................................1,0581,023928Treasurymanagementfees................................................472441437Commercialproductsrevenue..............................................433415400Mortgagebankingrevenue................................................259192432Investmentproductsfeesandcommissions.....................................146150152Securitiesgains(losses),net..............................................1514(106)Other..............................................................524813593Totalnoninterestincome.............................................7,1726,8466,045NoninterestExpenseCompensation........................................................2,6402,5132,383Employeebenefits......................................................494481431Netoccupancyandequipment.............................................686660641Professionalservices....................................................233199166Marketingandbusinessdevelopment.........................................242217235Technologyandcommunications............................................512505466Postage,printingandsupplies..............................................283265255Otherintangibles.......................................................376355458Debtprepayment......................................................–3354Other..............................................................1,396952774Totalnoninterestexpense............................................6,8626,1805,863Incomebeforeincometaxes...............................................6,2076,8636,571Applicableincometaxes..................................................1,8832,1122,082Netincome..........................................................$4,324$4,751$4,489Netincomeapplicabletocommonequity.......................................$4,264$4,703$4,489PerCommonShareEarningspercommonshare...............................................$2.46$2.64$2.45Dilutedearningspercommonshare..........................................$2.43$2.61$2.42Dividendsdeclaredpercommonshare........................................$1.625$1.39$1.23Averagecommonsharesoutstanding.........................................1,7351,7781,831Averagedilutedcommonsharesoutstanding....................................1,7581,8041,857SeeNotestoConsolidatedFinancialStatements.U.S.BANCORP69U.S.BancorpConsolidatedStatementofShareholders’Equity(DollarsandSharesinMillions)CommonSharesOutstandingPreferredStockCommonStockCapitalSurplusRetainedEarningsTreasuryStockOtherComprehensiveIncomeTotalShareholders’EquityBalanceDecember31,2004....1,858$–$20$5,902$16,758$(3,125)$(16)$19,539Netincome...................4,4894,489Unrealizedlossonsecuritiesavailable-for-sale...................(539)(539)Unrealizedlossonderivatives......(58)(58)Foreigncurrencytranslation........33Realizedlossonderivatives........(74)(74)Reclassificationforrealizedlosses...3939Minimumpensionliability..........(38)(38)Incometaxes.................254254Totalcomprehensiveincome...4,076Cashdividendsdeclaredoncommonstock.....................(2,246)(2,246)Issuanceofcommonandtreasurystock.....................19(81)525444Purchaseoftreasurystock........(62)(1,807)(1,807)Stockoptionandrestrictedstockgrants....................8484Sharesreservedtomeetdeferredcompensationobligations.......2(6)(4)BalanceDecember31,2005....1,815$–$20$5,907$19,001$(4,413)$(429)$20,086Changeinaccountingprinciple......4(237)(233)Netincome...................4,7514,751Unrealizedgainonsecuritiesavailable-for-sale.............6767Unrealizedgainonderivatives......3535Foreigncurrencytranslation........(30)(30)Realizedlossonderivatives........(199)(199)Reclassificationforrealizedlosses...3333Changeinretirementobligation.....(18)(18)Incometaxes.................4242Totalcomprehensiveincome...4,681CashdividendsdeclaredPreferred..................(48)(48)Common..................(2,466)(2,466)Issuanceofpreferredstock........1,000(52)948Issuanceofcommonandtreasurystock.....................40(99)1,1441,045Purchaseoftreasurystock........(90)(2,817)(2,817)Stockoptionandrestrictedstockgrants....................44Sharesreservedtomeetdeferredcompensationobligations.......2(5)(3)BalanceDecember31,2006....1,765$1,000$20$5,762$21,242$(6,091)$(736)$21,197Netincome...................4,3244,324Unrealizedlossonsecuritiesavailable-for-sale...................(482)(482)Unrealizedlossonderivatives......(299)(299)Foreigncurrencytranslation........88Reclassificationforrealizedlosses...9696Changeinretirementobligation.....352352Incometaxes.................125125Totalcomprehensiveincome...4,124CashdividendsdeclaredPreferred..................(60)(60)Common..................(2,813)(2,813)Issuanceofcommonandtreasurystock.....................21(45)627582Purchaseoftreasurystock........(58)(2,011)(2,011)Stockoptionandrestrictedstockgrants....................3232Sharesreservedtomeetdeferredcompensationobligations.......(5)(5)BalanceDecember31,2007....1,728$1,000$20$5,749$22,693$(7,480)$(936)$21,046SeeNotestoConsolidatedFinancialStatements.70U.S.BANCORPU.S.BancorpConsolidatedStatementofCashFlowsYearEndedDecember31(DollarsinMillions)200720062005OperatingActivitiesNetincome.....................................................$4,324$4,751$4,489AdjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivitiesProvisionforcreditlosses.........................................792544666Depreciationandamortizationofpremisesandequipment...................243233231Amortizationofintangibles........................................376355458Provisionfordeferredincometaxes..................................(97)(3)(301)Gainonsalesofsecuritiesandotherassets,net.........................(570)(575)(316)Loansoriginatedforsaleinthesecondarymarket,netofrepayments...........(27,395)(22,231)(20,054)Proceedsfromsalesofloansheldforsale.............................25,38922,03519,490Other,net...................................................(460)320(1,186)Netcashprovidedbyoperatingactivities............................2,6025,4293,477InvestingActivitiesProceedsfromsalesofavailable-for-saleinvestmentsecurities..................2,1351,4415,039Proceedsfrommaturitiesofinvestmentsecurities...........................4,2115,01210,264Purchasesofinvestmentsecurities.....................................(9,816)(7,080)(13,148)Netincreaseinloansoutstanding......................................(8,015)(5,003)(9,095)Proceedsfromsalesofloans........................................421616837Purchasesofloans...............................................(2,599)(2,922)(3,568)Acquisitions,netofcashacquired.....................................(111)(600)(1,008)Other,net.....................................................(1,232)(313)(1,159)Netcashusedininvestingactivities...............................(15,006)(8,849)(11,838)FinancingActivitiesNetincrease(decrease)indeposits....................................6,255(392)3,968Netincreaseinshort-termborrowings...................................5,3716,6127,116Proceedsfromissuanceoflong-termdebt................................22,39514,25515,519Principalpaymentsorredemptionoflong-termdebt.........................(16,836)(13,120)(12,848)Proceedsfromissuanceofpreferredstock...............................–948–Proceedsfromissuanceofcommonstock................................427910371Repurchaseofcommonstock........................................(1,983)(2,798)(1,855)Cashdividendspaidonpreferredstock..................................(60)(33)–Cashdividendspaidoncommonstock..................................(2,785)(2,359)(2,245)Netcashprovidedbyfinancingactivities............................12,7844,02310,026Changeincashandcashequivalents..............................3806031,665Cashandcashequivalentsatbeginningofyear............................8,8058,2026,537Cashandcashequivalentsatendofyear...........................$9,185$8,805$8,202SupplementalCashFlowDisclosuresCashpaidforincometaxes..........................................$1,878$2,263$2,131Cashpaidforinterest..............................................6,3605,3393,365Netnoncashtransferstoforeclosedproperty..............................18014598AcquisitionsAssetsacquired...............................................$635$1,603$1,545Liabilitiesassumed.............................................(393)(899)(393)Net.....................................................$242$704$1,152SeeNotestoConsolidatedFinancialStatements.U.S.BANCORP71NotestoConsolidatedFinancialStatementsNote1SIGNIFICANTACCOUNTINGPOLICIESU.S.Bancorpanditssubsidiaries(the“Company”)isamulti-statefinancialservicesholdingcompanyheadquarteredinMinneapolis,Minnesota.TheCompanyprovidesafullrangeoffinancialservicesincludinglendinganddepositoryservicesthroughbankingofficesprincipallyin24states.TheCompanyalsoengagesincreditcard,merchant,andATMprocessing,mortgagebanking,insurance,trustandinvestmentmanagement,brokerage,andleasingactivitiesprincipallyindomesticmarkets.BasisofPresentationTheconsolidatedfinancialstatementsincludetheaccountsoftheCompanyanditssubsidiariesandallvariableinterestentitiesforwhichtheCompanyistheprimarybeneficiary.Theconsolidationeliminatesallsignificantintercompanyaccountsandtransactions.Certainitemsinpriorperiodshavebeenreclassifiedtoconformtothecurrentpresentation.UsesofEstimatesThepreparationoffinancialstatementsinconformitywithgenerallyacceptedaccountingprinciplesrequiresmanagementtomakeestimatesandassumptionsthataffecttheamountsreportedinthefinancialstatementsandaccompanyingnotes.Actualexperiencecoulddifferfromthoseestimates.BUSINESSSEGMENTSWithintheCompany,financialperformanceismeasuredbymajorlinesofbusinessbasedontheproductsandservicesprovidedtocustomersthroughitsdistributionchannels.TheCompanyhasfivereportableoperatingsegments:WholesaleBankingWholesaleBankingofferslending,equipmentfinanceandsmall-ticketleasing,depository,treasurymanagement,capitalmarkets,foreignexchange,internationaltradeservicesandotherfinancialservicestomiddlemarket,largecorporate,commercialrealestateandpublicsectorclients.ConsumerBankingConsumerBankingdeliversproductsandservicesthroughbankingoffices,telephoneservicingandsales,on-lineservices,directmailandATMs.Itencompassescommunitybanking,metropolitanbanking,in-storebanking,smallbusinessbanking,consumerlending,mortgagebanking,consumerfinance,workplacebanking,studentbankingand24-hourbanking.WealthManagement&SecuritiesServicesWealthManagement&SecuritiesServicesprovidestrust,privatebanking,financialadvisory,investmentmanagement,retailbrokerageservices,insurance,custodyandmutualfundservicingthroughfivebusinesses:WealthManagement,CorporateTrust,FAFAdvisors,InstitutionalTrust&CustodyandFundServices.PaymentServicesPaymentServicesincludesconsumerandbusinesscreditcards,stored-valuecards,debitcards,corporateandpurchasingcardservices,consumerlinesofcredit,ATMprocessingandmerchantprocessing.TreasuryandCorporateSupportTreasuryandCorporateSupportincludestheCompany’sinvestmentportfolios,funding,capitalmanagementandassetsecuritizationactivities,interestrateriskmanagement,theneteffectoftransferpricingrelatedtoaveragebalancesandtheresidualaggregateofthoseexpensesassociatedwithcorporateactivitiesthataremanagedonaconsolidatedbasis.SegmentResultsAccountingpoliciesforthelinesofbusinessarethesameasthoseusedinpreparationoftheconsolidatedfinancialstatementswithrespecttoactivitiesspecificallyattributabletoeachbusinessline.However,thepreparationofbusinesslineresultsrequiresmanagementtoestablishmethodologiestoallocatefundingcostsandbenefits,expensesandotherfinancialelementstoeachlineofbusiness.Fordetailsofthesemethodologiesandsegmentresults,see“BasisforFinancialPresentation”andTable23“LineofBusinessFinancialPerformance”includedinManagement’sDiscussionandAnalysiswhichisincorporatedbyreferenceintotheseNotestoConsolidatedFinancialStatements.SECURITIESRealizedgainsorlossesonsecuritiesaredeterminedonatradedatebasisbasedonthespecificcarryingvalueoftheinvestmentsbeingsold.TradingSecuritiesDebtandequitysecuritiesheldforresaleareclassifiedastradingsecuritiesandreportedatfairvalue.Realizedgainsorlossesarereportedinnoninterestincome.Available-for-saleSecuritiesThesesecuritiesarenottradingsecuritiesbutmaybesoldbeforematurityinresponsetochangesintheCompany’sinterestrateriskprofile,fundingneedsordemandforcollateralizeddepositsbypublicentities.Available-for-salesecuritiesarecarriedatfairvaluewithunrealizednetgainsorlossesreportedwithinother72U.S.BANCORPcomprehensiveincomeinshareholders’equity.Whensold,theamortizedcostofthespecificsecuritiesisusedtocomputethegainorloss.Declinesinfairvaluethataredeemedother-than-temporary,ifany,arereportedinnoninterestincome.Held-to-maturitySecuritiesDebtsecuritiesforwhichtheCompanyhasthepositiveintentandabilitytoholdtomaturityarereportedathistoricalcostadjustedforamortizationofpremiumsandaccretionofdiscounts.Declinesinfairvaluethataredeemedotherthantemporary,ifany,arereportedinnoninterestincome.SecuritiesPurchasedUnderAgreementstoResellandSecuritiesSoldUnderAgreementstoRepurchaseSecuritiespurchasedunderagreementstoresellandsecuritiessoldunderagreementstorepurchasearegenerallyaccountedforascollateralizedfinancingtransactionsandarerecordedattheamountsatwhichthesecuritieswereacquiredorsold,plusaccruedinterest.ThefairvalueofcollateralreceivediscontinuallymonitoredandadditionalcollateralobtainedorrequestedtobereturnedtotheCompanyasdeemedappropriate.EQUITYINVESTMENTSINOPERATINGENTITIESEquityinvestmentsinpublicentitiesinwhichownershipislessthan20percentareaccountedforasavailable-for-salesecuritiesandcarriedatfairvalue.Similarinvestmentsinprivateentitiesareaccountedforusingthecostmethod.Investmentsinentitieswhereownershipinterestisbetween20percentand50percentareaccountedforusingtheequitymethodwiththeexceptionoflimitedpartnershipsandlimitedliabilitycompanieswhereanownershipinterestofgreaterthan5percentrequirestheuseoftheequitymethod.IftheCompanyhasavotinginterestgreaterthan50percent,theconsolidationmethodisused.Allequityinvestmentsareevaluatedforimpairmentatleastannuallyandmorefrequentlyifcertaincriteriaaremet.LOANSLoansarereportednetofunearnedincome.Interestincomeisaccruedontheunpaidprincipalbalancesasearned.Loanandcommitmentfeesandcertaindirectloanoriginationcostsaredeferredandrecognizedoverthelifeoftheloanand/orcommitmentperiodasyieldadjustments.CommitmentstoExtendCreditUnfundedresidentialmortgageloancommitmentsenteredintoinconnectionwithmortgagebankingactivitiesareconsideredderivativesandrecordedonthebalancesheetatfairvaluewithchangesinfairvaluerecordedinincome.Allotherunfundedloancommitmentsaregenerallyrelatedtoprovidingcreditfacilitiestocustomersofthebankandarenotactivelytradedfinancialinstruments.Theseunfundedcommitmentsaredisclosedasoff-balancesheetfinancialinstrumentsinNote21intheNotestoConsolidatedFinancialStatements.AllowanceforCreditLossesManagementdeterminestheadequacyoftheallowancebasedonevaluationsofcreditrelationships,theloanportfolio,recentlossexperience,andotherpertinentfactors,includingeconomicconditions.Thisevaluationisinherentlysubjectiveasitrequiresestimates,includingamountsoffuturecashcollectionsexpectedonnonaccrualloans,whichmaybesusceptibletosignificantchange.Theallowanceforcreditlossesrelatingtoimpairedloansisbasedontheloan’sobservablemarketprice,thecollateralforcertaincollateral-dependentloans,orthediscountedcashflowsusingtheloan’seffectiveinterestrate.TheCompanydeterminestheamountoftheallowancerequiredforcertainsectorsbasedonrelativeriskcharacteristicsoftheloanportfolio.Theallowancerecordedforcommercialloansisbasedonquarterlyreviewsofindividualcreditrelationshipsandananalysisofthemigrationofcommercialloansandactuallossexperience.Theallowancerecordedforhomogeneousconsumerloansisbasedonananalysisofproductmix,riskcharacteristicsoftheportfolio,bankruptcyexperiences,andhistoricallosses,adjustedforcurrenttrends,foreachhomogenouscategoryorgroupofloans.Theallowanceisincreasedthroughprovisionschargedtooperatingearningsandreducedbynetcharge-offs.TheCompanyalsoassessesthecreditriskassociatedwithoff-balancesheetloancommitments,lettersofcredit,andderivativesanddeterminestheappropriateamountofcreditlossliabilitythatshouldberecorded.Theliabilityforoff-balancesheetcreditexposurerelatedtoloancommitmentsandotherfinancialinstrumentsisincludedinotherliabilities.NonaccrualLoansGenerallycommercialloans(includingimpairedloans)areplacedonnonaccrualstatuswhenthecollectionofinterestorprincipalhasbecome90dayspastdueorisotherwiseconsidereddoubtful.Whenaloanisplacedonnonaccrualstatus,unpaidaccruedinterestisreversed.Futureinterestpaymentsaregenerallyappliedagainstprincipal.Revolvingconsumerlinesandcreditcardsarechargedoffby180dayspastdueandclosed-endconsumerloansotherthanloanssecuredby1-4familypropertiesarechargedoffat120dayspastdueandare,therefore,generallynotplacedonnonaccrualstatus.Certainretailcustomershavingfinancialdifficultiesmayhavethetermsoftheircreditcardandotherloanagreementsmodifiedtorequireonlyprincipalpaymentsand,assuch,arereportedasnonaccrual.U.S.BANCORP73ImpairedLoansAloanisconsideredtobeimpairedwhen,basedoncurrentinformationandevents,itisprobablethattheCompanywillbeunabletocollectallamountsdue(bothinterestandprincipal)accordingtothecontractualtermsoftheloanagreement.RestructuredLoansIncaseswhereaborrowerexperiencesfinancialdifficultiesandtheCompanymakescertainconcessionarymodificationstocontractualterms,theloanisclassifiedasarestructuredloan.Loansrestructuredatarateequaltoorgreaterthanthatofanewloanwithcomparableriskatthetimethecontractismodifiedmaybeexcludedfromrestructuredloansinthecalendaryearssubsequenttotherestructuringiftheyareincompliancewiththemodifiedterms.Generally,anonaccrualloanthatisrestructuredremainsonnonaccrualforaperiodofsixmonthstodemonstratethattheborrowercanmeettherestructuredterms.However,performancepriortotherestructuring,orsignificanteventsthatcoincidewiththerestructuring,areconsideredinassessingwhethertheborrowercanmeetthenewtermsandmayresultintheloanbeingreturnedtoaccrualstatusatthetimeofrestructuringorafterashorterperformanceperiod.Iftheborrower’sabilitytomeettherevisedpaymentscheduleisnotreasonablyassured,theloanremainsclassifiedasanonaccrualloan.LeasesTheCompanyengagesinbothdirectandleveragedleasefinancing.Thenetinvestmentindirectfinancingleasesisthesumofallminimumleasepaymentsandestimatedresidualvalues,lessunearnedincome.Unearnedincomeisaddedtointerestincomeoverthetermsoftheleasestoproducealevelyield.Theinvestmentinleveragedleasesisthesumofallleasepayments(lessnonrecoursedebtpayments)plusestimatedresidualvalues,lessunearnedincome.Incomefromleveragedleasesisrecognizedoverthetermoftheleasesbasedontheunrecoveredequityinvestment.Residualvaluesonleasedassetsarereviewedregularlyforother-than-temporaryimpairment.Residualvaluationsforretailautomobileleasesarebasedonindependentassessmentsofexpectedusedcarsalepricesattheend-of-term.ImpairmenttestsareconductedbasedonthesevaluationsconsideringtheprobabilityofthelesseereturningtheassettotheCompany,re-marketingefforts,insurancecoverageandancillaryfeesandcosts.Valuationsforcommercialleasesarebaseduponexternalorinternalmanagementappraisals.WhenthereisotherthantemporaryimpairmentintheestimatedfairvalueoftheCompany’sinterestintheresidualvalueofaleasedasset,thecarryingvalueisreducedtotheestimatedfairvaluewiththewritedownrecognizedinthecurrentperiod.LoansHeldforSaleLoansheldforsale(“LHFS”)representmortgageloanoriginationsintendedtobesoldinthesecondarymarketandotherloansthatmanagementhasanactiveplantosell.LHFSarecarriedatthelowerofcostormarketvalueasdeterminedonanaggregatebasisbytypeofloan.Intheeventmanagementdecidestosellloansreceivable,theloansaretransferredatthelowerofcostorfairvalue.LoanstransferredtoLHFSaremarked-to-market(“MTM”)atthetimeoftransfer.MTMlossesrelatedtothesale/transferofnon-homogeneousloansthatarepredominantlycredit-relatedarereflectedincharge-offs.Withrespecttohomogeneousloans,theamountof“probable”creditloss,determinedinaccordancewithStatementofFinancialAccountingStandardsNo.5,“AccountingforContingencies,”methodologiesutilizedtodeterminethespecificallowanceallocationfortheportfolio,isalsoincludedincharge-offs.AnyincrementallossdeterminedinaccordancewithMTMaccounting,thatincludesconsiderationofotherfactorssuchasestimatesofinherentlosses,isreportedseparatelyfromcharge-offsasareductiontotheallowanceforcreditlosses.Subsequentdecreasesinfairvaluearerecognizedinnoninterestincome.OtherRealEstateOtherrealestate(“ORE”),whichisincludedinotherassets,ispropertyacquiredthroughforeclosureorotherproceedings.OREiscarriedatfairvalue,lessestimatedsellingcosts.Thepropertyisevaluatedregularlyandanydecreasesinthecarryingamountareincludedinnoninterestexpense.DERIVATIVEFINANCIALINSTRUMENTSIntheordinarycourseofbusiness,theCompanyentersintoderivativetransactionstomanageitsinterestrate,prepayment,credit,priceandforeigncurrencyriskandtoaccommodatethebusinessrequirementsofitscustomers.Allderivativeinstrumentsarerecordedaseitherotherassets,otherliabilitiesorshort-termborrowingsatfairvalue.Subsequentchangesinaderivative’sfairvaluearerecognizedcurrentlyinearningsunlessspecifichedgeaccountingcriteriaaremet.Allderivativeinstrumentsthatqualifyforhedgeaccountingarerecordedatfairvalueandclassifiedeitherasahedgeofthefairvalueofarecognizedassetorliability(“fairvalue”hedge)orasahedgeofthevariabilityofcashflowstobereceivedorpaidrelatedtoarecognizedassetorliabilityoraforecastedtransaction(“cashflow”hedge).Changesinthefairvalueofaderivativethatishighlyeffectiveanddesignatedasafairvaluehedgeandtheoffsettingchangesinthefairvalueofthehedgeditemarerecordedinincome.Changesinthefairvalueofaderivativethatishighlyeffectiveanddesignatedasacashflowhedgearerecognizedinothercomprehensiveincomeuntilincomefromthecashflowsofthehedgeditemisrecognized.TheCompanyperformsanassessment,bothattheinceptionof74U.S.BANCORPthehedgeandonaquarterlybasisthereafter,whenrequired,todeterminewhetherthesederivativesarehighlyeffectiveinoffsettingchangesinthevalueofthehedgeditems.Anychangeinfairvalueresultingfromhedgeineffectivenessisimmediatelyrecordedinnoninterestincome.Ifaderivativedesignatedasahedgeisterminatedorceasestobehighlyeffective,thegainorlossisamortizedtoearningsovertheremaininglifeofthehedgedassetorliability(fairvaluehedge)oroverthesameperiod(s)thattheforecastedhedgedtransactionsimpactearnings(cashflowhedge).Ifthehedgeditemisdisposedof,ortheforecastedtransactionisnolongerprobable,thederivativeisrecordedatfairvaluewithanyresultinggainorlossincludedinthegainorlossfromthedispositionofthehedgeditemor,inthecaseofaforecastedtransactionthatisnolongerprobable,includedinearningsimmediately.REVENUERECOGNITIONTheCompanyrecognizesrevenueasitisearnedbasedoncontractualterms,astransactionsoccur,orasservicesareprovidedandcollectibilityisreasonablyassured.Incertaincircumstances,noninterestincomeisreportednetofassociatedexpensesthataredirectlyrelatedtovariablevolume-basedsalesorrevenuesharingarrangementsorwhentheCompanyactsonanagencybasisforothers.Certainspecificpoliciesincludethefollowing:CreditandDebitCardRevenueCreditanddebitcardrevenueincludesinterchangeincomefromcreditanddebitcards,annualfees,andothertransactionandaccountmanagementfees.Interchangeincomeisafeepaidbyamerchantbanktothecard-issuingbankthroughtheinterchangenetwork.Interchangefeesaresetbythecreditcardassociationsandarebasedoncardholderpurchasevolumes.TheCompanyrecordsinterchangeincomeastransactionsoccur.Transactionandaccountmanagementfeesarerecognizedastransactionsoccurorservicesareprovided,exceptforannualfees,whicharerecognizedovertheapplicableperiod.Volume-relatedpaymentstopartnersandcreditcardassociationsandexpensesforrewardsprogramsarealsorecordedwithincreditanddebitcardrevenue.Paymentstopartnersandexpensesrelatedtorewardsprogramsarerecordedwhenearnedbythepartnerorcustomer.MerchantProcessingServicesMerchantprocessingservicesrevenueconsistsprincipallyoftransactionandaccountmanagementfeeschargedtomerchantsfortheelectronicprocessingoftransactions,netofinterchangefeespaidtothecreditcardissuingbank,cardassociationassessments,andrevenuesharingamounts,andareallrecognizedatthetimethemerchant’stransactionsareprocessedorotherservicesareperformed.TheCompanymayenterintorevenuesharingagreementswithreferralpartnersorinconnectionwithpurchasesofmerchantcontractsfromsellers.Therevenuesharingamountsaredeterminedprimarilyonsalesvolumeprocessedorrevenuegeneratedforaparticulargroupofmerchants.Merchantprocessingrevenuealsoincludesrevenuesrelatedtopoint-of-saleequipmentrecordedassaleswhentheequipmentisshippedorasearnedforequipmentrentals.TrustandInvestmentManagementFeesTrustandinvestmentmanagementfeesarerecognizedovertheperiodinwhichservicesareperformedandarebasedonapercentageofthefairvalueoftheassetsundermanagementoradministration,fixedbasedonaccounttype,ortransaction-basedfees.DepositServiceChargesServicechargesondepositaccountsprimarilyrepresentmonthlyfeesbasedonminimumbalancesortransaction-basedfees.Thesefeesarerecognizedasearnedorastransactionsoccurandservicesareprovided.OTHERSIGNIFICANTPOLICIESIntangibleAssetsThepricepaidoverthenetfairvalueoftheacquiredbusinesses(“goodwill”)isnotamortized.Otherintangibleassetsareamortizedovertheirestimatedusefullives,usingstraight-lineandacceleratedmethods.Therecoverabilityofgoodwillandotherintangibleassetsisevaluatedannually,ataminimum,oronaninterimbasisifeventsorcircumstancesindicateapossibleinabilitytorealizethecarryingamount.Theevaluationincludesassessingtheestimatedfairvalueoftheintangibleassetbasedonmarketpricesforsimilarassets,whereavailable,andthepresentvalueoftheestimatedfuturecashflowsassociatedwiththeintangibleasset.IncomeTaxesDeferredtaxesarerecordedtoreflectthetaxconsequencesonfutureyearsofdifferencesbetweenthetaxbasisofassetsandliabilitiesandthefinancialreportingamountsateachyear-end.MortgageServicingRightsMortgageservicingrights(“MSRs”)arecapitalizedasseparateassetswhenloansaresoldandservicingisretainedormaybepurchasedfromothers.MSRsareinitiallyrecordedatfairvalue,ifpracticable,andateachsubsequentreportingdate.TheCompanydeterminesthefairvaluebyestimatingthepresentvalueoftheasset’sfuturecashflowsutilizingmarket-basedprepaymentrates,discountrates,andotherassumptionsvalidatedthroughcomparisontotradeinformation,industrysurveysandindependentthirdpartyappraisals.ChangesinthefairvalueofMSRsarerecordedinearningsduringtheperiodinwhichtheyoccur.RisksinherentintheMSRsvaluationincludehigherthanexpectedprepaymentratesU.S.BANCORP75and/ordelayedreceiptofcashflows.TheCompanyutilizesfutures,forwardsandinterestrateswapstomitigatethevaluationrisk.FairvaluechangesrelatedtotheMSRsandthefutures,forwardsandinterestrateswaps,aswellasservicingandotherrelatedfees,arerecordedinmortgagebankingrevenue.PensionsForpurposesofitsretirementplans,theCompanyutilizesameasurementdateofSeptember30.Atthemeasurementdate,planassetsaredeterminedbasedonfairvalue,generallyrepresentingobservablemarketprices.Theactuarialcostmethodusedtocomputethepensionliabilitiesandrelatedexpenseistheprojectedunitcreditmethod.Theprojectedbenefitobligationisprincipallydeterminedbasedonthepresentvalueofprojectedbenefitdistributionsatanassumeddiscountrate.Thediscountrateutilizedisbasedonmatch-fundingmaturitiesandinterestpaymentsofhighqualitycorporatebondsavailableinthemarketplacetoprojectedcashflowsasofthemeasurementdateforfuturebenefitpayments.Periodicpensionexpense(orincome)includesservicecosts,interestcostsbasedontheassumeddiscountrate,theexpectedreturnonplanassetsbasedonanactuariallyderivedmarket-relatedvalueandamortizationofactuarialgainsandlosses.Pensionaccountingreflectsthelong-termnatureofbenefitobligationsandtheinvestmenthorizonofplanassetsandcanhavetheeffectofreducingearningsvolatilityrelatedtoshort-termchangesininterestratesandmarketvaluations.Actuarialgainsandlossesincludetheimpactofplanamendmentsandvariousunrecognizedgainsandlosseswhicharedeferredandamortizedoverthefutureserviceperiodsofactiveemployees.Themarket-relatedvalueutilizedtodeterminetheexpectedreturnonplanassetsisbasedonfairvalueadjustedforthedifferencebetweenexpectedreturnsandactualperformanceofplanassets.Theunrealizeddifferencebetweenactualexperienceandexpectedreturnsisincludedinthemarket-relatedvalueandamortizedasacomponentofpensionexpenseratablyoverafive-yearperiod.Theoverfundedorunderfundedstatusoftheplansisrecordedasanassetorliabilityonthebalancesheet,withchangesinthatstatusrecognizedthroughothercomprehensiveincome.PremisesandEquipmentPremisesandequipmentarestatedatcostlessaccumulateddepreciationanddepreciatedprimarilyonastraight-linebasisovertheestimatedlifeoftheassets.Estimatedusefullivesrangeupto40yearsfornewlyconstructedbuildingsandfrom3to20yearsforfurnitureandequipment.Capitalizedleases,lessaccumulatedamortization,areincludedinpremisesandequipment.Theleaseobligationsareincludedinlong-termdebt.Capitalizedleasesareamortizedonastraight-linebasisovertheleasetermandtheamortizationisincludedindepreciationexpense.StatementofCashFlowsForpurposesofreportingcashflows,cashandcashequivalentsincludecashandmoneymarketinvestments,definedasinterest-bearingamountsduefrombanks,federalfundssoldandsecuritiespurchasedunderagreementstoresell.Stock-BasedCompensationTheCompanygrantsstock-basedawards,includingrestrictedstockandoptionstopurchasecommonstockoftheCompany.Stockoptiongrantsareforafixednumberofsharestoemployeesanddirectorswithanexercisepriceequaltothefairvalueofthesharesatthedateofgrant.Stock-basedcompensationforawardsisrecognizedintheCompany’sresultsofoperationsonastraight-linebasisoverthevestingperiod.TheCompanyimmediatelyrecognizescompensationcostofawardstoemployeesthatmeetretirementstatus,despitetheircontinuedactiveemployment.Theamortizationofstock-basedcompensationreflectsestimatedforfeituresadjustedforactualforfeitureexperience.Ascompensationexpenseisrecognized,adeferredtaxassetisrecordedthatrepresentsanestimateofthefuturetaxdeductionfromexerciseorreleaseofrestrictions.Atthetimestock-basedawardsareexercised,cancelled,expire,orrestrictionsarereleased,theCompanymayberequiredtorecognizeanadjustmenttotaxexpense.PerShareCalculationsEarningspershareiscalculatedbydividingnetincomeapplicabletocommonequitybytheweightedaveragenumberofcommonsharesoutstandingduringtheyear.Dilutedearningspershareiscalculatedbyadjustingincomeandoutstandingshares,assumingconversionofallpotentiallydilutivesecurities,usingthetreasurystockmethod.Note2ACCOUNTINGCHANGESBusinessCombinationsInDecember2007,theFinancialAccountingStandardsBoard(“FASB”)issuedStatementofFinancialAccountingStandardsNo.141(revised2007)(“SFAS141R”),“BusinessCombinations”,effectivefortheCompanybeginningonJanuary1,2009.SFAS141Restablishesprinciplesandrequirementsfortheacquirerinabusinesscombination,includingtherecognitionandmeasurementoftheidentifiableassetsacquired,theliabilitiesassumedandanynoncontrollinginterestintheacquiredentityasoftheacquisitiondate;therecognitionandmeasurementofthegoodwillacquiredinthebusinesscombinationorgainfromabargainpurchaseasoftheacquisitiondate;andthedeterminationofadditionaldisclosuresneededtoenableusersofthefinancialstatementstoevaluatethenatureandfinancialeffectsofthebusinesscombination.UnderSFAS141R,nearlyallacquiredassetsandliabilitiesassumedarerequiredtoberecordedatfairvalueattheacquisitiondate,includingloans.Thiswill76U.S.BANCORPeliminateseparaterecognitionoftheacquiredallowanceforloanlossesontheacquirer’sbalancesheetascreditrelatedfactorswillbeincorporateddirectlyintothefairvalueoftheloansrecordedattheacquisitiondate.Othersignificantchangesincluderecognizingtransactioncostsandmostrestructuringcostsasexpenseswhenincurred.Earlyadoptionisnotpermitted.TheCompanyiscurrentlyassessingtheimpactofthisguidanceonpotentialfuturebusinesscombinationsthatmayoccuronoraftertheJanuary1,2009effectivedate.NoncontrollingInterestsInDecember2007,theFASBissuedStatementofFinancialAccountingStandardsNo.160(“SFAS160”),“NoncontrollingInterestsinConsolidatedFinancialStatements,anamendmentofARBNo.51”,effectivefortheCompanybeginningonJanuary1,2009.SFAS160willchangetheaccountingandreportingforminorityinterests,whichwillberecharacterizedasnoncontrollinginterestsandclassifiedasacomponentofequity,separatefromtheCompany’sownequity,intheconsolidatedbalancesheet.ThisStatementalsorequirestheamountofnetincomeattributabletotheentityandtothenoncontrollingintereststobeshownseparatelyonthefaceoftheconsolidatedstatementofincome.SFAS160alsorequiresexpandeddisclosuresthatclearlyidentifyanddistinguishbetweentheinterestsoftheentityandthoseofthenoncontrollingowners.TheCompanyiscurrentlyassessingtheimpactofthisguidanceonitsfinancialstatements.LoanCommitmentsInNovember2007,theSecuritiesandExchangeCommission(“SEC”)issuedStaffAccountingBulletinNo.109(“SAB109”),“WrittenLoanCommitmentsRecordedatFairValueThroughEarnings”,whichrevisesandrescindsportionsofStaffAccountingBulletinNo.105,“ApplicationofAccountingPrinciplestoLoanCommitments.”SAB109iseffectiveforwrittenloancommitmentsissuedormodifiedbytheCompanybeginningonJanuary1,2008.SAB109providestheSEC’sviewsontheaccountingforwrittenloancommitmentsrecordedatfairvaluethroughearningsunderaccountingprinciplesgenerallyacceptedintheUnitedStates,andspecificallystatesthattheexpectednetfuturecashflowsrelatedtotheservicingofaloanshouldbeincludedinthemeasurementofallsuchwrittenloancommitments.TheadoptionofSAB109isnotexpectedtohaveamaterialimpactontheCompany’sfinancialstatements.FairValueOptionInFebruary2007,theFASBissuedStatementofFinancialAccountingStandardsNo.159(“SFAS159”),“TheFairValueOptionforFinancialAssetsandFinancialLiabilities”,effectivefortheCompanybeginningonJanuary1,2008.ThisStatementprovidesentitieswithanoptiontoreportselectedfinancialassetsandliabilitiesatfairvalue,withtheobjectivetoreduceboththecomplexityinaccountingforfinancialinstrumentsandthevolatilityinearningscausedbymeasuringrelatedassetsandliabilitiesdifferently.TheCompany’sadoptionofSFAS159isnotexpectedtohaveamaterialimpactontheCompany’sfinancialstatements.FairValueMeasurementsInSeptember2006,theFASBissuedStatementofFinancialAccountingStandardsNo.157(“SFAS157”),“FairValueMeasurements”,effectivefortheCompanybeginningonJanuary1,2008.ThisStatementdefinesfairvalue,establishesaframeworkformeasuringfairvalue,andexpandsdisclosuresaboutfairvaluemeasurements.ThisStatementprovidesaconsistentdefinitionoffairvaluewhichfocusesonexitpriceandprioritizesmarket-basedinputsobtainedfromsourcesindependentoftheentityoverthosefromtheentity’sowninputsthatarenotcorroboratedbyobservablemarketdata.SFAS157alsorequiresconsiderationofnonperformanceriskwhendeterminingfairvaluemeasurements.ThisStatementexpandsdisclosuresabouttheuseoffairvaluetomeasureassetsandliabilitiesininterimandannualperiodssubsequenttoinitialrecognition.Thedisclosuresfocusontheinputsusedtomeasurefairvalue,andforrecurringfairvaluemeasurementsusingsignificantunobservableinputs,theeffectofthemeasurementsonearningsorchangesinnetassetsfortheperiod.TheCompany’sadoptionofSFAS157willresultincertainchangesinthemeasurementoffairvalueand,atthetimeofadoption,isexpectedtoreduceearningsperdilutedcommonsharebytwocentsinthefirstquarterof2008.UncertaintyinIncomeTaxesInJune2006,theFASBissuedInterpretationNo.48(“FIN48”),“AccountingforUncertaintyinIncomeTaxes,aninterpretationofFASBStatementNo.109,AccountingforIncomeTaxes”,effectivefortheCompanybeginningonJanuary1,2007.FIN48clarifiestherecognitionthresholdataxpositionisrequiredtomeetbeforebeingrecognizedinthefinancialstatements.FIN48alsoprovidesguidanceondisclosureandothermatters.TheadoptionofFIN48didnothaveamaterialimpactontheCompany’sfinancialstatements.Note3RESTRICTIONSONCASHANDDUEFROMBANKSTheFederalReserveBankrequiresbanksubsidiariestomaintainminimumaveragereservebalances.Theamountofthereserverequirementwasapproximately$1.0billionatDecember31,2007.U.S.BANCORP77Note4INVESTMENTSECURITIESTheamortizedcost,grossunrealizedholdinggainsandlosses,andfairvalueofheld-to-maturityandavailable-for-salesecuritiesatDecember31wasasfollows:December31(DollarsinMillions)AmortizedCostUnrealizedGainsUnrealizedLossesFairValueAmortizedCostUnrealizedGainsUnrealizedLossesFairValue20072006Held-to-maturity(a)Mortgage-backedsecurities...............$6$–$–$6$7$–$–$7Obligationsofstateandpoliticalsubdivisions....564–60675–72Otherdebtsecurities...................12––1213––13Totalheld-to-maturitysecurities..........$74$4$–$78$87$5$–$92Available-for-sale(b)U.S.Treasuryandagencies...............$407$1$(3)$405$472$1$(6)$467Mortgage-backedsecurities...............31,30048(745)30,60334,465103(781)33,787Asset-backedsecurities(c)...............2,9226–2,9287––7Obligationsofstateandpoliticalsubdivisions....7,13118(94)7,0554,46382(6)4,539Othersecuritiesandinvestments...........2,3465(300)2,0511,22313(6)1,230Totalavailable-for-salesecurities.........$44,106$78$(1,142)$43,042$40,630$199$(799)$40,030(a)Held-to-maturitysecuritiesarecarriedathistoricalcostadjustedforamortizationofpremiumsandaccretionofdiscounts.(b)Available-for-salesecuritiesarecarriedatfairvaluewithunrealizednetgainsorlossesreportedwithinothercomprehensiveincomeinshareholders’equity.(c)Primarilyincludesinvestmentsinstructuredinvestmentvehicleswithunderlyingcollateralthatincludesamixofvariousmortgageandotherasset-backedsecurities.Theweighted-averagematurityoftheavailable-for-saleinvestmentsecuritieswas7.4yearsatDecember31,2007,comparedwith6.6yearsatDecember31,2006.Thecorrespondingweighted-averageyieldswere5.51percentand5.32percent,respectively.Theweighted-averagematurityoftheheld-to-maturityinvestmentsecuritieswas8.3yearsatDecember31,2007,comparedwith8.4yearsatDecember31,2006.Thecorrespondingweighted-averageyieldswere5.92percentand6.03percent,respectively.Foramortizedcost,fairvalueandyieldbymaturitydateofheld-to-maturityandavailable-for-salesecuritiesoutstandingatDecember31,2007,refertoTable11includedinManagement’sDiscussionandAnalysiswhichisincorporatedbyreferenceintotheseNotestoConsolidatedFinancialStatements.Securitiescarriedat$39.6billionatDecember31,2007,and$35.8billionatDecember31,2006,werepledgedtosecurepublic,privateandtrustdeposits,repurchaseagreementsandforotherpurposesrequiredbylaw.Securitiessoldunderagreementstorepurchasewherethebuyer/lenderhastherighttosellorpledgethesecuritieswerecollateralizedbysecuritieswithanamortizedcostof$10.5billionatDecember31,2007,and$9.8billionatDecember31,2006,respectively.Thefollowingtableprovidesinformationastotheamountofinterestincomefromtaxableandnon-taxableinvestmentsecurities:YearEndedDecember31(DollarsinMillions)200720062005Taxable..............................................................$1,833$1,882$1,938Non-taxable...........................................................26211916Totalinterestincomefrominvestmentsecurities................................$2,095$2,001$1,954Thefollowingtableprovidesinformationastotheamountofgrossgainsandlossesrealizedthroughthesalesofavailable-for-saleinvestmentsecurities:YearEndedDecember31(DollarsinMillions)200720062005Realizedgains...........................................................$15$15$13Realizedlosses..........................................................–(1)(119)Netrealizedgains(losses).................................................$15$14$(106)Incometax(benefit)onrealizedgains(losses).....................................$6$5$(40)78U.S.BANCORPIncludedinavailable-for-sale,asset-backedinvestmentsecurities,arestructuredinvestmentsecuritieswhichwerepurchasedinthefourthquarterof2007fromcertainmoneymarketfundsmanagedbyFAFAdvisors,Inc.,anaffiliateoftheCompany.Someofthesesecuritiesevidencedcreditdeteriorationsubsequenttoorigination,butpriortoacquisitionbytheCompany.StatementofPositionNo.03-3(“SOP03-3”),“AccountingforCertainLoansorDebtSecuritiesAcquiredinaTransfer”,requiresthedifferencebetweenthetotalexpectedcashflowsforthesesecuritiesandtheinitialrecordedinvestmenttoberecognizedinearningsoverthelifeofthesecurities,usingalevelyield.Ifsubsequentdecreasesinthefairvalueofthesesecuritiesareaccompaniedbyanadversechangeintheexpectedcashflows,another-than-temporaryimpairmentwillberecordedthroughearnings.Subsequentincreasesintheexpectedcashflowswillberecognizedasincomeprospectivelyovertheremaininglifeofthesecuritybyincreasingthelevelyield.AtDecember31,2007,thegrossundiscountedcashflowsthatweredueunderthecontractualtermsofthepurchasedsecuritiessubjecttoSOP03-3,were$2.5billion,whichincludedpaymentsreceivableof$33million.ChangesinthecarryingamountandaccretableyieldfortheyearendedDecember31,2007,areasfollows:(DollarsinMillions)AccretableYieldCarryingAmountBalanceatbeginningofperiod.............................................................$–$–Purchases(a)........................................................................1072,445Paymentsreceived.....................................................................–(20)Accretion...........................................................................(2)2Balanceatendofperiod.................................................................$105$2,427(a)TheCarryingamountofpurchasesrepresentsthefairvalueofthesecuritiesonthatdate.TheCompanyconductsaregularassessmentofitsinvestmentportfoliostodeterminewhetheranysecuritiesareother-than-temporarilyimpairedconsidering,amongotherfactors,thenatureofthesecurities,creditratingsorfinancialconditionoftheissuer,theextentanddurationoftheunrealizedloss,expectedcashflowsofunderlyingcollateral,marketconditionsandtheCompany’sabilitytoholdthesecuritiesthroughtheanticipatedrecoveryperiod.AtDecember31,2007,certaininvestmentsecuritiesincludedintheheld-to-maturityandavailable-for-salecategorieshadafairvaluethatwasbelowtheiramortizedcost.ThefollowingtableshowsthegrossunrealizedlossesandfairvalueoftheCompany’sinvestmentswithunrealizedlossesthatarenotdeemedtobeother-than-temporarilyimpairedbasedontheperiodtheinvestmentshavebeeninacontinuousunrealizedlossposition:(DollarsinMillions)FairValueUnrealizedLossesFairValueUnrealizedLossesFairValueUnrealizedLossesLessThan12Months12MonthsorGreaterTotalHeld-to-maturityObligationsofstateandpoliticalsubdivisions...................$10$–$1$–$11$–Total...........................................$10$–$1$–$11$–Available-for-saleU.S.Treasuryandagencies..............................$23$–$230$(3)$253$(3)Mortgage-backedsecurities..............................3,238(63)23,524(682)26,762(745)Asset-backedsecurities.................................5–––5–Obligationsofstateandpoliticalsubdivisions...................4,853(89)197(5)5,050(94)Othersecuritiesandinvestments...........................1,573(277)198(23)1,771(300)Total...........................................$9,692$(429)$24,149$(713)$33,841$(1,142)Generally,theunrealizedlosseswithineachinvestmentcategoryhaveoccurredduetorisinginterestratesoverthepastfewyears.Thesubstantialportionofsecuritiesthathaveunrealizedlossesareeithergovernmentsecurities,issuedbygovernment-backedagenciesorprivatelyissuedsecuritieswithhighinvestmentgradecreditratings.Unrealizedlosseswithinothersecuritiesandinvestmentsarealsotheresultofamodestwideningofcreditspreadssincetheinitialpurchasedate.Ingeneral,theissuersoftheinvestmentsecuritiesdonothavethecontractualabilitytopaythemoffatlessthanparatmaturityoranyearliercalldate.Asofthereportingdate,theCompanyexpectstoU.S.BANCORP79receiveallprincipalandinterestrelatedtothesesecurities.BecausetheCompanyhastheabilityandintenttoholditsinvestmentsecuritiesuntiltheiranticipatedrecoveryinvalueormaturity,theyarenotconsideredtobeother-than-temporarilyimpairedasofDecember31,2007.Note5LOANSANDALLOWANCEFORCREDITLOSSESThecompositionoftheloanportfolioatDecember31wasasfollows:(Dollarsinmillions)20072006CommercialCommercial..................................................................$44,832$40,640Leasefinancing................................................................6,2425,550Totalcommercial.............................................................51,07446,190CommercialRealEstateCommercialmortgages...........................................................20,14619,711Constructionanddevelopment......................................................9,0618,934Totalcommercialrealestate.....................................................29,20728,645ResidentialMortgagesResidentialmortgages...........................................................17,09915,316Homeequityloans,firstliens.......................................................5,6835,969Totalresidentialmortgages......................................................22,78221,285RetailCreditcard...................................................................10,9568,670Retailleasing.................................................................5,9696,960Homeequityandsecondmortgages..................................................16,44115,523OtherretailRevolvingcredit.............................................................2,7312,563Installment.................................................................5,2464,478Automobile.................................................................8,9708,693Student...................................................................451590Totalotherretail...........................................................17,39816,324Totalretail.................................................................50,76447,477Totalloans...............................................................$153,827$143,597Loansarepresentednetofunearnedinterestanddeferredfeesandcosts,whichamountedto$1.4billionand$1.3billionatDecember31,2007and2006,respectively.TheCompanyhadloansof$44.5billionatDecember31,2007,and$44.8billionatDecember31,2006,pledgedattheFederalHomeLoanBank(“FHLB”).Loansof$16.8billionatDecember31,2007,and$16.2billionatDecember31,2006,werepledgedattheFederalReserveBank.TheCompanyprimarilylendstoborrowersinthe24statesinwhichithasbankingoffices.Collateralforcommercialloansmayincludemarketablesecurities,accountsreceivable,inventoryandequipment.FordetailsoftheCompany’scommercialportfoliobyindustrygroupandgeographyasofDecember31,2007and2006,seeTable8includedinManagement’sDiscussionandAnalysiswhichisincorporatedbyreferenceintotheseNotestoConsolidatedFinancialStatements.FordetailoftheCompany’scommercialrealestateportfoliobypropertytypeandgeographyasofDecember31,2007and2006,seeTable9includedinManagement’sDiscussionandAnalysiswhichisincorporatedbyreferenceintotheseNotestoConsolidatedFinancialStatements.Suchloansarecollateralizedbytherelatedproperty.Nonperformingassetsincludenonaccrualloans,restructuredloansnotperforminginaccordancewithmodifiedterms,otherrealestateandothernonperformingassetsownedbytheCompany.FordetailsoftheCompany’snonperformingassetsasofDecember31,2007and2006,seeTable14includedinManagement’sDiscussionandAnalysiswhichisincorporatedbyreferenceintotheseNotestoConsolidatedFinancialStatements.80U.S.BANCORPThefollowingtablelistsinformationrelatedtononperformingloansasofDecember31:(DollarsinMillions)20072006Loansonnonaccrualstatus............................................................$540$432Restructuredloans..................................................................1738Totalnonperformingloans.............................................................$557$470Interestincomethatwouldhavebeenrecognizedatoriginalcontractualterms..........................$60$55Amountrecognizedasinterestincome.....................................................1916Forgonerevenue...................................................................$41$39Activityintheallowanceforcreditlosseswasasfollows:(DollarsinMillions)200720062005Balanceatbeginningofyear................................................$2,256$2,251$2,269AddProvisionchargedtooperatingexpense......................................792544666DeductLoanschargedoff....................................................1,032763949Lessrecoveriesofloanschargedoff........................................240219264Netloanschargedoff..................................................792544685Acquisitionsandotherchanges..............................................451Balanceatendofyear(a)..................................................$2,260$2,256$2,251ComponentsAllowanceforloanlosses...............................................$2,058$2,022$2,041Liabilityforunfundedcreditcommitments.....................................202234210Totalallowanceforcreditlosses.........................................$2,260$2,256$2,251(a)IncludedinthisanalysisisactivityrelatedtotheCompany’sliabilityforunfundedcommitments,whichisseparatelyrecordedinotherliabilitiesintheConsolidatedBalanceSheet.Aportionoftheallowanceforcreditlossesisallocatedtocommercialandcommercialrealestateloansdeemedimpaired.Theseimpairedloansareincludedinnonperformingassets.Asummaryofimpairedloansandtheirrelatedallowanceforcreditlossesisasfollows:(DollarsinMillions)RecordedInvestmentValuationAllowanceRecordedInvestmentValuationAllowanceRecordedInvestmentValuationAllowance200720062005ImpairedloansValuationallowancerequired..........$314$34$346$44$388$37Novaluationallowancerequired.......107–––––Totalimpairedloans..................$421$34$346$44$388$37Averagebalanceofimpairedloansduringtheyear..........................$366$344$412Interestincomerecognizedonimpairedloansduringtheyear...................–42CommitmentstolendadditionalfundstocustomerswhosecommercialandcommercialrealestateloanswereclassifiedasnonaccrualorrestructuredatDecember31,2007,totaled$12million.Inadditiontoimpairedcommercialandcommercialrealestateloans,theCompanyhadsmallerbalancehomogenousloansthatareaccruinginterestatratesconsideredtobebelowmarketrate.AtDecember31,2007,2006and2005,therecordedinvestmentintheseotherrestructuredloanswas$551million,$405millionand$315million,respectively,withaveragebalancesof$466million,$379million,and$278millionduring2007,2006and2005,respectively.TheCompanyrecognizedestimatedinterestincomeontheseloansof$29million,$35million,and$20millionduring2007,2006and2005,respectively.FortheyearsendedDecember31,2007,2006and2005,theCompanyhadnetgainsonthesaleofloansof$163million,$104millionand$175million,respectively,whichwereincludedinnoninterestincome,primarilyinmortgagebankingrevenue.TheCompanyhasequityinterestsintwojointventuresthatareaccountedforutilizingtheequitymethod.TheprincipalactivityofoneentityistoprovidecommercialrealU.S.BANCORP81estatefinancingthatthejointventuresecuritizesandsellstothirdpartyinvestors.Theprincipalactivityoftheotherentityistoprovideseniororsubordinatedfinancingtocustomersfortheconstruction,rehabilitationorredevelopmentofcommercialrealestate.Inconnectionwiththesejointventures,theCompanyprovideswarehousinglinestosupporttheoperations.Warehousingadvancestothejointventuresaremadeintheordinarycourseofbusinessandrepaymentofthesecreditfacilitiesoccurswhenthesecuritizationiscompletedorthecommercialrealestateprojectispermanentlyrefinancedbyothers.AtDecember31,2007and2006,theCompanyhad$2.3billionand$1.3billion,respectively,ofoutstandingloanbalancestothesejointventures.Note6LEASESThecomponentsofthenetinvestmentinsales-typeanddirectfinancingleasesatDecember31wereasfollows:(DollarsinMillions)20072006Aggregatefutureminimumleasepaymentstobereceived......................................$12,919$13,178Unguaranteedresidualvaluesaccruingtothelessor’sbenefit....................................391374Unearnedincome.................................................................(1,636)(1,605)Initialdirectcosts..................................................................253265Totalnetinvestmentinsales-typeanddirectfinancingleases(a)..............................$11,927$12,212(a)Theaccumulatedallowanceforuncollectibleminimumleasepaymentswas$120millionand$100millionatDecember31,2007and2006,respectively.Theminimumfutureleasepaymentstobereceivedfromsales-typeanddirectfinancingleaseswereasfollowsatDecember31,2007:(DollarsinMillions)2008......................................................................................$3,6122009......................................................................................3,3532010......................................................................................3,0112011......................................................................................1,8502012......................................................................................829Thereafter...................................................................................264Note7ACCOUNTINGFORTRANSFERSANDSERVICINGOFFINANCIALASSETSANDVARIABLEINTERESTENTITIESFINANCIALASSETSALESWhentheCompanysellsfinancialassets,itmayretaininterest-onlystrips,servicingrights,residualrightstoacashreserveaccount,and/orotherretainedinterestsinthesoldfinancialassets.Thegainorlossonsaledependsinpartonthepreviouscarryingamountofthefinancialassetsinvolvedinthetransferandisallocatedbetweentheassetssoldandtheretainedinterestsbasedontheirrelativefairvaluesatthedateoftransfer.Quotedmarketpricesareusedtodetermineretainedinterestfairvalueswhenreadilyavailable.Sincequotesaregenerallynotavailableforretainedinterests,theCompanyestimatesfairvaluebasedonthepresentvalueoffutureexpectedcashflowsusingmanagement’sbestestimatesofthekeyassumptions,includingcreditlosses,prepaymentspeeds,forwardyieldcurves,anddiscountratescommensuratewiththerisksinvolved.Retainedinterestsandliabilitiesarerecordedatfairvalueusingadiscountedcashflowmethodologyatinceptionandareevaluatedatleastquarterlythereafter.ConduitandSecuritizationTheCompanysponsorsanoff-balancesheetconduit,aqualifiedspecialpurposeentity(“QSPE”),towhichittransferredhigh-gradeinvestmentsecurities,fundedbytheissuanceofcommercialpaper.BecauseQSPE’sareexemptfromconsolidationundertheprovisionsofFinancialInterpretationNo.46R(“FIN46R”),“ConsolidationofVariableInterestEntities,”theCompanydoesnotconsolidatetheconduitstructureinitsfinancialstatements.Theconduitheldassetsof$1.2billionatDecember31,2007,and$2.2billionatDecember31,2006.Theseinvestmentsecuritiesincludeprimarily(i)privatelabelasset-backedsecurities,whichareinsurance“wrapped”bymonolineinsurancecompaniesand(ii)governmentagencymortgage-backedsecuritiesandcollateralizedmortgageobligations.Theconduithadcommercialpaperliabilitiesof$1.2billionatDecember31,2007,and$2.2billionatDecember31,2006.TheCompanybenefitsbytransferringtheinvestmentsecuritiesintoaconduitthatprovidesdiversificationoffundingsourcesinacapital-efficientmannerandthegenerationofincome.82U.S.BANCORPTheCompanyprovidesaliquidityfacilitytotheconduit.Utilizationoftheliquidityfacilitywouldbetriggerediftheconduitisunableto,ordoesnot,issuecommercialpapertofunditsassets.AliabilityfortheestimateofthepotentialriskoflosstheCompanyhasastheliquidityfacilityproviderisrecordedonthebalancesheetinotherliabilities.Theliabilityisadjusteddownwardovertimeastheunderlyingassetspaydownwiththeoffsetrecognizedasothernoninterestincome.Theliabilityfortheliquidityfacilitywas$2millionatDecember31,2007,and$10millionatDecember31,2006.Inaddition,theCompanyrecordeditsretainedresidualinterestintheinvestmentsecuritiesconduitof$2millionatDecember31,2007and$13millionatDecember31,2006.TheCompanyrecorded$2millioninrevenuefromtheconduitduring2007and$8millionduring2006,includingfeesforservicing,management,administrationandaccretionincomefromretainedinterests.SensitivityAnalysisAtDecember31,2007,keyeconomicassumptionsandthesensitivityofthecurrentfairvalueofresidualcashflowstoimmediate10percentand20percentadversechangesinthoseassumptionsfortheinvestmentsecuritiesconduitwereasfollows:December31,2007(DollarsinMillions)CurrentEconomicAssumptionsSensitivityAnalysis(a)Fairvalueofretainedinterests.....................................................................$3Weightedaveragelife(inyears).....................................................................3ExpectedRemainingLife(InYears)................................................................2.3Impactof10%adversechange....................................................................$—Impactof20%adversechange....................................................................(1)(a)Theresidualcashflowdiscountratewas2.9percentatDecember31,2007.TheinvestmentsareAAA/Aaaratedorinsuredinvestments,therefore,creditlossesareassumedtobezerowithnoimpactforinterestratemovement.Also,interestratemovementscreatenomaterialimpacttothevalueoftheresidualinterest,astheinvestmentsecuritiesconduitismostlymatchfunded.Thesesensitivitiesarehypotheticalandshouldbeusedwithcaution.Asthefiguresindicate,changesinfairvaluebasedona10percentvariationinassumptionsgenerallycannotbeextrapolatedbecausetherelationshipofthechangeintheassumptionstothechangeinfairvaluemaynotbelinear.Also,inthistabletheeffectofavariationinaparticularassumptiononthefairvalueoftheretainedinterestiscalculatedwithoutchanginganyotherassumptions;inreality,changesinonefactormayresultinchangesinanother(forexample,increasesinmarketinterestratesmayresultinlowerprepaymentsandincreasedcreditlosses),whichmightmagnifyorcounteractthesensitivities.CashFlowInformationDuringtheyearsendedDecember31,2007and2006,theinvestmentconduitgenerated$11millionand$15millionofcashflows,respectively,fromservicing,otherfeesandretainedinterests.VARIABLEINTERESTENTITIESTheCompanyisinvolvedinvariousentitiesthatareconsideredtobevariableinterestentities(“VIEs”),asdefinedinFASBInterpretationNo.46R.Generally,aVIEisacorporation,partnership,trustoranyotherlegalstructurethateitherdoesnothaveequityinvestorswithsubstantivevotingrightsorhasequityinvestorsthatdonotprovidesufficientfinancialresourcesfortheentitytosupportitsactivities.TheCompany’sinvestmentsinVIEsprimarilyrepresentprivateinvestmentfundsthatmakeequityinvestments,providedebtfinancingorpartnershipstosupportcommunity-basedinvestmentsinaffordablehousing,developmententitiesthatprovidecapitalforcommunitieslocatedinlow-incomedistrictsandhistoricrehabilitationprojectsthatmayenabletheCompanytoensureregulatorycompliancewiththeCommunityReinvestmentAct.Withrespecttotheseinvestments,theCompanyisrequiredtoconsolidateanyVIEinwhichitisdeterminedtobetheprimarybeneficiary.AtDecember31,2007,approximately$382millionoftotalassetsrelatedtovariousVIEswereconsolidatedbytheCompanyinitsfinancialstatements.CreditorsoftheseVIEshavenorecoursetothegeneralcreditoftheCompany.TheCompanyisnotrequiredtoconsolidateotherVIEsasitisnottheprimarybeneficiary.Insuchcases,theCompanydoesnotabsorbthemajorityoftheentities’expectedlossesnordoesitreceiveamajorityoftheentities’expectedresidualreturns.TheamountsoftheCompany’sinvestmentintheseunconsolidatedentitiesrangedfromlessthan$1millionto$69millionwithanaggregateamountofapproximately$2.2billionatDecember31,2007.WhiletheCompanybelievespotentiallossesfromtheseinvestmentsisremote,theCompany’smaximumexposuretotheseunconsolidatedVIEs,includinganytaximplicationsandunfundedcommitments,wasapproximately$3.7billionatDecember31,2007,assumingthatalloftheseparateinvestmentswithintheindividualprivatefundsaredeemedworthlessandthecommunity-basedbusinessandhousingprojects,andrelatedtaxcredits,completelyfailedanddidnotmeetcertaingovernmentcompliancerequirements.U.S.BANCORP83Note8PREMISESANDEQUIPMENTPremisesandequipmentatDecember31consistedofthefollowing:(DollarsinMillions)20072006Land..........................................................................$335$331Buildingsandimprovements..........................................................2,4322,372Furniture,fixturesandequipment.......................................................2,4632,352Capitalizedbuildingandequipmentleases.................................................164163Constructioninprogress.............................................................8115,4025,229Lessaccumulateddepreciationandamortization............................................(3,623)(3,394)Total.......................................................................$1,779$1,835Note9MORTGAGESERVICINGRIGHTSTheCompany’sportfolioofresidentialmortgagesservicedforotherswas$97.0billionand$82.9billionatDecember31,2007and2006,respectively.EffectiveJanuary1,2006,theCompanyrecordsMSRsinitiallyatfairvalueandateachsubsequentreportingdate,andrecordschangesinfairvalueinnoninterestincomeintheperiodinwhichtheyoccur.PriortoJanuary1,2006,theinitialcarryingvalueofMSRswasamortizedovertheestimatedlifeofthetangibleassetandchangesinvaluation,underthelower-of-cost-or-marketaccountingmethod,wererecognizedasimpairmentsorreparationwithinotherintangibleexpenses.InconjunctionwithitsMSRs,theCompanymayutilizederivatives,includingfutures,forwardsandinterestrateswapstooffsettheeffectofinterestratechangesonthefairvalueofMSRs.ThenetimpactofassumptionchangesonthefairvalueofMSRs,excludingdecay,andtherelatedderivativesincludedinmortgagebankingrevenuewasanetlossof$35millionand$37millionfortheyearsendedDecember31,2007,and2006,respectively.Loanservicingfees,notincludingvaluationchanges,includedinmortgagebankingrevenuewere$353millionand$319millionfortheyearsendedDecember31,2007and2006,respectively.ChangesinfairvalueofcapitalizedMSRsaresummarizedasfollows:YearEndedDecember31(DollarsinMillions)200720062005Balanceatbeginningofperiod..................................................$1,427$1,123$866Rightspurchased.........................................................145227Rightscapitalized.........................................................440398369Rightssold.............................................................(130)––ChangesinfairvalueofMSRs:Duetochangeinvaluationassumptions(a).....................................(102)26–Otherchangesinfairvalue(b).............................................(187)(172)–Amortization............................................................––(197)Reparation(impairment)....................................................––53Changeinaccountingprinciple................................................––5Balanceatendofperiod......................................................$1,462$1,427$1,123(a)Principallyreflectschangesindiscountratesandprepaymentspeedassumptions,primarilyarisingfrominterestratechanges.(b)Primarilyrepresentschangesduetocollection/realizationofexpectedcashflowsovertime(decay).TheCompanydeterminesfairvaluebyestimatingthepresentvalueoftheasset’sfuturecashflowsutilizingmarket-basedprepaymentrates,discountrates,andotherassumptionsvalidatedthroughcomparisontotradeinformation,industrysurveys,andindependentthirdpartyappraisals.RisksinherentintheMSRsvaluationincludehigherthanexpectedprepaymentratesand/ordelayedreceiptofcashflows.TheestimatedsensitivitytochangesininterestratesofthefairvalueoftheMSRsportfolioandtherelatedderivativeinstrumentsatDecember31,2007,wasasfollows:(DollarsinMillions)50bps25bps25bps50bpsDownScenarioUpScenarioNetfairvalue.................................................................$(8)$1$(14)$(49)84U.S.BANCORPThefairvalueofMSRsanditssensitivitytochangesininterestratesisinfluencedbythemixoftheservicingportfolioandcharacteristicsofeachsegmentoftheportfolio.TheCompany’sservicingportfolioconsistsofthedistinctportfoliosofMortgageRevenueBondPrograms(“MRBP”),government-insuredmortgagesandconventionalmortgages.TheMRBPdivisionspecializesinservicingloansmadeunderstateandlocalhousingauthorityprograms.Theseprogramsprovidemortgagestolow-incomeandmoderate-incomeborrowersandaregenerallygovernment-insuredprogramswithafavorableratesubsidy,downpaymentand/orclosingcostassistance.Mortgageloansoriginatedaspartofgovernmentagencyandstateloansprogramstendtoexperienceslowerprepaymentratesandbettercashflowsthanconventionalmortgageloans.Theservicingportfoliosarepredominantlycomprisedoffixed-rateagencyloans(FNMA,FHLMC,GNMA,FHLBandvarioushousingagencies)withlimitedadjustable-rateorjumbomortgageloans.AsummaryoftheCompany’sMSRsandrelatedcharacteristicsbyportfolioasofDecember31,2007,wasasfollows:(DollarsinMillions)MRBPGovernmentConventionalTotalServicingportfolio.............................................$10,926$10,171$75,917$97,014Fairmarketvalue..............................................$231$166$1,065$1,462Value(bps)*.................................................211163140151Weighted-averageservicingfees(bps)...............................40413234Multiple(value/servicingfees).....................................5.283.984.384.44Weighted-averagenoterate.......................................5.92%6.27%5.99%6.01%Age(inyears)................................................2.93.12.72.8Expectedlife(inyears)..........................................9.06.26.36.6Discountrate................................................11.1%10.9%10.0%10.2%*Valueiscalculatedasfairmarketvaluedividedbytheservicingportfolio.Note10INTANGIBLEASSETSIntangibleassetsconsistedofthefollowing:December31(DollarsinMillions)EstimatedLife(a)AmortizationMethod(b)20072006BalanceGoodwill...........................................$7,647$7,538Merchantprocessingcontracts............................9years/8yearsSL/AC704797Coredepositbenefits..................................11years/5yearsSL/AC154212Mortgageservicingrights(c).............................1,4621,427Trustrelationships.....................................15years/7yearsSL/AC346431Otheridentifiedintangibles...............................8years/5yearsSL/AC377360Total...........................................$10,690$10,765(a)Estimatedliferepresentstheamortizationperiodforassetssubjecttothestraightlinemethodandtheweightedaverageamortizationperiodforintangiblessubjecttoacceleratedmethods.Ifmorethanoneamortizationmethodisusedforacategory,theestimatedlifeforeachmethodiscalculatedandreportedseparately.(b)Amortizationmethods:SL=straightlinemethodAC=acceleratedmethodsgenerallybasedoncashflows(c)Mortgageservicingrightsarerecordedatfairvalue,andarenotamortized.Aggregateamortizationexpenseconsistedofthefollowing:YearEndedDecember31(DollarsinMillions)200720062005Merchantprocessingcontracts...............................................$154$149$138Coredepositbenefits......................................................686574Mortgageservicingrights(a).................................................––144Trustrelationships........................................................767147Otheridentifiedintangibles..................................................787055Total...............................................................$376$355$458(a)EffectiveJanuary1,2006,mortgageservicingrightsarerecordedatfairvalueandarenolongeramortized.TheyearendedDecember31,2005,includesmortgageservicingrightsreparationof$53million.U.S.BANCORP85Belowistheestimatedamortizationexpenseforthenextfiveyears:(DollarsinMillions)2008........................................................................................$3322009........................................................................................2872010........................................................................................2242011........................................................................................1722012........................................................................................128ThefollowingtablereflectsthechangesinthecarryingvalueofgoodwillfortheyearsendedDecember31,2007and2006:(DollarsinMillions)WholesaleBankingConsumerBankingWealthManagementPaymentServicesConsolidatedCompanyBalanceatDecember31,2005.....................$1,330$2,106$1,374$2,195$7,005Goodwillacquired............................–70171265506Other(a)..................................–––2727BalanceatDecember31,2006.....................$1,330$2,176$1,545$2,487$7,538Goodwillacquired............................–41192484Other(a)..................................–––2525BalanceatDecember31,2007.....................$1,330$2,217$1,564$2,536$7,647(a)Otherchangesingoodwillincludetheeffectofforeignexchangetranslation.Note11SHORT-TERMBORROWINGS(a)Thefollowingtableisasummaryofshort-termborrowingsforthelastthreeyears:(DollarsinMillions)AmountRateAmountRateAmountRate200720062005Atyear-endFederalfundspurchased........................$2,8171.88%$2,5544.97%$3,1333.93%Securitiessoldunderagreementstorepurchase........10,5414.119,7634.5710,8543.65Commercialpaper.............................11,2294.179,9744.904,4193.89Othershort-termborrowings......................7,7835.044,6423.951,7943.89Total...................................$32,3704.16%$26,9334.62%$20,2003.76%AveragefortheyearFederalfundspurchased(b)......................$2,7319.63%$3,4588.30%$2,9166.63%Securitiessoldunderagreementstorepurchase........10,9394.5310,6804.2411,8492.93Commercialpaper.............................9,2654.756,6314.723,3263.11Othershort-termborrowings......................5,9905.543,6535.171,2913.57Total...................................$28,9255.29%$24,4225.08%$19,3823.56%Maximummonth-endbalanceFederalfundspurchased........................$4,419$5,886$4,659Securitiessoldunderagreementstorepurchase........12,18113,98814,931Commercialpaper.............................11,2299,9744,419Othershort-termborrowings......................7,7836,6201,794(a)Interestandratesarepresentedonafullytaxable-equivalentbasisutilizingataxrateof35percent.(b)Averagefederalfundspurchasedratesincludecompensationexpenseforcorporatecardandcorporatetrustbalances.86U.S.BANCORPNote12LONG-TERMDEBTLong-termdebt(debtwithoriginalmaturitiesofmorethanoneyear)atDecember31consistedofthefollowing:(DollarsinMillions)RateTypeRate(a)MaturityDate20072006U.S.Bancorp(ParentCompany)Subordinatednotes.......................................Fixed6.875%2007$–$220Fixed7.30%2007–74Fixed7.50%2026199199Convertibleseniordebentures...............................Floating3.30%203524402Floating3.68%2035447668Floating3.18%20364562,500Floating3.12%20373,000–Medium-termnotes.......................................Fixed3.13%-5.30%2008-20101,5002,575Floating4.89%-4.90%2009-20101,0001,000Juniorsubordinateddebentures..............................Fixed6.30%-10.20%2031-20674,0583,497Floating6.13%-6.22%2027–310Capitalizedleaseobligations,mortgageindebtednessandother(b)......24(26)Subtotal..........................................10,70811,419SubsidiariesSubordinatednotes.......................................Fixed6.50%2008300300Fixed6.30%2008300300Fixed5.70%2008400400Fixed7.125%2009500500Fixed6.375%20111,5001,500Fixed6.30%2014963963Fixed4.95%20141,0001,000Fixed4.80%2015500500Fixed3.80%2015369369Fixed4.375%20171,315–Floating5.52%2014550550FederalHomeLoanBankadvances...........................Fixed.50%-8.25%2008-20265,309348Floating4.85%-5.34%2008-201711,8486,749Banknotes............................................Fixed3.40%-5.92%2008-20122,4303,350Floating4.62%-5.20%2008-20475,1359,145Capitalizedleaseobligations,mortgageindebtednessandother(b)......313209Subtotal..........................................32,73226,183Total............................................$43,440$37,602(a)Weighted-averageinterestratesofmedium-termnotes,FederalHomeLoanBankadvancesandbanknoteswere4.54percent,5.00percentand4.89percent,respectively.(b)Otherincludesdebtissuancefeesandunrealizedgainsandlossesanddeferredfeesrelatingtoderivativeinstruments.ConvertibleseniordebenturesissuedbytheCompanypayinterestonaquarterlybasisuntilaspecifiedperiodoftime(fiveornineyearspriortotheapplicablematuritydate).Afterthisdate,theCompanywillnotpayinterestonthedebenturespriortomaturity.Onthematuritydateoronanyearlierredemptiondate,theholderwillreceivetheoriginalprincipalplusaccruedinterest.Thedebenturesareconvertibleatanytimeonorpriortothematuritydate.Iftheconvertibleseniordebenturesareconverted,holdersofthedebentureswillgenerallyreceivecashuptotheaccretedprincipalamountofthedebenturesplus,ifthemarketpriceoftheCompany’sstockexceedstheconversionpriceineffectonthedateofconversion,anumberofsharesoftheCompany’scommonstock,oranequivalentamountofcashattheCompany’soption,asdeterminedinaccordancewithspecifiedterms.TheconvertibleseniordebenturesarecallablebytheCompanyandputablebytheinvestorsatapriceequalto100percentoftheaccretedprincipalamountplusaccruedandunpaidinterest.During2007,investorselectedtoputdebentureswithaprincipalamountof$2.6billionbacktotheCompany.U.S.BANCORP87Thetablebelowsummarizesthesignificanttermsofthefloating-rateconvertibleseniordebenturesissuedduring2006and2007at$1,000perdebenture:(DollarsinMillions)Originalfaceamount..........$2,500$3,000AmountoutstandingatDecember31,2007.........$456$3,000Issuedate.................September20,2006February6,2007Interestrate(a).............LIBORminus1.75%LIBORminus1.75%InterestrateatDecember31,2007........3.18%3.12%Callabledates..............September20,2007,andthereafterFebruary6,2008,andthereafterPutabledates...............September20,2007,2008,2011andeveryfiveyears,thereafterFebruary6,2008,2009,2012,2017andeveryfiveyears,thereafterConversionrateinsharesper$1,000debentureatDecember31,2007........26.486924.426ConversionpricepershareatDecember31,2007........$37.75$40.94Maturitydate...............September20,2036February6,2037(a)TheinterestrateindexrepresentsthreemonthLondonInterbankOfferedRate(“LIBOR”)During2007,theCompanyissued$536millionoffixed-ratejuniorsubordinateddebenturestoaseparatelyformedwholly-ownedtrustforthepurposeofissuingCompany-obligatedmandatorilyredeemablepreferredsecuritiesataninterestrateof6.30percent.Inaddition,theCompanyelectedtoredeem$312millionoffloating-ratejuniorsubordinateddebentures.RefertoNote13,“JuniorSubordinatedDebentures”forfurtherinformationonthenatureandtermsofthesedebentures.TheCompany’ssubsidiary,U.S.BankNationalAssociation,mayissuefixedandfloatingratesubordinatednotestoprovideliquidityandsupportitscapitalrequirements.During2007,subordinatednotesof$1.3billionwereissuedbythesubsidiary.TheCompanyhasanarrangementwiththeFHLBwherebybasedoncollateralavailable(residentialandcommercialmortgages),theCompanycouldhaveborrowedanadditional$9billionatDecember31,2007.Maturitiesoflong-termdebtoutstandingatDecember31,2007,were:(DollarsinMillions)ParentCompanyConsolidated2008..........................................................................$502$10,4862009..........................................................................1,0037,3892010..........................................................................9922,0122011..........................................................................282,5902012..........................................................................73,297Thereafter.......................................................................8,17617,666Total..........................................................................$10,708$43,44088U.S.BANCORPNote13JUNIORSUBORDINATEDDEBENTURESAsofDecember31,2007,theCompanysponsoredandwhollyowned100%ofthecommonequityofninetruststhatwereformedforthepurposeofissuingCompany-obligatedmandatorilyredeemablepreferredsecurities(“TrustPreferredSecurities”)tothird-partyinvestorsandinvestingtheproceedsfromthesaleoftheTrustPreferredSecuritiessolelyinjuniorsubordinateddebtsecuritiesoftheCompany(the“Debentures”).TheDebenturesheldbythetrusts,whichtotaled$4.1billion,arethesoleassetsofeachtrust.TheCompany’sobligationsundertheDebenturesandrelateddocuments,takentogether,constituteafullandunconditionalguaranteebytheCompanyoftheobligationsofthetrusts.TheguaranteecoversthedistributionsandpaymentsonliquidationorredemptionoftheTrustPreferredSecurities,butonlytotheextentoffundsheldbythetrusts.TheCompanyhastherighttoredeemtheDebenturesinwholeorinpart,onorafterspecificdates,ataredemptionpricespecifiedintheindenturesplusanyaccruedbutunpaidinteresttotheredemptiondate.TheCompanyusedtheproceedsfromthesalesoftheDebenturesforgeneralcorporatepurposes.InconnectionwiththeformationofUSBCapitalIX,thetrustissuedredeemableIncomeTrustSecurities(“ITS”)tothirdpartyinvestors,investingtheproceedsinDebenturesissuedbytheCompanyandenteredintostockpurchasecontractstopurchasepreferredstocktobeissuedbytheCompanyinthefuture.Pursuanttothestockpurchasecontracts,theCompanyisrequiredtomakecontractpaymentsof.65percent,alsopayablesemi-annually,throughaspecifiedstockpurchasedateexpectedtobeApril15,2011.Priortothespecifiedstockpurchasedate,theTrustisrequiredtoremarketandselltheDebenturestothirdpartyinvestorstogeneratecashproceedstosatisfyitsobligationtopurchasetheCompany’sSeriesANon-CumulativePerpetualPreferredStock(“SeriesAPreferredStock”)pursuanttothestockpurchasecontracts.TheSeriesAPreferredStock,whenissuedpursuanttothestockpurchasecontracts,isexpectedtopayquarterlydividendsequaltothegreaterofthree-monthLIBORplus1.02percentor3.50percent.Inconnectionwiththistransaction,theCompanyalsoenteredintoareplacementcapitalcovenantwhichrestrictstheCompany’srightstorepurchasetheITSandtoredeemorrepurchasetheSeriesAPreferredStock.ThefollowingtableisasummaryoftheDebenturesincludedinlong-termdebtasofDecember31,2007:IssuanceTrust(DollarsinMillions)IssuanceDateSecuritiesAmountDebenturesAmountRateTypeRateMaturityDateEarliestRedemptionDateRetailUSBCapitalXII..........February2007$535$536Fixed6.30February2067February15,2012USBCapitalXI..........August2006765766Fixed6.60September2066September15,2011USBCapitalX...........April2006500501Fixed6.50April2066April12,2011USBCapitalVIII.........December2005375387Fixed6.35December2065December29,2010USBCapitalVII..........August2005300309Fixed5.88August2035August15,2010USBCapitalVI..........March2005275284Fixed5.75March2035March9,2010VailBanksStatutoryTrustII..March200177Fixed10.18June2031June8,2011VailBanksStatutoryTrustI..February20011717Fixed10.20February2031February22,2011InstitutionalUSBCapitalIX..........March20061,2501,251Fixed5.54April2042April15,2015Total...............$4,024$4,058U.S.BANCORP89Note14SHAREHOLDERS’EQUITYAtDecember31,2007and2006,theCompanyhadauthoritytoissue4billionsharesofcommonstockand50millionsharesofpreferredstock.TheCompanyhad1,728millionand1,765millionsharesofcommonstockoutstandingatDecember31,2007and2006,respectively,andhad482millionsharesreservedforfutureissuances,primarilyunderstockoptionplansandsharesthatmaybeissuedinconnectionwiththeCompany’sconvertibleseniordebentures,atDecember31,2007.AtDecember31,2007,theCompanyhad40,000sharesofpreferredstockoutstanding.OnMarch27,2006,theCompanyissueddepositarysharesrepresentinganownershipinterestin40,000sharesofSeriesBNon-CumulativePerpetualPreferredStockwithaliquidationpreferenceof$25,000pershare(the“SeriesBPreferredStock”).TheSeriesBPreferredStockhasnostatedmaturityandwillnotbesubjecttoanysinkingfundorotherobligationoftheCompany.DividendsontheSeriesBPreferredStock,ifdeclared,willaccrueandbepayablequarterly,inarrears,atarateperannumequaltothegreaterofthree-monthLIBORplus.60percent,or3.50percent.OnApril15,2011,orthereafter,theSeriesBPreferredStockisredeemableattheCompany’soption,subjecttothepriorapprovaloftheFederalReserveBoard,ataredemptionpriceequalto$25,000pershare,plusanydeclaredandunpaiddividends,withoutaccumulationofanyundeclareddividends.InconnectionwiththeissuanceoftheSeriesBPreferredStock,theCompanyalsoenteredintoareplacementcapitalcovenant,whichrestrictstheCompany’srightstoredeemorrepurchasetheSeriesBPreferredStock.Exceptincertainlimitedcircumstances,theSeriesBPreferredStockwillnothaveanyvotingrights.TheCompanyhasapreferredsharepurchaserightsplanintendedtopreservethelong-termvalueoftheCompanybydiscouragingahostiletakeoveroftheCompany.Undertheplan,eachshareofcommonstockcarriesarighttopurchaseoneone-thousandthofashareofpreferredstock.TherightsbecomeexercisableincertainlimitedcircumstancesinvolvingapotentialbusinesscombinationtransactionoranacquisitionofsharesoftheCompanyandareexercisableatapriceof$100perright,subjecttoadjustment.Followingcertainotherevents,eachrightentitlesitsholdertopurchasefor$100anamountofcommonstockoftheCompany,or,incertaincircumstances,securitiesoftheacquirer,havingathen-currentmarketvalueoftwicetheexercisepriceoftheright.ThedilutiveeffectoftherightsontheacquiringcompanyisintendedtoencourageittonegotiatewiththeCompany’sBoardofDirectorspriortoattemptingatakeover.IftheBoardofDirectorsbelievesaproposedacquisitionisinthebestinterestsoftheCompanyanditsshareholders,theBoardmayamendtheplanorredeemtherightsforanominalamountinordertopermittheacquisitiontobecompletedwithoutinterferencefromtheplan.Untilarightisexercised,theholderofarighthasnorightsasashareholderoftheCompany.TherightsexpireonFebruary27,2011.OnDecember21,2004,theBoardofDirectorsapprovedanauthorizationtorepurchase150millionsharesofoutstandingcommonstockduringthefollowing24months.In2005,allsharerepurchasesweremadeunderthisplan.OnAugust3,2006,theBoardofDirectorsapprovedanauthorizationtorepurchase150millionsharesofoutstandingcommonstockthroughDecember31,2008.ThisnewauthorizationreplacedtheDecember21,2004,repurchaseprogram.During2006,theCompanyrepurchased62millionsharesofcommonstockunderthe2004authorizationand28millionsharesunderthe2006authorization.During2007,allsharerepurchasesweremadeunderthe2006authorization.ThefollowingtablesummarizestheCompany’scommonstockrepurchasedineachofthelastthreeyears:(DollarsandSharesinMillions)SharesValue2007.........................................................................58$2,0112006.........................................................................902,8172005.........................................................................621,80790U.S.BANCORPShareholders’equityisaffectedbytransactionsandvaluationsofassetandliabilitypositionsthatrequireadjustmentstoAccumulatedOtherComprehensiveIncome.ThereconciliationofthetransactionsaffectingAccumulatedOtherComprehensiveIncomeincludedinshareholders’equityfortheyearsendedDecember31,isasfollows:(DollarsinMillions)Pre-taxTax-effectNet-of-taxBalancesNet-of-TaxTransactions2007Unrealizedlossonsecuritiesavailable-for-sale..................$(482)$183$(299)$(659)Unrealizedlossonderivatives.............................(299)115(184)(191)Foreigncurrencytranslation...............................8(3)5(6)Realizedlossonderivatives...............................–––(28)Reclassificationforrealizedlosses..........................96(38)58–Changeinretirementobligation............................352(132)220(52)Total............................................$(325)$125$(200)$(936)2006Unrealizedgainonsecuritiesavailable-for-sale..................$67$(25)$42$(370)Unrealizedgainonderivatives.............................35(14)21(6)Foreigncurrencytranslation...............................(30)11(19)(12)Realizedlossonderivatives...............................(199)75(124)(77)Reclassificationforrealizedlosses..........................33(12)21–Changeinretirementobligation............................(398)150(248)(271)Total............................................$(492)$185$(307)$(736)2005Unrealizedlossonsecuritiesavailable-for-sale..................$(539)$205$(334)$(402)Unrealizedlossonderivatives.............................(58)22(36)(27)Foreigncurrencytranslation...............................3(1)27Realizedlossonderivatives...............................(74)28(46)16Reclassificationforrealizedlosses..........................39(15)24–Minimumpensionliability.................................(38)15(23)(23)Total............................................$(667)$254$(413)$(429)RegulatoryCapitalThemeasuresusedtoassesscapitalincludethecapitalratiosestablishedbybankregulatoryagencies,includingthespecificratiosforthe“wellcapitalized”designation.CapitaladequacyfortheCompanyanditsbankingsubsidiariesismeasuredbasedontworisk-basedmeasures,Tier1andtotalrisk-basedcapital.Tier1capitalisconsideredcorecapitalandincludescommonshareholders’equityplusqualifyingpreferredstock,trustpreferredsecuritiesandminorityinterestsinconsolidatedsubsidiaries(includedinotherliabilitiesandsubjecttocertainlimitations),andisadjustedfortheaggregateimpactofcertainitemsincludedinothercomprehensiveincome.Totalrisk-basedcapitalincludesTier1capitalandotheritemssuchassubordinateddebtandtheallowanceforcreditlosses.Bothmeasuresarestatedasapercentageofrisk-weightedassets,whicharemeasuredbasedontheirperceivedcreditriskandincludecertainoff-balancesheetexposures,suchasunfundedloancommitments,lettersofcredit,andderivativecontracts.TheCompanyisalsosubjecttoaleverageratiorequirement,anonrisk-basedassetratio,whichisdefinedasTier1capitalasapercentageofaverageassets,adjustedforgoodwillandothernon-qualifyingintangiblesandotherassets.ThefollowingtableprovidesthecomponentsoftheCompany’sregulatorycapital:(DollarsinMillions)20072006December31Tier1CapitalCommonshareholders’equity......$20,046$20,197Qualifyingpreferredstock.........1,0001,000Qualifyingtrustpreferredsecurities..4,0243,639Minorityinterests...............695694LessintangibleassetsGoodwill..................(7,534)(7,423)Otherdisallowedintangibleassets.................(1,421)(1,640)Other(a)....................729569TotalTier1Capital.........17,53917,036Tier2CapitalAllowanceforcreditlosses........2,2602,256Eligiblesubordinateddebt.........6,1265,199Other......................–4TotalTier2capital.........8,3867,459TotalRiskBasedCapital.....$25,925$24,495Risk-WeightedAssets.............$212,592$194,659(a)Includestheimpactofitemsincludedinothercomprehensiveincome,suchasunrealizedgains/(losses)onavailable-for-salesecurities,accumulatednetgainsoncashflowhedges,pensionliabilityadjustments,etc.U.S.BANCORP91Minorityinterestsprincipallyrepresentpreferredstockofconsolidatedsubsidiaries.During2006,theCompany’sprimarybankingsubsidiaryformedUSBRealtyCorp.,arealestateinvestmenttrust,forthepurposeofissuing5,000sharesofFixed-to-FloatingRateExchangeableNon-cumulativePerpetualSeriesAPreferredStockwithaliquidationpreferenceof$100,000pershare(“SeriesAPreferredSecurities”)tothirdpartyinvestors,andinvestingtheproceedsincertainassets,consistingpredominatelyofmortgage-backedsecuritiesfromtheCompany.DividendsontheSeriesAPreferredSecurities,ifdeclared,willaccrueandbepayablequarterly,inarrears,atarateperannumof6.091percentfromDecember22,2006to,butexcluding,January15,2012.AfterJanuary15,2012,theratewillbeequaltothree-monthLIBORfortherelateddividendperiodplus1.147percent.IfUSBRealtyCorp.hasnotdeclaredadividendontheSeriesAPreferredSecuritiesbeforethedividendpaymentdateforanydividendperiod,suchdividendshallnotbecumulativeandshallceasetoaccrueandbepayable,andUSBRealtyCorp.willhavenoobligationtopaydividendsaccruedforsuchdividendperiod,whetherornotdividendsontheSeriesAPreferredSecuritiesaredeclaredforanyfuturedividendperiod.TheSeriesAPreferredSecuritieswillberedeemable,inwholeorinpart,attheoptionofUSBRealtyCorp.onthedividendpaymentdateoccurringinJanuary2012andeachfifthanniversarythereafter,orinwholebutnotinpart,attheoptionofUSBRealtyCorp.onanydividenddatebeforeorafterJanuary2012thatisnotafive-yeardate.AnyredemptionwillbesubjecttotheapprovaloftheOfficeoftheComptrolleroftheCurrency.ForasummaryoftheregulatorycapitalrequirementsandtheactualratiosasofDecember31,2007and2006,fortheCompanyanditsbanksubsidiaries,seeTable21includedinManagement’sDiscussionandAnalysis,whichisincorporatedbyreferenceintotheseNotestoConsolidatedFinancialStatements.Note15EARNINGSPERSHAREThecomponentsofearningspersharewere:(DollarsandSharesinMillions,ExceptPerShareData)200720062005Netincome................................................................$4,324$4,751$4,489Preferreddividends..........................................................(60)(48)–Netincomeapplicabletocommonequity.......................................$4,264$4,703$4,489Averagecommonsharesoutstanding..............................................1,7351,7781,831Neteffectoftheexerciseandassumedpurchaseofstockawardsandconversionofoutstandingconvertiblenotes.........................................................232626Averagedilutedcommonsharesoutstanding.........................................1,7581,8041,857Earningspercommonshare....................................................$2.46$2.64$2.45Dilutedearningspercommonshare...............................................$2.43$2.61$2.42FortheyearsendedDecember31,2007,2006and2005,optionstopurchase13million,1millionand16millionshares,respectively,wereoutstandingbutnotincludedinthecomputationofdilutedearningspersharebecausetheywereantidilutive.ConvertibleseniordebenturesthatcouldpotentiallybeconvertedintosharesoftheCompany’scommonstockpursuanttoaspecifiedformula,werenotincludedinthecomputationofdilutedearningspersharetotheextenttheconversionswereantidilutive.Note16EMPLOYEEBENEFITSEmployeeInvestmentPlanTheCompanyhasadefinedcontributionretirementsavingsplanwhichallowsqualifiedemployeestomakecontributionsupto75percentoftheirannualcompensation,subjecttoInternalRevenueServicelimits,throughsalarydeductionsunderSection401(k)oftheInternalRevenueCode.Employeecontributionsareinvested,attheemployees’direction,amongavarietyofinvestmentalternatives.Employeecontributionsare100percentmatchedbytheCompany,uptofourpercentofanemployee’seligibleannualcompensation.TheCompany’smatchingcontributionvestsimmediately.AlthoughthematchingcontributionisinitiallyinvestedintheCompany’scommonstock,anemployeecanreinvestthematchingcontributionsamongvariousinvestmentalternatives.Totalexpensewas$62million,$58millionand$53millionin2007,2006and2005,respectively.PensionPlansPensionbenefitsareprovidedtosubstantiallyallemployeesbasedonyearsofservice,multipliedbyapercentageoftheirfinalaveragepay.Employeesbecomevesteduponcompletingfiveyearsofvestingservice.In92U.S.BANCORPaddition,twocashbalancepensionbenefitplansexistandonlyinvestmentorinterestcreditscontinuetobecreditedtoparticipants’accounts.Planassetsconsistofvariousequities,equitymutualfundsandothermiscellaneousassets.Ingeneral,theCompany’spensionplans’objectivesincludemaintainingafundedstatussufficienttomeetparticipantbenefitobligationsovertimewhilereducinglong-termfundingrequirementsandpensioncosts.TheCompanyhasanestablishedprocessforevaluatingalltheplans,theirperformanceandsignificantplanassumptions,includingtheassumeddiscountrateandthelong-termrateofreturn(“LTROR”).Annually,theCompany’sCompensationCommittee(“theCommittee”),assistedbyoutsideconsultants,evaluatesplanobjectives,fundingpoliciesandplaninvestmentpoliciesconsideringitslong-terminvestmenttimehorizonandassetallocationstrategies.Theprocessalsoevaluatessignificantplanassumptions.Althoughplanassumptionsareestablishedannually,theCompanymayupdateitsanalysisonaninterimbasisinordertoberesponsivetosignificanteventsthatoccurduringtheyear,suchasplanmergersandamendments.Inadditiontothefundedqualifiedpensionplans,theCompanymaintainsnon-qualifiedplansthatareunfundedandtheaggregateaccumulatedbenefitobligationexceedstheassets.Theassumptionsusedincomputingthepresentvalueoftheaccumulatedbenefitobligation,theprojectedbenefitobligationandnetpensionexpensearesubstantiallyconsistentwiththoseassumptionsusedforthefundedqualifiedplans.FundingPracticesTheCompany’sfundingpolicyistocontributeamountstoitsplanssufficienttomeettheminimumfundingrequirementsoftheEmployeeRetirementIncomeSecurityActof1974,plussuchadditionalamountsastheCompanydeterminestobeappropriate.Therewerenominimumfundingrequirementsin2007or2006,andtheCompanyanticipatesnominimumfundingrequirementin2008.Anycontributionsmadetotheplansareinvestedinaccordancewithestablishedinvestmentpoliciesandassetallocationstrategies.InvestmentPoliciesandAssetAllocationInestablishingitsinvestmentpoliciesandassetallocationstrategies,theCompanyconsidersexpectedreturnsandthevolatilityassociatedwithdifferentstrategies.Theindependentconsultantperformsmodelingthatprojectsnumerousoutcomesusingabroadrangeofpossiblescenarios,includingamixofpossibleratesofinflationandeconomicgrowth.Startingwithcurrenteconomicinformation,themodelbasesitsprojectionsonpastrelationshipsbetweeninflation,fixedincomeratesandequityreturnswhenthesetypesofeconomicconditionshaveexistedovertheprevious30years,bothintheU.S.andinforeigncountries.Generally,basedonhistoricalperformanceofthevariousinvestmentassetclasses,investmentsinequitieshaveoutperformedotherinvestmentclassesbutaresubjecttohighervolatility.Whileanassetallocationincludingbondsandotherassetsgenerallyhaslowervolatilityandmayprovideprotectioninadeclininginterestrateenvironment,itlimitsthepensionplan’slong-termup-sidepotential.Giventhepensionplans’investmenthorizonandthefinancialviabilityoftheCompanytomeetitsfundingobjectives,theCommitteehasdeterminedthatanassetallocationstrategyinvestingin100percentequitiesdiversifiedamongvariousdomesticequitycategoriesandinternationalequitiesisappropriate.AtDecember31,2007and2006,planassetsofthequalifiedretirementplansincludedmutualfundsthathaveassetmanagementarrangementswithrelatedpartiestotaling$1.3billionand$1.2billion,respectively.Thefollowingtable,whichisunaudited,exceptfortheactualassetallocationsatDecember31,2007and2006,providesasummaryofassetallocationsadoptedbytheCompanycomparedwithatypicalassetallocationalternative:AssetClassTypicalAssetMixActualTargetActualTargetCompoundStandardDeviationDecember2007December2006AssetAllocation2008ExpectedReturnsDomesticEquitiesLargeCap.....................32%55%55%55%55%9.0%16.0%MidCap......................101719161910.021.0SmallCap.....................5566610.021.0InternationalEquities.............15202019209.019.0FixedIncome...................32––––AlternativeInvestments...........62–2–Other..........................–1–2–TotalMixOrWeightedRates.......100%100%100%100%100%9.516.5LTRORassumed................7.9%8.9%(a)8.9%Standarddeviation...............10.8%16.5%16.0%(a)TheLTRORassumedforthetargetassetallocationstrategyof8.9percentisbasedonarangeofestimatesevaluatedbytheCompanywhichwerecenteredaroundthecompoundexpectedreturnof9.5percentreducedforestimatedassetmanagementandadministrativefees.U.S.BANCORP93Inaccordancewithitsexistingpractices,theindependentpensionconsultantutilizedbytheCompanyupdatedtheanalysisofexpectedratesofreturnandevaluatedpeergroupdata,marketconditionsandotherfactorsrelevanttodeterminingtheLTRORassumptionsforpensioncostsfor2007and2006.TheanalysisperformedindicatedthattheLTRORassumptionof8.9percent,usedinboth2007and2006,continuedtobeinlinewithexpectedreturnsbasedoncurrenteconomicconditionsandtheCompanyexpectstocontinueusingthisLTRORin2008.RegardlessoftheextentoftheCompany’sanalysisofalternativeassetallocationstrategies,economicscenariosandpossibleoutcomes,planassumptionsdevelopedfortheLTRORaresubjecttoimprecisionandchangesineconomicfactors.Asaresultofthemodelingimprecisionanduncertainty,theCompanyconsidersarangeofpotentialexpectedratesofreturn,economicconditionsforseveralscenarios,historicalperformancerelativetoassumedratesofreturnandassetallocationandLTRORinformationforapeergroupinestablishingitsassumptions.PostretirementMedicalPlanInadditiontoprovidingpensionbenefits,theCompanyprovideshealthcareanddeathbenefitstocertainretiredemployeesthrougharetireemedicalprogram.Generally,allactiveemployeesmaybecomeeligibleforretireehealthcarebenefitsbymeetingdefinedageandservicerequirements.TheCompanymayalsosubsidizethecostofcoverageforemployeesmeetingcertainageandservicerequirements.Themedicalplancontainsothercost-sharingfeaturessuchasdeductiblesandcoinsurance.Theestimatedcostoftheseretireebenefitpaymentsisaccruedduringtheemployees’activeservice.TheCompanyusesameasurementdateofSeptember30foritsretirementplans.Thefollowingtablesummarizesbenefitobligationandplanassetactivityfortheretirementplans:(DollarsinMillions)2007200620072006PensionPlansPostretirementMedicalPlanProjectedBenefitObligationBenefitobligationatbeginningofmeasurementperiod...............$2,127$2,147$238$245Servicecost............................................707065Interestcost............................................1261181413Planparticipants’contributions...............................––1517Actuarial(gain)loss.......................................12(84)(34)(9)Benefitpayments........................................(122)(124)(35)(35)Acquisitionsandother.....................................12–22Benefitobligationatendofmeasurementperiod(a).................$2,225$2,127$206$238FairValueOfPlanAssetsFairvalueatbeginningofmeasurementperiod....................$2,578$2,419$183$39Actualreturnonplanassets.................................46826097Employercontributions.....................................19235155Planparticipants’contributions...............................––1517Benefitpayments........................................(122)(124)(35)(35)Fairvalueatendofmeasurementperiod........................$2,943$2,578$177$183FundedStatusFundedstatusatendofmeasurementperiod.....................$718$451$(29)$(55)Fourthquartercontribution..................................54––Recognizedamount.......................................$723$455$(29)$(55)ComponentsOfTheConsolidatedBalanceSheetNoncurrentbenefitasset...................................$992$704$–$–Currentbenefitliability.....................................(21)(13)––Noncurrentbenefitliability...................................(248)(236)(29)(55)Recognizedamount.......................................$723$455$(29)$(55)AccumulatedOtherComprehensiveIncomeNetactuarial(gain)loss....................................$159$480$(50)$(13)Priorservice(credit)cost...................................(26)(32)(4)(4)Transition(asset)obligation..................................––44Recognizedamount.......................................133448(50)(13)Deferredtaxasset(liability)..................................50169(19)(5)Netimpactonothercomprehensiveincome.......................$83$279$(31)$(8)(a)AtDecember31,2007and2006,theaccumulatedbenefitobligationforallqualifiedpensionplanswas$1.8billion.Thefollowingtableprovidesinformationforpensionplanswithbenefitobligationsinexcessofplanassets:(DollarsinMillions)20072006Projectedbenefitobligation..............................................................$274$249Accumulatedbenefitobligation...........................................................265248Fairvalueofplanassets...............................................................––94U.S.BANCORPThefollowingtablesetsforththecomponentsofnetperiodicbenefitcostandotheramountsrecognizedinaccumulatedothercomprehensiveincomefortheretirementplans:(DollarsinMillions)200720062005200720062005PensionPlansPostretirementMedicalPlanComponentsOfNetPeriodicBenefitCostServicecost..................................$70$70$63$6$5$5Interestcost..................................126118112141316Expectedreturnonplanassets.....................(199)(191)(194)(6)(1)(1)Priorservice(credit)costandtransition(asset)obligationamortization................................(6)(6)(6)–––Actuarial(gain)lossamortization....................639058–––Netperiodicbenefitcost............................$54$81$33$14$17$20OtherChangesInPlanAssetsAndBenefitObligationsRecognizedInAccumulatedOtherComprehensiveIncomeCurrentyearactuarial(gain)loss....................$(258)$(154)$–$(37)$(15)$–Actuarial(gain)lossamortization....................(63)(90)––––Priorservice(credit)costandtransition(asset)obligationamortization................................66––––Totalrecognizedinaccumulatedothercomprehensiveincome...$(315)$(238)$–$(37)$(15)$–Totalrecognizedinnetperiodicbenefitcostandaccumulatedothercomprehensiveincome(a)(b)...................$(261)$(157)$33$(23)$2$20(a)Theestimatednetlossandpriorservicecreditforthedefinedbenefitpensionplansthatwillbeamortizedfromaccumulatedothercomprehensiveincomeintonetperiodicbenefitcostin2008are$32millionand$(6)million,respectively.(b)Theestimatednetgainforthepostretirementmedicalplanthatwillbeamortizedfromaccumulatedothercomprehensiveincomeintonetperiodicbenefitcostin2008is$4million.Thefollowingtablesetsforthweightedaverageassumptionsusedtodetermineendofyearobligations:(DollarsinMillions)2007200620072006PensionPlansPostretirementMedicalPlanDiscountrate(a).....................................................6.3%6.0%6.1%6.0%Rateofcompensationincrease,determinedonaliabilityweightedbasis................3.22.2**Healthcarecosttrendrate(b)Priortoage65....................................................8.0%8.0%Afterage65......................................................9.010.0EffectonaccumulatedpostretirementbenefitobligationOnepercentincrease...............................................$12$15Onepercentdecrease...............................................(11)(13)(a)For2007,thediscountratewasdevelopedusingTowersPerrin’scashflowmatchingbondmodelwithamodifieddurationforthepensionplansandpostretirementmedicalplanof12.5and7.9years,respectively.For2006,thediscountratewasdevelopedusingTowersPerrin’scashflowmatchingbondmodelwithamodifieddurationof12.6yearsforallemployeebenefitplans.(b)Thepre-65andpost-65ratesareassumedtodecreasegraduallyto5.5percentby2012and6.0percentby2013,respectively,andremainattheselevelsthereafter.*NotapplicableThefollowingtablesetsforthweightedaverageassumptionsusedtodeterminenetperiodicbenefitcost:(DollarsinMillions)200720062005200720062005PensionPlansPostretirementMedicalPlanDiscountrate.....................................6.0%5.7%6.0%6.0%5.7%6.0%Expectedreturnonplanassets.........................8.98.98.93.53.53.5Rateofcompensationincrease.........................3.53.53.5***Healthcarecosttrendrate(a)Priortoage65..................................8.0%9.0%10.0%Afterage65...................................10.011.012.0EffectontotalofservicecostandinterestcostOnepercentincrease.............................$1$1$1Onepercentdecrease.............................(1)(1)(1)(a)Thepre-65andpost-65ratesareassumedtodecreasegraduallyto5.5percentand6.0percent,respectively,by2012andremainattheselevelsthereafter.*Notapplicable.U.S.BANCORP95In2008,theCompanyexpectstocontribute$21milliontoitsnon-qualifiedpensionplansandtomakenocontributionstoitspostretirementmedicalplan.Thefollowingbenefitpaymentsareexpectedtobepaidfromtheretirementplans:(DollarsinMillions)PensionPlansPostretirementMedicalPlan(a)EstimatedFutureBenefitPayments2008........................................................................$147$182009........................................................................132192010........................................................................134192011........................................................................139192012........................................................................141202013–2017...................................................................771106(a)Netofparticipantcontributions.FederalsubsidiesexpectedtobereceivedbythepostretirementmedicalplanarenotsignificanttotheCompany.Note17STOCK-BASEDCOMPENSATIONAspartofitsemployeeanddirectorcompensationprograms,theCompanymaygrantcertainstockawardsundertheprovisionsoftheexistingstockcompensationplans,includingplansassumedinacquisitions.Theplansprovideforgrantsofoptionstopurchasesharesofcommonstockatafixedpriceequaltothefairvalueoftheunderlyingstockatthedateofgrant.Optiongrantsaregenerallyexercisableuptotenyearsfromthedateofgrant.Inaddition,theplansprovideforgrantsofsharesofcommonstockorstockunitsthataresubjecttorestrictionontransferpriortovesting.Moststockawardsvestoverthreetofiveyearsandaresubjecttoforfeitureifcertainvestingrequirementsarenotmet.Stockincentiveplansofacquiredcompaniesaregenerallyterminatedatthemergerclosingdates.OptionholdersundersuchplansreceivetheCompany’scommonstock,oroptionstobuytheCompany’sstock,basedontheconversiontermsofthevariousmergeragreements.Thehistoricalstockawardinformationpresentedbelowhasbeenrestatedtoreflecttheoptionsoriginallygrantedunderacquiredcompanies’plans.AtDecember31,2007,therewere68millionshares(subjecttoadjustmentforforfeitures)availableforgrantundervariousplans.STOCKOPTIONSAWARDSThefollowingisasummaryofstockoptionsoutstandingandexercisedundervariousstockoptionsplansoftheCompany:YearEndedDecember31StockOptions/SharesWeighted-AverageExercisePriceWeighted-AverageRemainingContractualTermAggregateIntrinsicValue(inmillions)2007Numberoutstandingatbeginningofperiod.......................97,052,221$25.42Granted............................................13,810,73735.81Exercised...........................................(17,595,906)23.66Cancelled(a)........................................(2,055,588)30.59Numberoutstandingatendofperiod(b)........................91,211,464$27.224.9$413Exercisableatendofperiod.................................62,701,270$24.823.5$4342006Numberoutstandingatbeginningofperiod.......................125,983,461$24.38Granted............................................12,464,19730.16Exercised...........................................(38,848,953)23.39Cancelled(a)........................................(2,546,484)28.09Numberoutstandingatendofperiod(b)........................97,052,221$25.425.1$1,045Exercisableatendofperiod.................................71,747,675$24.014.0$8742005Numberoutstandingatbeginningofperiod.......................134,727,285$23.41Granted............................................12,489,06230.14Exercised...........................................(17,719,565)20.96Cancelled(a)........................................(3,513,321)25.07Numberoutstandingatendofperiod(b)........................125,983,461$24.385.0$694Exercisableatendofperiod.................................100,110,188$23.644.3$626(a)Optionscancelledincludesbothnon-vested(i.e.,forfeitures)andvestedoptions.(b)Outstandingoptionsincludestock-basedawardsthatmaybeforfeitedinfutureperiods,howevertheimpactoftheestimatedforfeituresisreflectedincompensationexpense.96U.S.BANCORPStock-basedcompensationexpenseisbasedontheestimatedfairvalueoftheawardatthedateofgrantormodification.ThefairvalueofeachoptionawardisestimatedonthedateofgrantusingtheBlack-Scholesoption-pricingmodel,requiringtheuseofsubjectiveassumptions.Becauseemployeestockoptionshavecharacteristicsthatdifferfromthoseoftradedoptions,includingvestingprovisionsandtradinglimitationsthatimpacttheirliquidity,thedeterminedvalueusedtomeasurecompensationexpensemayvaryfromtheiractualfairvalue.ThefollowingtableincludestheweightedaverageestimatedfairvalueandassumptionsutilizedbytheCompanyfornewlyissuedgrants:200720062005Estimatedfairvalue................................................................$5.38$6.26$6.65Risk-freeinterestrates..............................................................4.7%4.3%3.6%Dividendyield...................................................................4.3%4.0%3.5%Stockvolatilityfactor................................................................20.28.29Expectedlifeofoptions(inyears)......................................................5.05.45.4ExpectedstockvolatilityisbasedonseveralfactorsincludingthehistoricalvolatilityoftheCompany’sstock,impliedvolatilitydeterminedfromtradedoptionsandotherfactors.TheCompanyuseshistoricaldatatoestimateoptionexercisesandemployeeterminationstoestimatetheexpectedlifeofoptions.Therisk-freeinterestratefortheexpectedlifeoftheoptionsisbasedontheU.S.Treasuryyieldcurveineffectonthedateofgrant.TheexpecteddividendyieldisbasedontheCompany’sexpecteddividendyieldoverthelifeoftheoptions.Theaggregatefairvalueofoptionsharesvestedwas$61millionand$81millionfor2007and2006,respectively.Theintrinsicvalueofoptionsexercisedwas$192million,$346millionand$161millionfor2007,2006and2005,respectively.Cashreceivedfromoptionexercisesunderallshare-basedpaymentarrangementswas$400million,$885millionand$367millionfor2007,2006and2005,respectively.Thetaxbenefitrealizedforthetaxdeductionsfromoptionexercisesoftheshare-basedpaymentarrangementstotaled$73million,$131millionand$60millionfor2007,2006and2005,respectively.Tosatisfyoptionexercises,theCompanypredominantlyusestreasurystock.AdditionalinformationregardingstockoptionsoutstandingasofDecember31,2007,isasfollows:RangeofExercisePricesSharesWeighted-AverageRemainingContractualLife(Years)Weighted-AverageExercisePriceSharesWeighted-AverageExercisePriceOptionsOutstandingExercisableOptions$9.89–$15.00..............................204,1052.7$13.00204,105$13.00$15.01–$20.00..............................9,785,0143.318.869,667,62018.86$20.01–$25.00..............................25,079,1763.522.1624,994,89422.16$25.01–$30.00..............................32,130,5814.429.1321,915,73528.91$30.01–$35.00..............................12,168,7276.630.925,666,99630.77$35.01–$36.90..............................11,843,8618.936.06251,92036.0091,211,4644.9$27.2262,701,270$24.82RESTRICTEDSTOCKAWARDSAsummaryofthestatusoftheCompany’srestrictedsharesofstockispresentedbelow:YearEndedDecember31SharesWeighted-AverageGrant-DateFairValueSharesWeighted-AverageGrant-DateFairValueSharesWeighted-AverageGrant-DateFairValue200720062005NonvestedSharesNumberoutstandingatbeginningofperiod......................2,919,901$27.322,644,171$26.732,265,625$25.06Granted.....................952,87835.691,040,20130.221,024,62230.03Vested......................(1,292,748)25.31(493,730)28.91(481,323)25.58Cancelled....................(211,946)31.05(270,741)29.75(164,753)27.60Numberoutstandingatendofperiod...2,368,085$31.452,919,901$27.322,644,171$26.73U.S.BANCORP97Thetotalfairvalueofsharesvestedwas$45million,$15million,and$15millionfor2007,2006and2005,respectively.Stock-basedcompensationexpensewas$77million,$101millionand$132millionfor2007,2006and2005,respectively.Atthetimeemployeestockoptionsexpire,areexercisedorcancelled,theCompanydeterminesthetaxbenefitassociatedwiththestockawardandundercertaincircumstancesmayberequiredtorecognizeanadjustmenttotaxexpense.Onanafter-taxbasis,stock-basedcompensationwas$48million,$64millionand$83millionfor2007,2006,and2005,respectively.AsofDecember31,2007,therewas$118millionoftotalunrecognizedcompensationcostrelatedtononvestedshare-basedarrangementsgrantedundertheplans.Thatcostisexpectedtoberecognizedoveraweighted-averageperiodof3yearsascompensation.Note18INCOMETAXESThecomponentsofincometaxexpensewere:(DollarsinMillions)200720062005FederalCurrent.........................................................$1,732$1,817$2,107Deferred........................................................(95)1(281)Federalincometax..............................................1,6371,8181,826StateCurrent.........................................................248298276Deferred........................................................(2)(4)(20)Stateincometax................................................246294256Totalincometaxprovision..........................................$1,883$2,112$2,082Areconciliationofexpectedincometaxexpenseatthefederalstatutoryrateof35percenttotheCompany’sapplicableincometaxexpensefollows:(DollarsinMillions)200720062005Taxatstatutoryrate(35percent).......................................$2,173$2,402$2,300Stateincometax,atstatutoryrates,netoffederaltaxbenefit....................160191166TaxeffectofTaxcredits....................................................(220)(212)(184)Tax-exemptincome..............................................(130)(91)(70)Resolutionoffederalandstateincometaxexaminations.....................(57)(83)(94)Otheritems...................................................(43)(95)(36)Applicableincometaxes.............................................$1,883$2,112$2,082Thetaxeffectsoffairvalueadjustmentsonsecuritiesavailable-for-sale,derivativeinstrumentsincashflowhedgesandcertaintaxbenefitsrelatedtostockoptionsarerecordeddirectlytoshareholders’equityaspartofothercomprehensiveincome.Inpreparingitstaxreturns,theCompanyisrequiredtointerpretcomplextaxlawsandregulationsandutilizeincomeandcostallocationmethodstodetermineitstaxableincome.Onanongoingbasis,theCompanyissubjecttoexaminationsbyfederal,stateandlocalgovernmenttaxingauthoritiesthatmaygiverisetodifferinginterpretationsofthesecomplexlaws,regulationsandmethods.Duetothenatureoftheexaminationprocess,itgenerallytakesyearsbeforetheseexaminationsarecompletedandmattersareresolved.Includedineachofthelastthreeyearswerereductionsinincometaxexpenseandassociatedliabilitiesrelatedtotheresolutionofvariousfederalandstateincometaxexaminations.ThefederalincometaxexaminationresolutionscoversubstantiallyalloftheCompany’slegalentitiesfortheyearsthrough2004.TheCompanyalsoresolvedseveralstateincometaxexaminationswhichcovervaryingyearsfrom1998through2005indifferentstates.TheresolutionofthesecycleswastheresultofnegotiationsheldbetweentheCompanyandrepresentativesofvarioustaxingauthoritiesthroughouttheexaminations.During2007,theInternalRevenueServicecommencedexaminationoftheCompany’staxreturnsfortheyearsendedDecember31,2005and2006.Theyearsopentoexaminationbystateandlocalgovernmentauthoritiesvarybyjurisdiction.98U.S.BANCORPEffectiveJanuary1,2007,theCompanyadoptedtheprovisionsofFIN48.TheadoptionofFIN48didnotresultinacumulative-effectaccountingadjustmentfortheCompany.TheCompanyclassifiesinterestandpenaltiesrelatedtounrecognizedtaxpositionsasacomponentofincometaxexpense.AtJanuary1,2007,theCompany’stotalamountofunrecognizedtaxpositionswere$364million,ofwhich$237millionrelatedtounrecognizedtaxpositionsthatifrecognized,wouldaffecttheeffectivetaxrate.Inaddition,theamountaccruedforthepaymentofinterestonunrecognizedtaxpositionswas$22million.Areconciliationofthechangeinthefederal,stateandforeignunrecognizedtaxpositionsbalancefromJanuary1,2007toDecember31,2007follows:(DollarsinMillions)BalanceatJanuary1,2007........................................................................$364Additions....................................................................................21Examresolutions...............................................................................(49)Statuteexpirations..............................................................................(40)BalanceatDecember31,2007.....................................................................$296Thetotalamountofunrecognizedtaxpositionsthat,ifrecognizedwouldimpacttheeffectiveincometaxrateasofDecember31,2007,was$192million.DuringtheyearendedDecember31,2007,theCompanyrecognizedapproximately$13millionininterestandhadapproximately$35millionaccruedforthepaymentofinterestatDecember31,2007.TheCompanycompleteditsanalysisofuncertaintaxpositionsasofDecember31,2007.Whilecertainexaminationsmaybeconcluded,statutesmaylapseorotherdevelopmentsmayoccur.TheCompanydoesnotbelievethatasignificantincreaseordecreaseintheuncertaintaxpositionswilloccuroverthenexttwelvemonths.Deferredincometaxassetsandliabilitiesreflectthetaxeffectofestimatedtemporarydifferencesbetweenthecarryingamountsofassetsandliabilitiesforfinancialreportingpurposesandtheamountsusedforthesameitemsforincometaxreportingpurposes.ThesignificantcomponentsoftheCompany’snetdeferredtaxliabilityasofDecember31were:(DollarsinMillions)20072006DeferredTaxAssetsAllowanceforcreditlosses.........................................................$879$871Securitiesavailable-for-saleandfinancialinstruments.......................................538278Stockcompensation.............................................................232255Otherinvestmentbasisdifferences...................................................18495Accruedexpenses..............................................................111135Accruedseverance,pensionandretirementbenefits.......................................6768Federal,stateandforeignnetoperatinglosscarryforwards...................................6666Otherdeferredtaxassets,net......................................................2510Grossdeferredtaxassets.......................................................2,1021,778DeferredTaxLiabilitiesLeasingactivities...............................................................(2,139)(2,327)Pensionandpostretirementbenefits..................................................(392)(167)Mortgageservicingrights..........................................................(390)(290)Loans.......................................................................(80)(48)Deferredfees..................................................................(59)(81)Intangibleassetbasis............................................................(20)(29)Accelerateddepreciation..........................................................(9)(13)Otherdeferredtaxliabilities,net.....................................................(226)(240)Grossdeferredtaxliabilities......................................................(3,315)(3,195)Valuationallowance.............................................................(66)(66)NetDeferredTaxLiability.........................................................$(1,279)$(1,483)TheCompanyhasestablishedavaluationallowancetooffsetdeferredtaxassetsrelatedtofederal,stateandforeignnetoperatinglosscarryforwardswhicharesubjecttovariouslimitationsundertherespectiveincometaxlawsandsomeofwhichmayexpireunused.TheCompanyhasapproximately$413millionoffederal,stateandforeignnetoperatinglosscarryforwardswhichexpireatvarioustimesthrough2024.CertaineventscoveredbyInternalRevenueCodesection593(e),whichwasnotrepealed,willtriggeraU.S.BANCORP99recaptureofbaseyearreservesofacquiredthriftinstitutions.Thebaseyearreservesofacquiredthriftinstitutionswouldberecapturedifanentityceasestoqualifyasabankforfederalincometaxpurposes.Thebaseyearreservesofthriftinstitutionsalsoremainsubjecttoincometaxpenaltyprovisionsthat,ingeneral,requirerecaptureuponcertainstockredemptionsof,andexcessdistributionsto,stockholders.AtDecember31,2007,retainedearningsincludedapproximately$102millionofbaseyearreservesforwhichnodeferredfederalincometaxliabilityhasbeenrecognized.Note19DERIVATIVEINSTRUMENTSIntheordinarycourseofbusiness,theCompanyentersintoderivativetransactionstomanageitsinterestrate,prepayment,credit,priceandforeigncurrencyrisksandtoaccommodatethebusinessrequirementsofitscustomers.TheCompanydoesnotenterintoderivativetransactionsforspeculativepurposes.RefertoNote1“SignificantAccountingPolicies”intheNotestoConsolidatedFinancialStatementsforadiscussionoftheCompany’saccountingpoliciesforderivativeinstruments.Forinformationrelatedtoderivativepositionsheldforassetandliabilitymanagementpurposesandcustomer-relatedderivativepositions,seeTable18“DerivativePositions,”includedinManagement’sDiscussionandAnalysis,whichisincorporatedbyreferenceintheseNotestoConsolidatedFinancialStatements.ASSETANDLIABILITYMANAGEMENTPOSITIONSCashFlowHedgesTheCompanyhas$16.0billionofdesignatedcashflowhedgesatDecember31,2007.Thesederivativesareinterestrateswapsthatarehedgesoftheforecastedcashflowsfromtheunderlyingvariable-ratedebt.AllcashflowhedgesarehighlyeffectivefortheyearendedDecember31,2007,andthechangeinfairvalueattributedtohedgeineffectivenesswasnotmaterial.AtDecember31,2007and2006,accumulatedothercomprehensiveincomeincludedadeferredafter-taxnetlossof$219millionand$83million,respectively,relatedtocashflowhedges.Theunrealizedlosswillbereflectedinearningswhentherelatedcashflowsorhedgedtransactionsoccurandwilloffsettherelatedperformanceofthehedgeditems.Theoccurrenceoftheserelatedcashflowsandhedgedtransactionsremainsprobable.Theestimatedamountofafter-taxlosstobereclassifiedfromaccumulatedothercomprehensiveincomeintoearningsduring2008is$106million.Thisincludesgainsrelatedtohedgesthatwereterminatedearlyandtheforecastedtransactionsarestillprobable.FairValueHedgesTheCompanymayusederivativesthatareprimarilyinterestrateswapsthathedgethechangeinfairvaluerelatedtointerestratechangesofunderlyingfixed-ratedebt,juniorsubordinateddebenturesanddepositobligations.Inaddition,theCompanymayuseforwardcommitmentstosellresidentialmortgageloanstohedgeitsinterestrateriskrelatedtoresidentialmortgageloansheldforsale.TheCompanycommitstoselltheloansatspecifiedpricesinafutureperiod,typicallywithin90days,andisexposedtointerestrateriskduringtheperiodbetweenissuingaloancommitmentandthesaleoftheloanintothesecondarymarket.TheCompanyhas$7.3billionofdesignatedfairvaluehedgesatDecember31,2007.AllfairvaluehedgesareconsideredhighlyeffectivefortheyearendedDecember31,2007.Thechangeinfairvalueattributedtohedgeineffectivenesswasalossof$7millionfortheyearendedDecember31,2007.NetInvestmentHedgesTheCompanyentersintoderivativestoprotectitsnetinvestmentincertainforeignoperations.TheCompanyusesforwardcommitmentstosellspecifiedamountsofcertainforeigncurrenciesandforeigndenominateddebttohedgeitscapitalvolatilityriskassociatedwithfluctuationsinforeigncurrencyexchangerates.Thenetamountofgainsorlossesincludedinthecumulativetranslationadjustmentfor2007wasnotsignificant.OtherDerivativePositionsTheCompanyhasderivativepositionsthatareusedforinterestrateriskandotherriskmanagementpurposesbutarenotdesignatedascashflowhedgesorfairvaluehedgesinaccordancewiththeprovisionsofStatementofFinancialAccountingStandardsNo.133,“AccountingforDerivativeInstrumentsandHedgingActivities.”AtDecember31,2007,theCompanyhad$2.8billionofforwardcommitmentstosellresidentialmortgageloanstohedgetheCompany’sinterestrateriskrelatedto$3.7billionofunfundedresidentialmortgageloancommitments.Gainsandlossesonmortgagebankingderivativesandtheunfundedloancommitmentsareincludedinmortgagebankingrevenueonthestatementofincome.AtDecember31,2007,theCompanyalsoheldU.S.Treasuryfutures,optionsonU.S.Treasuryfuturescontracts,forwardcommitmentstobuyresidentialmortgageloansandinterestrateswapstoeconomicallyhedgethechangeinfairvalueofitsresidentialMSRs.CUSTOMER-RELATEDPOSITIONSTheCompanyactsasasellerandbuyerofinterestratecontractsandforeignexchangeratecontractsonbehalfofcustomers.AtDecember31,2007,theCompanyhad$40.9billionofaggregatecustomerderivativepositions,including$33.4billionofinterestrateswaps,capsand100U.S.BANCORPfloors,and$7.5billionofforeignexchangeratecontracts.TheCompanyminimizesitsmarketandliquidityrisksbytakingsimilaroffsettingpositions.Gainsorlossesoncustomer-relatedtransactionswerenotsignificantfortheyearendedDecember31,2007.Note20FAIRVALUESOFFINANCIALINSTRUMENTSDuetothenatureofitsbusinessanditscustomers’needs,theCompanyoffersalargenumberoffinancialinstruments,mostofwhicharenotactivelytraded.Whenmarketquotesareunavailable,valuationtechniques,includingdiscountedcashflowcalculationsandpricingmodelsorservices,areused.TheCompanyalsousesvariousaggregationmethodsandassumptions,suchasthediscountrateandcashflowtimingandamounts.Asaresult,thefairvalueestimatescanneitherbesubstantiatedbyindependentmarketcomparisons,norrealizedbytheimmediatesaleorsettlementofthefinancialinstrument.Also,theestimatesreflectapointintimeandcouldchangesignificantlybasedonchangesineconomicfactors,suchasinterestrates.Furthermore,thedisclosureofcertainfinancialandnonfinancialassetsandliabilitiesisnotrequired.Finally,thefairvaluedisclosureisnotintendedtoestimateamarketvalueoftheCompanyasawhole.AsummaryoftheCompany’svaluationtechniquesandassumptionsfollows.CashandCashEquivalentsThecarryingvalueofcash,amountsduefrombanks,federalfundssoldandsecuritiespurchasedunderresaleagreementswasassumedtoapproximatefairvalue.SecuritiesInvestmentsecuritieswerevaluedusingavailablemarketquotes.Insomeinstances,forsecuritiesthatarenotwidelytraded,marketquotesforcomparablesecuritieswereused.LoansTheloanportfolioincludesadjustableandfixed-rateloans,thefairvalueofwhichwasestimatedusingdiscountedcashflowanalysesandothervaluationtechniques.Tocalculatediscountedcashflows,theloanswereaggregatedintopoolsofsimilartypesandexpectedrepaymentterms.Theexpectedcashflowsofloansconsideredhistoricalprepaymentexperiencesandestimatedcreditlossesfornonperformingloansandwerediscountedusingcurrentratesofferedtoborrowersofsimilarcreditcharacteristics.Thefairvalueofadjustablerateloansisassumedtobeequaltotheirparvalue.DepositLiabilitiesThefairvalueofdemanddeposits,savingsaccountsandcertainmoneymarketdepositsisequaltotheamountpayableondemandatyear-end.Thefairvalueoffixed-ratecertificatesofdepositwasestimatedbydiscountingthecontractualcashflowusingthediscountratesimpliedbyhigh-gradecorporatebondyieldcurves.Short-termBorrowingsFederalfundspurchased,securitiessoldunderagreementstorepurchase,commercialpaperandothershort-termfundsborrowedhavefloatingratesorshort-termmaturities.Theirparvalueisassumedtoapproximatetheirfairvalue.Long-termDebtTheestimatedfairvalueofmedium-termnotes,banknotes,andsubordinateddebtwasdeterminedbyusingdiscountedcashflowanalysisbasedonhigh-gradecorporatebondyieldcurves.Floatingratedebtisassumedtobeequaltoparvalue.Capitaltrustandotherlong-termdebtinstrumentswerevaluedusingmarketquotes.InterestRateSwaps,EquityContractsandOptionsTheinterestrateoptionsandswapcashflowswereestimatedusingathird-partypricingmodelanddiscountedbasedonappropriateLIBOR,eurodollarfutures,swap,treasurynoteyieldcurvesandequitymarketprices.LoanCommitments,LettersofCreditandGuaranteesThefairvalueofcommitments,lettersofcreditandguaranteesrepresentstheestimatedcoststoterminateorotherwisesettletheobligationswithathird-party.Residentialmortgagecommitmentsareactivelytradedandthefairvalueisestimatedusingavailablemarketquotes.Otherloancommitments,lettersofcreditandguaranteesarenotactivelytraded.SubstantiallyallloancommitmentshavefloatingratesanddonotexposetheCompanytointerestraterisk,assumingnopremiumordiscountwasascribedtoloancommitmentsbecausefundingcouldoccuratmarketrates.TheCompanyestimatesthefairvalueofloancommitments,lettersofcreditandguaranteesbasedontherelatedamountofunamortizeddeferredcommitmentfees,adjustedfortheprobablelossesforthesearrangements.U.S.BANCORP101TheestimatedfairvaluesoftheCompany’sfinancialinstrumentsatDecember31areshowninthetablebelow.(DollarsinMillions)CarryingAmountFairValueCarryingAmountFairValue20072006FinancialAssetsCashandcashequivalents.........................................$9,185$9,185$8,805$8,805Investmentsecurities.............................................43,11643,12040,11740,122Loansheldforsale..............................................4,8194,8193,2563,256Loans.......................................................151,769151,512141,575140,188Totalfinancialassets...........................................208,889$208,636193,753$192,371Nonfinancialassets............................................28,72625,479Totalassets...............................................$237,615$219,232FinancialLiabilitiesDeposits.....................................................$131,445$131,469$124,882$124,762Short-termborrowings............................................32,37032,58026,93326,948Long-termdebt.................................................43,44043,00637,60237,766Totalfinancialliabilities..........................................207,255$207,055189,417$189,476Nonfinancialliabilities..........................................9,3148,618Shareholders’equity...........................................21,04621,197Totalliabilitiesandshareholders’equity............................$237,615$219,232DerivativePositionsAssetandliabilitymanagementpositionsInterestrateswaps............................................$(290)$(290)$53$53Futuresandforwards...........................................(84)(84)33Foreignexchangecontracts......................................1811811515Options....................................................1010(1)(1)Equitycontracts..............................................(3)(3)44Creditdefaultswaps...........................................11(1)(1)CustomerrelatedpositionsInterestratecontracts..........................................79795858Foreignexchangecontracts......................................141499Thefairvalueofunfundedcommitments,standbylettersofcreditandotherguaranteesisapproximatelyequaltotheircarryingvalue.Thecarryingvalueofunfundedcommitmentsandstandbylettersofcreditwas$313million.Thecarryingvalueofotherguaranteeswas$290million.Note21GUARANTEESANDCONTINGENTLIABILITIESCOMMITMENTSTOEXTENDCREDITCommitmentstoextendcreditarelegallybindingandgenerallyhavefixedexpirationdatesorotherterminationclauses.ThecontractualamountrepresentstheCompany’sexposuretocreditloss,intheeventofdefaultbytheborrower.TheCompanymanagesthiscreditriskbyusingthesamecreditpoliciesitappliestoloans.Collateralisobtainedtosecurecommitmentsbasedonmanagement’screditassessmentoftheborrower.Thecollateralmayincludemarketablesecurities,receivables,inventory,equipmentandrealestate.SincetheCompanyexpectsmanyofthecommitmentstoexpirewithoutbeingdrawn,totalcommitmentamountsdonotnecessarilyrepresenttheCompany’sfutureliquidityrequirements.Inaddition,thecommitmentsincludeconsumercreditlinesthatarecancelableuponnotificationtotheconsumer.LETTERSOFCREDITStandbylettersofcreditarecommitmentstheCompanyissuestoguaranteetheperformanceofacustomertoathird-party.Theguaranteesfrequentlysupportpublicandprivateborrowingarrangements,includingcommercialpaperissuances,bondfinancingsandothersimilartransactions.TheCompanyissuescommerciallettersofcreditonbehalfofcustomerstoensurepaymentorcollectioninconnectionwithtradetransactions.Intheeventofacustomer’snonperformance,theCompany’screditlossexposureisthesameasinanyextensionofcredit,uptotheletter’scontractualamount.Managementassessestheborrower’scredittodeterminethenecessarycollateral,whichmayincludemarketablesecurities,receivables,inventory,equipmentandrealestate.Sincetheconditionsrequiringthe102U.S.BANCORPCompanytofundlettersofcreditmaynotoccur,theCompanyexpectsitsliquidityrequirementstobelessthanthetotaloutstandingcommitments.ThemaximumpotentialfuturepaymentsguaranteedbytheCompanyunderstandbyletterofcreditarrangementsatDecember31,2007,wereapproximately$12.7billionwithaweighted-averagetermofapproximately23months.Theestimatedfairvalueofstandbylettersofcreditwas$90millionatDecember31,2007.ThecontractornotionalamountsofcommitmentstoextendcreditandlettersofcreditatDecember31,2007,wereasfollows:(DollarsinMillions)LessThanOneYearAfterOneYearTotalCommitmentstoextendcreditCommercial............$16,031$43,636$59,667Corporateandpurchasingcards(a)............11,364–11,364Consumercreditcards.....54,363–54,363Otherconsumer.........3,22015,31318,533LettersofcreditStandby...............6,6336,02112,654Commercial............29857355(a)PrimarilycancelableattheCompany’sdiscretion.LEASECOMMITMENTSRentalexpenseforoperatingleasesamountedto$207millionin2007,$193millionin2006and$192millionin2005.Futureminimumpayments,netofsubleaserentals,undercapitalizedleasesandnoncancelableoperatingleaseswithinitialorremainingtermsofoneyearormore,consistedofthefollowingatDecember31,2007:(DollarsinMillions)CapitalizedLeasesOperatingLeases2008....................$11$1682009....................101562010....................101412011....................91212012....................9105Thereafter.................34358Totalminimumleasepayments...$83$1,049Lessamountrepresentinginterest.................29Presentvalueofnetminimumleasepayments...........$54GUARANTEESGuaranteesarecontingentcommitmentsissuedbytheCompanytocustomersorotherthird-parties.TheCompany’sguaranteesprimarilyincludeparentguaranteesrelatedtosubsidiaries’third-partyborrowingarrangements;third-partyperformanceguaranteesinherentintheCompany’sbusinessoperations,suchasindemnifiedsecuritieslendingprogramsandmerchantcharge-backguarantees;indemnificationorbuy-backprovisionsrelatedtocertainassetsales;andcontingentconsiderationarrangementsrelatedtoacquisitions.Forcertainguarantees,theCompanyhasrecordedaliabilityrelatedtothepotentialobligation,orhasaccesstocollateraltosupporttheguaranteeorthroughtheexerciseofotherrecourseprovisionscanoffsetsomeorallofthemaximumpotentialfuturepaymentsmadeundertheseguarantees.Third-PartyBorrowingArrangementsTheCompanyprovidesguaranteestothird-partiesasapartofcertainsubsidiaries’borrowingarrangements,primarilyrepresentingguaranteedoperatingorcapitalleasepaymentsorotherdebtobligationswithmaturitydatesextendingthrough2013.ThemaximumpotentialfuturepaymentsguaranteedbytheCompanyunderthesearrangementswereapproximately$331millionatDecember31,2007.TheCompany’srecordedliabilitiesasofDecember31,2007,included$1millionrepresentingoutstandingamountsowedtothesethird-partiesandrequiredtoberecordedontheCompany’sbalancesheetinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStates.CommitmentsfromSecuritiesLendingTheCompanyparticipatesinsecuritieslendingactivitiesbyactingasthecustomer’sagentinvolvingtheloanofsecurities.TheCompanyindemnifiescustomersforthedifferencebetweenthemarketvalueofthesecuritieslentandthemarketvalueofthecollateralreceived.Cashcollateralizesthesetransactions.ThemaximumpotentialfuturepaymentsguaranteedbytheCompanyunderthesearrangementswereapproximately$13.9billionatDecember31,2007,andrepresentedthemarketvalueofthesecuritieslenttothird-parties.AtDecember31,2007,theCompanyheldassetswithamarketvalueof$14.3billionascollateralforthesearrangements.AssetsSalesTheCompanyhasprovidedguaranteestocertainthird-partiesinconnectionwiththesaleofcertainassets,primarilyloanportfoliosandlow-incomehousingtaxcredits.Theseguaranteesaregenerallyintheformofassetbuy-backormake-wholeprovisionsthataretriggereduponacrediteventorachangeinthetax-qualifyingstatusoftherelatedprojects,asapplicable,andremainineffectuntiltheloansarecollectedorfinaltaxcreditsarerealized,respectively.ThemaximumpotentialfuturepaymentsguaranteedbytheCompanyunderthesearrangementswereapproximately$500millionatDecember31,2007,andrepresentedtheproceedsortheguaranteedportionreceivedfromthebuyerinthesetransactionswherethebuy-backormake-wholeprovisionshavenotyetexpired.RecourseavailabletotheCompanyincludesguaranteesfromtheSmallBusinessAdministration(forSBAloanssold),recourseU.S.BANCORP103againstthecorrespondentthatoriginatedtheloanortheprivatemortgageissuer,therighttocollectpaymentsfromthedebtors,and/ortherighttoliquidatetheunderlyingcollateral,ifany,andretaintheproceeds.Basedonitsestablishedloan-to-valueguidelines,theCompanybelievestherecourseavailableissufficienttorecoverfuturepayments,ifany,undertheloanbuy-backguarantees.MerchantProcessingTheCompany,throughitssubsidiaries,providesmerchantprocessingservices.Undertherulesofcreditcardassociations,amerchantprocessorretainsacontingentliabilityforcreditcardtransactionsprocessed.Thiscontingentliabilityarisesintheeventofabillingdisputebetweenthemerchantandacardholderthatisultimatelyresolvedinthecardholder’sfavor.Inthissituation,thetransactionis“charged-back”tothemerchantandthedisputedamountiscreditedorotherwiserefundedtothecardholder.IftheCompanyisunabletocollectthisamountfromthemerchant,itbearsthelossfortheamountoftherefundpaidtothecardholder.Acardholder,throughitsissuingbank,generallyhasuntilthelatterofuptofourmonthsafterthedatethetransactionisprocessedorthereceiptoftheproductorservicetopresentacharge-backtotheCompanyasthemerchantprocessor.Theabsolutemaximumpotentialliabilityisestimatedtobethetotalvolumeofcreditcardtransactionsthatmeettheassociations’requirementstobevalidcharge-backtransactionsatanygiventime.Managementestimatesthatthemaximumpotentialexposureforcharge-backswouldapproximatethetotalamountofmerchanttransactionsprocessedthroughthecreditcardassociationsforthelastfourmonths.Forthelastfourmonthsthisamounttotaledapproximately$73.0billion.Inmostcases,thiscontingentliabilityisunlikelytoarise,asmostproductsandservicesaredeliveredwhenpurchasedandamountsarerefundedwhenitemsarereturnedtomerchants.However,wheretheproductorserviceisnotprovideduntilafuturedate(“futuredelivery”),thepotentialforthiscontingentliabilityincreases.Tomitigatethisrisk,theCompanymayrequirethemerchanttomakeanescrowdeposit,mayplacemaximumvolumelimitationsonfuturedeliverytransactionsprocessedbythemerchantatanypointintime,ormayrequirevariouscreditenhancements(includinglettersofcreditandbankguarantees).Also,merchantprocessingcontractsmayincludeeventtriggerstoprovidetheCompanymorefinancialandoperationalcontrolintheeventoffinancialdeteriorationofthemerchant.TheCompany’sprimaryexposuretofuturedeliveryisrelatedtomerchantprocessingforairlines,cruiselinesandlargetouroperators.TheCompanycurrentlyprocessescardtransactionsintheUnitedStates,CanadaandEuropeforairlines,cruiselinesandlargetouroperators.Intheeventofliquidationofthesemerchants,theCompanycouldbecomefinanciallyliableforrefundingticketspurchasedthroughthecreditcardassociationsunderthecharge-backprovisions.Charge-backriskrelatedtothesemerchantsisevaluatedinamannersimilartocreditriskassessmentsand,assuch,merchantprocessingcontractscontainvariousprovisionstoprotecttheCompanyintheeventofdefault.AtDecember31,2007,thevalueofairline,cruiselineandlargetouroperatorticketspurchasedtobedeliveredatafuturedatewas$4.0billion,withairlineticketsrepresenting91percentofthatamount.TheCompanyheldcollateralof$943millioninescrowdeposits,lettersofcreditandindemnitiesfromfinancialinstitutions,andliensonvariousassets.Withrespecttofuturedeliveryriskforothermerchants,theCompanyheld$52millionofmerchantescrowdepositsascollateral.Inadditiontospecificcollateralorothercreditenhancements,theCompanymaintainsaliabilityforitsimpliedguaranteesassociatedwithfuturedelivery.AtDecember31,2007,theliabilitywas$33millionprimarilyrelatedtotheseairlines,cruiselinesandlargetouroperatorsprocessingarrangements.Inthenormalcourseofbusiness,theCompanyhasunresolvedcharge-backsthatareinprocessofresolution.TheCompanyassessesthelikelihoodofitspotentialliabilitybasedontheextentandnatureofunresolvedcharge-backsanditshistoricallossexperience.AtDecember31,2007,theCompanyhadarecordedliabilityforpotentiallossesof$17million.ContingentConsiderationArrangementsTheCompanyhascontingentpaymentobligationsrelatedtocertainbusinesscombinationtransactions.Paymentsareguaranteedaslongascertainpost-acquisitionperformance-basedcriteriaaremetorcustomerrelationshipsaremaintained.AtDecember31,2007,themaximumpotentialfuturepaymentsrequiredtobemadebytheCompanyunderthesearrangementswasapproximately$13million.Ifrequired,themajorityofthesecontingentpaymentsarepayablewithinthenext12months.MinimumRevenueGuaranteesInthenormalcourseofbusiness,theCompanymayenterintorevenueshareagreementswiththirdpartybusinesspartnerswhogeneratecustomerreferralsorprovidemarketingorotherservicesrelatedtothegenerationofrevenue.Incertainoftheseagreements,theCompanymayguaranteethataminimumamountofrevenuesharepaymentswillbemadetothethirdpartyoveraspecifiedperiodoftime.AtDecember31,2007,themaximumpotentialfuturepaymentsrequiredtobemadebytheCompanyundertheseagreementswas$24million.OtherGuaranteesTheCompanyprovidesliquidityandcreditenhancementfacilitiestoaCompany-sponsoredconduit,asmorefullydescribedinthe“Off-BalanceSheet104U.S.BANCORPArrangements”sectionwithinManagement’sDiscussionandAnalysis.Althoughmanagementbelievesadrawagainstthesefacilitiesisremote,themaximumpotentialfuturepaymentsguaranteedbytheCompanyunderthesearrangementswereapproximately$1.2billionatDecember31,2007.TherecordedfairvalueoftheCompany’sliabilityforthecreditenhancementliquidityfacilitywas$2millionatDecember31,2007,andwasincludedinotherliabilities.TheCompanyhasalsomadefinancialperformanceguaranteesrelatedtotheoperationsofitssubsidiaries.ThemaximumpotentialfuturepaymentsguaranteedbytheCompanyunderthesearrangementswereapproximately$2.1billionatDecember31,2007.OTHERCONTINGENTLIABILITIESVisaRestructuringandCardAssociationLitigationTheCompany’spaymentservicesbusinessissuesandacquirescreditanddebitcardtransactionsthroughtheVisaU.S.A.Inc.cardassociation(“VisaU.S.A.”)oritsaffiliates(collectively“Visa”).OnOctober3,2007,VisacompletedarestructuringandissuedsharesofVisaInc.commonstocktoitsfinancialinstitutionmembersincontemplationofitsinitialpublicoffering(“IPO”)anticipatedinthefirstquarterof2008(the“VisaReorganization”).Inaddition,theCompanyandcertainofitssubsidiarieshavebeennamedasdefendantsalongwithVisaU.S.A.andMasterCardInternational(the“CardAssociations”),aswellasseveralotherbanks,inantitrustlawsuitschallengingthepracticesoftheCardAssociations(the“VisaLitigation”).VisaU.S.A.memberbankshaveacontingentobligationtoindemnifyVisaInc.undertheVisaU.S.A.bylaws(whichweremodifiedatthetimeoftherestructuringinOctober2007)forpotentiallossesarisingfromtheVisaLitigation.TheCompanyhasalsoenteredintojudgmentandlosssharingagreementswithVisaU.S.A.andcertainotherbanksinordertoapportionfinancialresponsibilitiesarisingfromanypotentialadversejudgmentornegotiatedsettlementsrelatedtotheVisaLitigation.AsapartoftheVisaReorganization,theCompanyreceiveditsproportionatenumberofClassU.S.A.sharesofVisaInc.commonstock.InconnectionwiththeIPO,itisexpectedthataportionoftheseshareswillberedeemedforcash,withtheremainingsharestobeconvertedtoClassAsharesthreeyearsaftertheIPOoruponsettlementoftheVisaLitigation,whicheverislater.Additionally,VisaInc.isexpectedtosetasideaportionoftheproceedsfromtheIPOinanescrowaccountforthebenefitofmemberfinancialinstitutionstofundtheexpensesoftheVisaLitigationaswellasthemembers’proportionateshareofanyjudgmentsorsettlementsthatmayariseoutoftheVisaLitigation.OnNovember7,2007,VisaannouncedthesettlementoftheportionoftheVisaLitigationinvolvingAmericanExpress,andaccordingly,theCompanyrecordeda$115millionchargeinthethirdquarterof2007foritsproportionateshareofthissettlement.InadditiontotheliabilityrelatedtothesettlementwithAmericanExpress,VisaU.S.A.memberbanksarerequiredtorecognizethecontingentobligationtoindemnifyVisaInc.undertheVisaU.S.A.bylawsforpotentiallossesarisingfromtheremainingVisaLitigationattheestimatedfairvalueofsuchobligationinaccordancewithFinancialAccountingStandardsBoardInterpretationNo.45,“Guarantor’sAccountingandDisclosureRequirementsforGuarantees,IncludingIndirectGuaranteesofIndebtednessofOthers.”ThecontingentobligationofmemberbanksundertheVisaU.S.A.bylawshasnospecifiedmaximumamount.Whiletheestimationofanypotentiallossesrelatedtothislitigationishighlyjudgmental,theCompanyrecognizedachargeofapproximately$215millioninthefourthquarterof2007.UponcompletionoftheanticipatedIPO,theCompanyexpectstorecognizeagainrelatedtoitsinterestinVisaInc.TheamountofthegainwillbebasedonthefairvalueofanyVisaInc.sharesutilizedtoestablishtheescrowaccount(limitedtotheamountoftheobligationrecorded)andtheVisaInc.sharesredeemedforcash.TheCompanyexpectsthevalueoftheseVisaInc.sharestoexceedtheaggregateofthe$115millionand$215millionlitigationchargesrecordedbytheCompanyinthethirdandfourthquarterof2007,respectively.OtherTheCompanyissubjecttovariousotherlitigation,investigationsandlegalandadministrativecasesandproceedingsthatariseintheordinarycourseofitsbusinesses.Duetotheircomplexnature,itmaybeyearsbeforesomemattersareresolved.Whileitisimpossibletoascertaintheultimateresolutionorrangeoffinancialliabilitywithrespecttothesecontingentmatters,theCompanybelievesthattheaggregateamountofsuchliabilitieswillnothaveamaterialadverseeffectonthefinancialcondition,resultsofoperationsorcashflowsoftheCompany.U.S.BANCORP105Note22U.S.BANCORP(PARENTCOMPANY)CONDENSEDBALANCESHEETDecember31(DollarsinMillions)20072006AssetsDepositswithsubsidiarybanks,principallyinterest-bearing...................................$5,948$9,903Available-for-salesecurities........................................................3,735253Investmentsinbankandbankholdingcompanysubsidiaries..................................21,20422,003Investmentsinnonbanksubsidiaries..................................................650297Advancestobanksubsidiaries......................................................1001,000Advancestononbanksubsidiaries...................................................726496Otherassets..................................................................1,594794Totalassets..............................................................$33,957$34,746LiabilitiesAndShareholders’EquityShort-termfundsborrowed........................................................$1,148$1,055Long-termdebt................................................................10,70811,419Otherliabilities................................................................1,0551,075Shareholders’equity.............................................................21,04621,197Totalliabilitiesandshareholders’equity............................................$33,957$34,746CONDENSEDSTATEMENTOFINCOMEYearEndedDecember31(DollarsinMillions)200720062005IncomeDividendsfrombankandbankholdingcompanysubsidiaries..........................$3,541$4,205$2,609Dividendsfromnonbanksubsidiaries..........................................224––Interestfromsubsidiaries..................................................587538200Otherincome..........................................................(27)4322Totalincome......................................................4,3254,7862,831ExpenseInterestonshort-termfundsborrowed.........................................515425Interestonlong-termdebt.................................................663630311Otherexpense.........................................................345993Totalexpense.....................................................748743429Incomebeforeincometaxesandequityinundistributedincomeofsubsidiaries..............3,5774,0432,402Incometaxcredit.......................................................(63)(58)(73)Incomeofparentcompany.................................................3,6404,1012,475Equityinundistributedincomeofsubsidiaries....................................6846502,014Netincome.......................................................$4,324$4,751$4,489106U.S.BANCORPCONDENSEDSTATEMENTOFCASHFLOWSYearEndedDecember31(DollarsinMillions)200720062005OperatingActivitiesNetincome..........................................................$4,324$4,751$4,489AdjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivitiesEquityinundistributedincomeofsubsidiaries.................................(684)(650)(2,014)Other,net.........................................................4(77)128Netcashprovidedbyoperatingactivities..................................3,6444,0242,603InvestingActivitiesProceedsfromsalesandmaturitiesofinvestmentsecurities.........................311113Purchasesofinvestmentsecurities..........................................(3,618)(154)–Investmentsinsubsidiaries...............................................(208)(7)(43)Equitydistributionsfromsubsidiaries.........................................66310739Netincreaseinshort-termadvancestosubsidiaries...............................(230)(486)(5)Long-termadvancestosubsidiaries..........................................–(1,000)–Principalcollectedonlong-termadvancestosubsidiaries...........................1,000––Other,net...........................................................(32)(18)(18)Netcashusedininvestingactivities.....................................(2,394)(1,547)(14)FinancingActivitiesNetincrease(decrease)inshort-termborrowings................................(12)27399Proceedsfromissuanceoflong-termdebt.....................................3,5366,5505,979Principalpaymentsorredemptionoflong-termdebt...............................(4,328)(5,947)(1,862)Proceedsfromissuanceofpreferredstock.....................................–948–Proceedsfromissuanceofcommonstock.....................................427910371Repurchaseofcommonstock.............................................(1,983)(2,798)(1,855)Cashdividendspaidonpreferredstock.......................................(60)(33)–Cashdividendspaidoncommonstock.......................................(2,785)(2,359)(2,245)Netcashprovidedby(usedin)financingactivities...........................(5,205)(2,456)487Changeincashandcashequivalents....................................(3,955)213,076Cashandcashequivalentsatbeginningofyear.................................9,9039,8826,806Cashandcashequivalentsatendofyear.................................$5,948$9,903$9,882Transferoffunds(dividends,loansoradvances)frombanksubsidiariestotheCompanyisrestricted.FederallawrequiresloanstotheCompanyoritsaffiliatestobesecuredandgenerallylimitsloanstotheCompanyoranindividualaffiliateto10percentofeachbank’sunimpairedcapitalandsurplus.Intheaggregate,loanstotheCompanyandallaffiliatescannotexceed20percentofeachbank’sunimpairedcapitalandsurplus.DividendpaymentstotheCompanybyitssubsidiarybanksaresubjecttoregulatoryreviewandstatutorylimitationsand,insomeinstances,regulatoryapproval.TheapprovaloftheComptrolleroftheCurrencyisrequirediftotaldividendsbyanationalbankinanycalendaryearexceedthebank’snetincomeforthatyearcombinedwithitsretainednetincomefortheprecedingtwocalendaryears,orifthebank’sretainedearningsarelessthanzero.Furthermore,dividendsarerestrictedbytheComptrolleroftheCurrency’sminimumcapitalconstraintsforallnationalbanks.Withintheseguidelines,allbanksubsidiarieshavetheabilitytopaydividendswithoutpriorregulatoryapproval.TheamountofdividendsavailabletotheparentcompanyfromthebanksubsidiariesatDecember31,2007,wasapproximately$1.1billion.U.S.BANCORP107U.S.BancorpConsolidatedBalanceSheet—FiveYearSummaryDecember31(DollarsinMillions)20072006200520042003%Change2007v2006AssetsCashandduefrombanks.........................$8,884$8,639$8,004$6,336$8,6302.8%Held-to-maturitysecurities.........................7487109127152(14.9)Available-for-salesecurities........................43,04240,03039,65941,35443,1827.5Loansheldforsale.............................4,8193,2563,0302,8132,85748.0Loans......................................153,827143,597136,462124,941116,8117.1Lessallowanceforloanlosses...................(2,058)(2,022)(2,041)(2,080)(2,184)(1.8)Netloans..................................151,769141,575134,421122,861114,6277.2Otherassets..................................29,02725,64524,24221,61320,02313.2Totalassets..............................$237,615$219,232$209,465$195,104$189,4718.4%LiabilitiesandShareholders’EquityDepositsNoninterest-bearing...........................$33,334$32,128$32,214$30,756$32,4703.8%Interest-bearing.............................98,11192,75492,49589,98586,5825.8Totaldeposits.............................131,445124,882124,709120,741119,0525.3Short-termborrowings...........................32,37026,93320,20013,08410,85020.2Long-termdebt................................43,44037,60237,06934,73933,81615.5Otherliabilities................................9,3148,6187,4017,0016,5118.1Totalliabilities............................216,569198,035189,379175,565170,2299.4Shareholders’equity.............................21,04621,19720,08619,53919,242(.7)Totalliabilitiesandshareholders’equity...........$237,615$219,232$209,465$195,104$189,4718.4%108U.S.BANCORPU.S.BancorpConsolidatedStatementofIncome—FiveYearSummaryYearEndedDecember31(DollarsinMillions)20072006200520042003%Change2007v2006InterestIncomeLoans......................................$10,627$9,873$8,306$7,125$7,2317.6%Loansheldforsale.............................27723618113424317.4Investmentsecurities............................2,0952,0011,9541,8271,6844.7Otherinterestincome...........................137153110100100(10.5)Totalinterestincome........................13,13612,26310,5519,1869,2587.1InterestExpenseDeposits....................................2,7542,3891,5599041,09715.3Short-termborrowings...........................1,4331,20369026316719.1Long-termdebt................................2,2601,9301,24790880517.1Totalinterestexpense.......................6,4475,5223,4962,0752,06916.8Netinterestincome.............................6,6896,7417,0557,1117,189(.8)Provisionforcreditlosses.........................7925446666691,25445.6Netinterestincomeafterprovisionforcreditlosses........5,8976,1976,3896,4425,935(4.8)NoninterestIncomeCreditanddebitcardrevenue......................94980071364956118.6Corporatepaymentproductsrevenue.................63155748840736113.3ATMprocessingservices.........................245243229175166.8Merchantprocessingservices......................1,10196377067556114.3Trustandinvestmentmanagementfees...............1,3391,2351,0099819548.4Depositservicecharges..........................1,0581,0239288077163.4Treasurymanagementfees........................4724414374674667.0Commercialproductsrevenue......................4334154004324014.3Mortgagebankingrevenue........................25919243239736734.9Investmentproductsfeesandcommissions.............146150152156145(2.7)Securitiesgains(losses),net......................1514(106)(105)2457.1Other......................................524813593478370(35.5)Totalnoninterestincome.....................7,1726,8466,0455,5195,3134.8NoninterestExpenseCompensation................................2,6402,5132,3832,2522,1775.1Employeebenefits..............................4944814313893282.7Netoccupancyandequipment.....................6866606416316443.9Professionalservices............................23319916614914317.1Marketingandbusinessdevelopment.................24221723519418011.5Technologyandcommunications....................5125054664304181.4Postage,printingandsupplies......................2832652552482466.8Otherintangibles...............................3763554585506825.9Debtprepayment..............................–3354155–*Other......................................1,39695277478777946.6Totalnoninterestexpense....................6,8626,1805,8635,7855,59711.0Incomefromcontinuingoperationsbeforeincometaxes....6,2076,8636,5716,1765,651(9.6)Applicableincometaxes..........................1,8832,1122,0822,0091,941(10.8)Incomefromcontinuingoperations...................4,3244,7514,4894,1673,710(9.0)Discontinuedoperations(after-tax)...................––––23–Netincome..................................$4,324$4,751$4,489$4,167$3,733(9.0)Netincomeapplicabletocommonequity...............$4,264$4,703$4,489$4,167$3,733(9.3)*NotmeaningfulU.S.BANCORP109U.S.BancorpQuarterlyConsolidatedFinancialData(DollarsinMillions,ExceptPerShareData)FirstQuarterSecondQuarterThirdQuarterFourthQuarterFirstQuarterSecondQuarterThirdQuarterFourthQuarter20072006InterestIncomeLoans...................................$2,578$2,616$2,703$2,730$2,307$2,425$2,545$2,596Loansheldforsale...........................5970767251576464Investmentsecurities.........................516516522541490500500511Otherinterestincome.........................3434333643364034Totalinterestincome.....................3,1873,2363,3343,3792,8913,0183,1493,205InterestExpenseDeposits..................................675663694722503578640668Short-termborrowings........................328379374352270270321342Long-termdebt.............................535562599564403484528515Totalinterestexpense....................1,5381,6041,6671,6381,1761,3321,4891,525Netinterestincome..........................1,6491,6321,6671,7411,7151,6861,6601,680Provisionforcreditlosses......................177191199225115125135169Netinterestincomeafterprovisionforcreditlosses.....1,4721,4411,4681,5161,6001,5611,5251,511NoninterestIncomeCreditanddebitcardrevenue...................205228235281182202206210Corporatepaymentproductsrevenue..............145157164165127139150141ATMprocessingservices.......................5962626259616360Merchantprocessingservices...................250285287279213253253244Trustandinvestmentmanagementfees.............322342331344297314305319Depositservicecharges.......................243272271272232264268259Treasurymanagementfees.....................111126118117107116111107Commercialproductsrevenue...................100105107121104107100104Mortgagebankingrevenue.....................6768764824756825Investmentproductsfeesandcommissions..........3438363838423436Securitiesgains(losses),net....................1374–3–11Other....................................15916915046231179190213Totalnoninterestincome..................1,6961,8551,8441,7771,6141,7551,7481,729NoninterestExpenseCompensation..............................635659656690633627632621Employeebenefits...........................133123119119133123123102Netoccupancyandequipment...................165171175175165161168166Professionalservices.........................4759567135415469Marketingandbusinessdevelopment..............4864666440585861Technologyandcommunications.................125126127134117127128133Postage,printingandsupplies...................6971707366666667Otherintangibles............................9495949385898992Debtprepayment............................–––––11–22Other....................................229272380515226227220279Totalnoninterestexpense..................1,5451,6401,7431,9341,5001,5301,5381,612Incomebeforeincometaxes....................1,6231,6561,5691,3591,7141,7861,7351,628Applicableincometaxes.......................493500473417561585532434Netincome................................$1,130$1,156$1,096$942$1,153$1,201$1,203$1,194Netincomeapplicabletocommonequity............$1,115$1,141$1,081$927$1,153$1,184$1,187$1,179Earningspercommonshare....................$.64$.66$.63$.54$.64$.66$.67$.67Dilutedearningspercommonshare...............$.63$.65$.62$.53$.63$.66$.66$.66110U.S.BANCORPU.S.BancorpSupplementalFinancialDataEarningsPerCommonShareSummary20072006200520042003Earningspercommonsharefromcontinuingoperations.......$2.46$2.64$2.45$2.21$1.93Discontinuedoperations............................––––.01Earningspercommonshare..........................$2.46$2.64$2.45$2.21$1.94Dilutedearningspercommonsharefromcontinuingoperations..$2.43$2.61$2.42$2.18$1.92Discontinuedoperations............................––––.01Dilutedearningspercommonshare....................$2.43$2.61$2.42$2.18$1.93Dividendsdeclaredpercommonshare...................$1.625$1.390$1.230$1.020$.855RatiosReturnonaverageassets...........................1.93%2.23%2.21%2.17%1.99%Returnonaveragecommonequity.....................21.323.622.521.419.2Averagetotalequitytoaverageassets...................9.49.79.810.210.3Dividendspercommonsharetonetincomepercommonshare..66.152.750.246.244.1OtherStatistics(DollarsandSharesinMillions)Commonsharesoutstanding(a).......................1,7281,7651,8151,8581,923AveragecommonsharesoutstandingandcommonstockequivalentsEarningspercommonshare.......................1,7351,7781,8311,8871,924Dilutedearningspercommonshare..................1,7581,8041,8571,9131,936Numberofshareholders(b)..........................63,83766,31369,21771,49274,341Commondividendsdeclared.........................$2,813$2,466$2,246$1,917$1,645(a)DefinedastotalcommonshareslesscommonstockheldintreasuryatDecember31.(b)BasedonnumberofcommonstockshareholdersofrecordatDecember31.STOCKPRICERANGEANDDIVIDENDSHighLowClosingPriceDividendsDeclaredHighLowClosingPriceDividendsDeclaredSalesPriceSalesPrice20072006Firstquarter.....................$36.84$34.40$34.97$.400$31.31$28.99$30.50$.330Secondquarter...................35.1832.7432.95$.40031.8930.1730.88$.330Thirdquarter.....................34.1729.0932.53$.40033.4230.5433.22$.330Fourthquarter....................34.2130.2131.74$.42536.8532.9636.19$.400ThecommonstockofU.S.BancorpistradedontheNewYorkStockExchange,underthetickersymbol“USB.”AtJanuary31,2008,therewere63,721holdersofrecordoftheCompany’scommonstock.STOCKPERFORMANCECHARTThefollowingchartcomparesthecumulativetotalshareholderreturnontheCompany’scommonstockduringthefiveyearsendedDecember31,2007,withthecumulativetotalreturnontheStandard&Poor’s500CommercialBankIndexandtheStandard&Poor’s500Index.Thecomparisonassumes$100wasinvestedonDecember31,2002,intheCompany’scommonstockandineachoftheforegoingindicesandassumesthereinvestmentofalldividends.100145131129161150143160 153150 202177 17318618313720072006200520042003200275100125150175200225Total ReturnS&P 500 Commercial Bank IndexUSBS&P 500U.S.BANCORP111U.S.BancorpConsolidatedDailyAverageBalanceSheetand(DollarsinMillions)AverageBalancesInterestYieldsandRatesAverageBalancesInterestYieldsandRatesYearEndedDecember3120072006AssetsInvestmentsecurities............................$41,313$2,2395.42%$39,961$2,0635.16%Loansheldforsale.............................4,2982776.443,6632366.45Loans(b)Commercial................................47,8123,1436.5745,4402,9696.53Commercialrealestate........................28,5922,0797.2728,7602,1047.32Residentialmortgages.........................22,0851,3546.1321,0531,2245.81Retail....................................48,8594,0808.3545,3483,6027.94Totalloans............................147,34810,6567.23140,6019,8997.04Otherearningassets............................1,7241377.952,0061537.64Totalearningassets......................194,68313,3096.84186,23112,3516.63Allowanceforloanlosses.........................(2,042)(2,052)Unrealizedgain(loss)onavailable-for-salesecurities......(874)(1,007)Otherassets(c)...............................31,85430,340Totalassets...........................$223,621$213,512LiabilitiesandShareholders’EquityNoninterest-bearingdeposits.......................$27,364$28,755Interest-bearingdepositsInterestchecking............................26,1173511.3423,552233.99Moneymarketsavings.........................25,3326512.5726,6675692.13Savingsaccounts............................5,30619.355,59919.35Timecertificatesofdepositlessthan$100,000........14,6546444.4013,7615243.81Timedepositsgreaterthan$100,000...............22,3021,0894.8822,2551,0444.69Totalinterest-bearingdeposits...............93,7112,7542.9491,8342,3892.60Short-termborrowings...........................28,9251,5315.2924,4221,2425.08Long-termdebt................................44,5602,2605.0740,3571,9304.78Totalinterest-bearingliabilities.................167,1966,5453.91156,6135,5613.55Otherliabilities(d)..............................8,0647,434Shareholders’equityPreferredequity.............................1,000767Commonequity.............................19,99719,943Totalshareholders’equity....................20,99720,710Totalliabilitiesandshareholders’equity.........$223,621$213,512Netinterestincome.............................$6,764$6,790Grossinterestmargin............................2.93%3.08%Grossinterestmarginwithouttaxable-equivalentincrements..2.893.05PercentofEarningAssetsInterestincome................................6.84%6.63%Interestexpense...............................3.372.98Netinterestmargin.............................3.47%3.65%Netinterestmarginwithouttaxable-equivalentincrements...3.43%3.62%(a)Interestandratesarepresentedonafullytaxable-equivalentbasisutilizingataxrateof35percent.(b)Interestincomeandratesonloansincludeloanfees.Nonaccrualloansareincludedinaverageloanbalances.(c)Includesapproximately$1,427millionofearningassetsfromdiscontinuedoperationsin2003.(d)Includesapproximately$1,034millionofinterest-bearingliabilitiesfromdiscontinuedoperationsin2003.112U.S.BANCORPRelatedYieldsandRates(a)AverageBalancesInterestYieldsandRatesAverageBalancesInterestYieldsandRatesAverageBalancesInterestYieldsandRates%ChangeAverageBalances2005200420032007v2006$42,103$1,9624.66%$43,009$1,8364.27%$37,248$1,6974.56%3.4%3,2901815.493,0791344.355,0412434.8217.342,6412,5015.8739,3482,2135.6241,3262,3155.605.227,9641,8046.4527,2671,5435.6627,1421,5855.84(.6)18,0361,0015.5514,3228125.6711,6967136.104.942,9693,0257.0439,7332,5776.4936,7732,6337.167.7131,6108,3316.33120,6707,1455.92116,9377,2466.204.81,4221107.771,3651007.331,5821006.32(14.1)178,42510,5845.93168,1239,2155.48160,8089,2865.774.5(2,098)(2,303)(2,467).5(368)(346)12013.227,23926,11929,1695.0$203,198$191,593$187,6304.7$29,229$29,816$31,715(4.8)22,785135.5920,93371.3419,10484.4410.929,3143581.2232,854235.7232,310318.98(5.0)5,81915.265,86615.265,61221.38(5.2)13,1993892.9513,0743412.6115,4934512.916.520,6556623.2013,6792421.7712,3192231.81.291,7721,5591.7086,4069041.0584,8381,0971.292.019,3826903.5614,5342631.8110,5031671.5918.436,1411,2473.4535,1159082.5933,6638052.3910.4147,2953,4962.37136,0552,0751.53129,0042,0691.606.86,7216,2637,5188.5–––30.419,95319,45919,393.319,95319,45919,3931.4$203,198$191,593$187,6304.7%$7,088$7,140$7,2173.56%3.95%4.17%3.543.934.155.93%5.48%5.77%1.961.231.283.97%4.25%4.49%3.95%4.23%4.47%U.S.BANCORP113CompanyInformationGeneralBusinessDescriptionU.S.Bancorpisamulti-statefinancialservicesholdingcompanyheadquarteredinMinneapolis,Minnesota.U.S.BancorpwasincorporatedinDelawarein1929andoperatesasafinancialholdingcompanyandabankholdingcompanyundertheBankHoldingCompanyActof1956.U.S.Bancorpprovidesafullrangeoffinancialservices,includinglendinganddepositoryservices,cashmanagement,foreignexchangeandtrustandinvestmentmanagementservices.Italsoengagesincreditcardservices,merchantandATMprocessing,mortgagebanking,insurance,brokerageandleasing.U.S.Bancorp’sbankingsubsidiariesareengagedinthegeneralbankingbusiness,principallyindomesticmarkets.Thesubsidiariesrangeinsizefrom$39millionto$139billionindepositsandprovideawiderangeofproductsandservicestoindividuals,businesses,institutionalorganizations,governmentalentitiesandotherfinancialinstitutions.CommercialandconsumerlendingservicesareprincipallyofferedtocustomerswithintheCompany’sdomesticmarkets,todomesticcustomerswithforeignoperationsandwithincertainnichenationalvenues.Lendingservicesincludetraditionalcreditproductsaswellascreditcardservices,financingandimport/exporttrade,asset-backedlending,agriculturalfinanceandotherproducts.Leasingproductsareofferedthroughbankleasingsubsidiaries.Depositoryservicesincludecheckingaccounts,savingsaccountsandtimecertificatecontracts.Ancillaryservicessuchasforeignexchange,treasurymanagementandreceivablelock-boxcollectionareprovidedtocorporatecustomers.U.S.Bancorp’sbankandtrustsubsidiariesprovideafullrangeofassetmanagementandfiduciaryservicesforindividuals,estates,foundations,businesscorporationsandcharitableorganizations.U.S.Bancorp’snon-bankingsubsidiariesprimarilyofferinvestmentandinsuranceproductstotheCompany’scustomersprincipallywithinitsmarketsandmutualfundprocessingservicestoabroadrangeofmutualfunds.Bankingandinvestmentservicesareprovidedthroughanetworkof2,518bankingofficesprincipallyoperatingin24statesintheMidwestandWest.TheCompanyoperatesanetworkof4,867brandedATMsandprovides24-hour,sevendayaweektelephonecustomerservice.MortgagebankingservicesareprovidedthroughbankingofficesandloanproductionofficesthroughouttheCompany’smarkets.Consumerlendingproductsmaybeoriginatedthroughbankingoffices,indirectcorrespondents,brokersorotherlendingsources,andaconsumerfinancedivision.TheCompanyisalsooneofthelargestprovidersofVisa»corporateandpurchasingcardservicesandcorporatetrustservicesintheUnitedStates.Awholly-ownedsubsidiary,NOVAInformationSystems,Inc.(“NOVA”),providesmerchantprocessingservicesdirectlytomerchantsandthroughanetworkofbankingaffiliations.AffiliatesofNOVAprovidesimilarmerchantservicesinCanadaandsegmentsofEurope.TheseforeignoperationsarenotsignificanttotheCompany.Onafull-timeequivalentbasis,asofDecember31,2007U.S.Bancorpemployed52,277people.CompetitionThecommercialbankingbusinessishighlycompetitive.Subsidiarybankscompetewithothercommercialbanksandwithotherfinancialinstitutions,includingsavingsandloanassociations,mutualsavingsbanks,financecompanies,mortgagebankingcompanies,creditunionsandinvestmentcompanies.Inrecentyears,competitionhasincreasedfrominstitutionsnotsubjecttothesameregulatoryrestrictionsasdomesticbanksandbankholdingcompanies.GovernmentPoliciesTheoperationsoftheCompany’svariousoperatingunitsareaffectedbystateandfederallegislativechangesandbypoliciesofvariousregulatoryauthorities,includingthoseofthenumerousstatesinwhichtheyoperate,theUnitedStatesandforeigngovernments.Thesepoliciesinclude,forexample,statutorymaximumlegallendingrates,domesticmonetarypoliciesoftheBoardofGovernorsoftheFederalReserveSystem,UnitedStatesfiscalpolicy,internationalcurrencyregulationsandmonetarypolicies,U.S.PatriotActandcapitaladequacyandliquidityconstraintsimposedbybankregulatoryagencies.SupervisionandRegulationAsaregisteredbankholdingcompanyandfinancialholdingcompanyundertheBankHoldingCompanyAct,U.S.Bancorpissubjecttothesupervisionof,andregulationby,theBoardofGovernorsoftheFederalReserveSystem.UndertheBankHoldingCompanyAct,afinancialholdingcompanymayengageinbanking,managingorcontrollingbanks,furnishingorperformingservicesforbanksitcontrols,andconductingotherfinancialactivities.U.S.BancorpmustobtainthepriorapprovaloftheFederalReserveBoardbeforeacquiringmorethan5percentoftheoutstandingsharesofanotherbankorbankholdingcompany,andmustprovidenoticeto,andinsomesituationsobtainthepriorapprovalof,theFederalReserveBoardinconnectionwithengagingin,oracquiringmorethan5percentoftheoutstandingsharesofacompanyengagedin,anewfinancialactivity.UndertheBankHoldingCompanyAct,U.S.BancorpmayacquirebanksthroughouttheUnitedStates,subjectonlytostateorfederaldepositcapsandstateminimumagerequirements.114U.S.BANCORPNationalbanksaresubjecttothesupervisionof,andareexaminedby,theComptrolleroftheCurrency.AllsubsidiarybanksoftheCompanyaremembersoftheFederalDepositInsuranceCorporationandaresubjecttoexaminationbytheFDIC.Inpractice,theprimaryfederalregulatormakesregularexaminationsofeachsubsidiarybanksubjecttoitsregulatoryrevieworparticipatesinjointexaminationswithotherfederalregulators.Areassubjecttoregulationbyfederalauthoritiesincludetheallowanceforcreditlosses,investments,loans,mergers,issuanceofsecurities,paymentofdividends,establishmentofbranchesandotheraspectsofoperations.PropertiesU.S.Bancorpanditssignificantsubsidiariesoccupyheadquarterofficesunderalong-termleaseinMinneapolis,Minnesota.TheCompanyalsoleasessevenfreestandingoperationscentersinCincinnati,Denver,Milwaukee,Minneapolis,PortlandandSt.Paul.TheCompanyownstenprincipaloperationscentersinCincinnati,Coeurd’Alene,Fargo,Milwaukee,Owensboro,Portland,St.LouisandSt.Paul.AtDecember31,2007,theCompany’ssubsidiariesownedandoperatedatotalof1,485facilitiesandleasedanadditional1,429facilities,allofwhicharewellmaintained.TheCompanybelievesitscurrentfacilitiesareadequatetomeetitsneeds.AdditionalinformationwithrespecttopremisesandequipmentispresentedinNotes8and21oftheNotestoConsolidatedFinancialStatements.RiskFactorsThereareanumberoffactors,includingthosespecifiedbelow,thatmayadverselyaffecttheCompany’sbusiness,financialresultsorstockprice.AdditionalrisksthattheCompanycurrentlydoesnotknowaboutorcurrentlyviewsasimmaterialmayalsoimpairtheCompany’sbusinessoradverselyimpactitsfinancialresultsorstockprice.IndustryRiskFactorsTheCompany’sbusinessandfinancialresultsaresignificantlyaffectedbygeneralbusinessandeconomicconditionsTheCompany’sbusinessactivitiesandearningsareaffectedbygeneralbusinessconditionsintheUnitedStatesandabroad.Theseconditionsincludeshort-termandlong-terminterestrates,inflation,monetarysupply,fluctuationsinbothdebtandequitycapitalmarkets,andthestrengthoftheUnitedStateseconomyandthelocaleconomiesinwhichtheCompanyoperates.Forexample,aneconomicdownturn,anincreaseinunemployment,adeclineinrealestatevaluesorothereventsthataffecthouseholdand/orcorporateincomescouldresultinadeteriorationofcreditquality,achangeintheallowanceforcreditlosses,orreduceddemandforcreditorfee-basedproductsandservices.ChangesinthefinancialperformanceandconditionoftheCompany’sborrowerscouldnegativelyaffectrepaymentofthoseborrowers’loans.Inaddition,changesinsecuritiesmarketconditionsandmonetaryfluctuationscouldadverselyaffecttheavailabilityandtermsoffundingnecessarytomeettheCompany’sliquidityneeds.ChangesinthedomesticinterestrateenvironmentcouldreducetheCompany’snetinterestincomeTheoperationsoffinancialinstitutionssuchastheCompanyaredependenttoalargedegreeonnetinterestincome,whichisthedifferencebetweeninterestincomefromloansandinvestmentsandinterestexpenseondepositsandborrowings.Aninstitution’snetinterestincomeissignificantlyaffectedbymarketratesofinterest,whichinturnareaffectedbyprevailingeconomicconditions,bythefiscalandmonetarypoliciesofthefederalgovernmentandbythepoliciesofvariousregulatoryagencies.Likeallfinancialinstitutions,theCompany’sbalancesheetisaffectedbyfluctuationsininterestrates.Volatilityininterestratescanalsoresultintheflowoffundsawayfromfinancialinstitutionsintodirectinvestments.Directinvestments,suchasU.S.Governmentandcorporatesecuritiesandotherinvestmentvehicles(includingmutualfunds)generallypayhigherratesofreturnthanfinancialinstitutions,becauseoftheabsenceoffederalinsurancepremiumsandreserverequirements.Changesinthelaws,regulationsandpoliciesgoverningfinancialservicescompaniescouldaltertheCompany’sbusinessenvironmentandadverselyaffectoperationsTheBoardofGovernorsoftheFederalReserveSystemregulatesthesupplyofmoneyandcreditintheUnitedStates.ItsfiscalandmonetarypoliciesdetermineinalargeparttheCompany’scostoffundsforlendingandinvestingandthereturnthatcanbeearnedonthoseloansandinvestments,bothofwhichaffecttheCompany’snetinterestmargin.FederalReserveBoardpoliciescanalsomateriallyaffectthevalueoffinancialinstrumentsthattheCompanyholds,suchasdebtsecuritiesandmortgageservicingrights.TheCompanyanditsbanksubsidiariesareheavilyregulatedatthefederalandstatelevels.Thisregulationistoprotectdepositors,federaldepositinsurancefundsandthebankingsystemasawhole.Congressandstatelegislaturesandfederalandstateagenciescontinuallyreviewbankinglaws,regulationsandpoliciesforpossiblechanges.Changesinstatutes,regulationsorpoliciescouldaffecttheCompanyinsubstantialandunpredictableways,includinglimitingthetypesoffinancialservicesandproductsthattheCompanyoffersand/orincreasingtheabilityofnon-bankstooffercompetingfinancialservicesandproducts.TheCompanycannotpredictwhetheranyofthispotentiallegislationwillbeenacted,andifenacted,theeffectthatitoranyregulationswouldhaveontheCompany’sfinancialconditionorresultsofoperations.U.S.BANCORP115Thefinancialservicesindustryishighlycompetitive,andcompetitivepressurescouldintensifyandadverselyaffecttheCompany’sfinancialresultsTheCompanyoperatesinahighlycompetitiveindustrythatcouldbecomeevenmorecompetitiveasaresultoflegislative,regulatoryandtechnologicalchangesandcontinuedconsolidation.TheCompanycompeteswithothercommercialbanks,savingsandloanassociations,mutualsavingsbanks,financecompanies,mortgagebankingcompanies,creditunionsandinvestmentcompanies.Inaddition,technologyhasloweredbarrierstoentryandmadeitpossiblefornon-bankstoofferproductsandservicestraditionallyprovidedbybanks.ManyoftheCompany’scompetitorshavefewerregulatoryconstraintsandsomehavelowercoststructures.Also,thepotentialneedtoadapttoindustrychangesininformationtechnologysystems,onwhichtheCompanyandfinancialservicesindustryarehighlydependent,couldpresentoperationalissuesandrequirecapitalspending.ChangesinconsumeruseofbanksandchangesinconsumerspendingandsavinghabitscouldadverselyaffecttheCompany’sfinancialresultsTechnologyandotherchangesnowallowmanyconsumerstocompletefinancialtransactionswithoutusingbanks.Forexample,consumerscanpaybillsandtransferfundsdirectlywithoutgoingthroughabank.This“disintermediation”couldresultinthelossoffeeincome,aswellasthelossofcustomerdepositsandincomegeneratedfromthosedeposits.Inaddition,changesinconsumerspendingandsavinghabitscouldadverselyaffecttheCompany’soperations,andtheCompanymaybeunabletotimelydevelopcompetitivenewproductsandservicesinresponsetothesechangesthatareacceptedbynewandexistingcustomers.ActsorthreatsofterrorismandpoliticalormilitaryactionstakenbytheUnitedStatesorothergovernmentscouldadverselyaffectgeneraleconomicorindustryconditionsGeopoliticalconditionsmayalsoaffecttheCompany’searnings.ActsorthreatsofterrorismandpoliticalormilitaryactionstakenbytheUnitedStatesorothergovernmentsinresponsetoterrorism,orsimilaractivity,couldadverselyaffectgeneraleconomicorindustryconditions.CompanyRiskFactorsTheCompany’sallowanceforloanlossesmaynotbeadequatetocoveractuallossesLikeallfinancialinstitutions,theCompanymaintainsanallowanceforloanlossestoprovideforloandefaultsandnon-performance.TheCompany’sallowanceforloanlossesisbasedonitshistoricallossexperienceaswellasanevaluationoftherisksassociatedwithitsloanportfolio,includingthesizeandcompositionoftheloanportfolio,currenteconomicconditionsandgeographicconcentrationswithintheportfolio.ThestrengthoftheUnitedStateseconomyandthelocaleconomieswhichtheCompanydoesbusinessmaybedifferentthanexpected,resultingin,amongotherthings,anincreaseddeteriorationincreditqualityofourloanportfolio,orinthevalueofcollateralsecuringthoseloans.TheCompany’sallowanceforloanlossesmaynotbeadequatetocoveractualloanlosses,andfutureprovisionsforloanlossescouldmateriallyandadverselyaffectitsfinancialresults.TheCompanymaysufferlossesinitsloanportfoliodespiteitsunderwritingpracticesTheCompanyseekstomitigatetherisksinherentinitsloanportfoliobyadheringtospecificunderwritingpractices.Thesepracticesofteninclude:analysisofaborrower’scredithistory,financialstatements,taxreturnsandcashflowprojections;valuationofcollateralbasedonreportsofindependentappraisers;andverificationofliquidassets.AlthoughtheCompanybelievesthatitsunderwritingcriteriaareappropriateforthevariouskindsofloansitmakes,theCompanymayincurlossesonloansthatmeetthesecriteria.TheCompany’sinvestmentportfoliovaluesmaybeadverselyimpactedbychanginginterestratesanddeteriorationinthecreditqualityofunderlyingcollateralwithinastructuredinvestmentTheCompanygenerallyinvestsingovernmentsecurities,securitiesissuedbygovernment-backedagenciesorprivatelyissuedsecuritieshighlyratedbycreditratingagenciesthatmayhavelimitedcreditrisk,but,aresubjecttochangesinmarketvalueduetochanginginterestratesandimpliedcreditspreads.However,certainsecuritiesrepresentbeneficialinterestsinstructuredinvestmentswhicharecollateralizedbyresidentialmortgages,collateralizeddebtobligationsandothersimilarasset-backedassets.Whilethesestructuredinvestmentsarehighlyratedbycreditratingagenciesatthetimeofinitialinvestment,thesecreditratingsaresubjecttochangeduetodeteriorationinthecreditqualityoftheunderlyingcollateral.Duringrecentmonths,thesestructuredsecuritieshavebeensubjecttosignificantmarketvolatilityduetotheuncertaintyofthecreditratings,deteriorationincreditlossesoccurringwithincertaintypesofresidentialmortgages,changesinprepaymentsandthelackoftransparencyrelatedtothestructuresandthecollateralunderlyingthestructuredinvestmentvehicles.Givenrecentmarketconditionsandchangingeconomicfactors,theCompanymayhavevaluationlossesorrecognizeimpairmentrelatedtostructuredinvestments.MaintainingorincreasingtheCompany’smarketsharemaydependonloweringpricesandmarketacceptanceofnewproductsandservicesTheCompany’ssuccessdepends,inpart,onitsabilitytoadaptitsproductsandservicestoevolvingindustrystandards.Thereisincreasingpressuretoprovideproductsandservicesatlowerprices.Lowerprices116U.S.BANCORPcanreducetheCompany’snetinterestmarginandrevenuesfromitsfee-basedproductsandservices.Inaddition,thewidespreadadoptionofnewtechnologies,includinginternetservices,couldrequiretheCompanytomakesubstantialexpenditurestomodifyoradapttheCompany’sexistingproductsandservices.Also,theseandothercapitalinvestmentsintheCompany’sbusinessesmaynotproduceexpectedgrowthinearningsanticipatedatthetimeoftheexpenditure.TheCompanymightnotbesuccessfulinintroducingnewproductsandservices,achievingmarketacceptanceofitsproductsandservices,ordevelopingandmaintainingloyalcustomers.Becausethenatureofthefinancialservicesbusinessinvolvesahighvolumeoftransactions,theCompanyfacessignificantoperationalrisksTheCompanyoperatesinmanydifferentbusinessesindiversemarketsandreliesontheabilityofitsemployeesandsystemstoprocessahighnumberoftransactions.OperationalriskistheriskoflossresultingfromtheCompany’soperations,including,butnotlimitedto,theriskoffraudbyemployeesorpersonsoutsideoftheCompany,theexecutionofunauthorizedtransactionsbyemployees,errorsrelatingtotransactionprocessingandtechnology,breachesoftheinternalcontrolsystemandcompliancerequirementsandbusinesscontinuationanddisasterrecovery.Thisriskoflossalsoincludesthepotentiallegalactionsthatcouldariseasaresultofanoperationaldeficiencyorasaresultofnoncompliancewithapplicableregulatorystandards,adversebusinessdecisionsortheirimplementation,andcustomerattritionduetopotentialnegativepublicity.Intheeventofabreakdownintheinternalcontrolsystem,improperoperationofsystemsorimproperemployeeactions,theCompanycouldsufferfinancialloss,faceregulatoryactionandsufferdamagetoitsreputation.ThechangeinresidualvalueofleasedassetsmayhaveanadverseimpactontheCompany’sfinancialresultsTheCompanyengagesinleasingactivitiesandissubjecttotheriskthattheresidualvalueofthepropertyunderleasewillbelessthantheCompany’srecordedassetvalue.AdversechangesintheresidualvalueofleasedassetscanhaveanegativeimpactontheCompany’sfinancialresults.TheriskofchangesintherealizedvalueoftheleasedassetscomparedtorecordedresidualvaluesdependsonmanyfactorsoutsideoftheCompany’scontrol,includingsupplyanddemandfortheassets,collectinginsuranceclaims,conditionoftheassetsattheendoftheleaseterm,andothereconomicfactors.NegativepublicitycoulddamagetheCompany’sreputationandadverselyimpactitsbusinessandfinancialresultsReputationrisk,ortherisktotheCompany’searningsandcapitalfromnegativepublicity,isinherentintheCompany’sbusiness.NegativepublicitycanresultfromtheCompany’sactualorallegedconductinanynumberofactivities,includinglendingpractices,corporategovernanceandacquisitions,andactionstakenbygovernmentregulatorsandcommunityorganizationsinresponsetothoseactivities.NegativepublicitycanadverselyaffecttheCompany’sabilitytokeepandattractcustomersandcanexposetheCompanytolitigationandregulatoryaction.BecausemostoftheCompany’sbusinessesoperateunderthe“U.S.Bank”brand,actualorallegedconductbyonebusinesscanresultinnegativepublicityaboutotherbusinessestheCompanyoperates.AlthoughtheCompanytakesstepstominimizereputationriskindealingwithcustomersandotherconstituencies,theCompany,asalargediversifiedfinancialservicescompanywithahighindustryprofile,isinherentlyexposedtothisrisk.TheCompany’sreportedfinancialresultsdependonmanagement’sselectionofaccountingmethodsandcertainassumptionsandestimatesTheCompany’saccountingpoliciesandmethodsarefundamentaltohowtheCompanyrecordsandreportsitsfinancialconditionandresultsofoperations.TheCompany’smanagementmustexercisejudgmentinselectingandapplyingmanyoftheseaccountingpoliciesandmethodssotheycomplywithgenerallyacceptedaccountingprinciplesandreflectmanagement’sjudgmentofthemostappropriatemannertoreporttheCompany’sfinancialconditionandresults.Insomecases,managementmustselecttheaccountingpolicyormethodtoapplyfromtwoormorealternatives,anyofwhichmightbereasonableunderthecircumstances,yetmightresultintheCompany’sreportingmateriallydifferentresultsthanwouldhavebeenreportedunderadifferentalternative.CertainaccountingpoliciesarecriticaltopresentingtheCompany’sfinancialconditionandresults.Theyrequiremanagementtomakedifficult,subjectiveorcomplexjudgmentsaboutmattersthatareuncertain.Materiallydifferentamountscouldbereportedunderdifferentconditionsorusingdifferentassumptionsorestimates.Thesecriticalaccountingpoliciesinclude:theallowanceforcreditlosses;estimationsoffairvalue;thevaluationofmortgageservicingrights;thevaluationofgoodwillandotherintangibleassets;andincometaxes.Becauseoftheuncertaintyofestimatesinvolvedinthesematters,theCompanymayberequiredtodooneormoreofthefollowing:significantlyincreasetheallowanceforcreditlossesand/orsustaincreditlossesthataresignificantlyhigherthanthereserveprovided;recognizesignificantimpairmentonitsgoodwillandotherintangibleassetbalances;orsignificantlyincreaseitsaccruedtaxesliability.Formoreinformation,referto“CriticalAccountingPolicies”inthisAnnualReport.ChangesinaccountingstandardscouldmateriallyimpacttheCompany’sfinancialstatementsFromtimetotime,theU.S.BANCORP117FinancialAccountingStandardsBoardchangesthefinancialaccountingandreportingstandardsthatgovernthepreparationoftheCompany’sfinancialstatements.ThesechangescanbehardtopredictandcanmateriallyimpacthowtheCompanyrecordsandreportsitsfinancialconditionandresultsofoperations.Insomecases,theCompanycouldberequiredtoapplyaneworrevisedstandardretroactively,resultingintheCompany’srestatingpriorperiodfinancialstatements.AcquisitionsmaynotproducerevenueenhancementsorcostsavingsatlevelsorwithintimeframesoriginallyanticipatedandmayresultinunforeseenintegrationdifficultiesTheCompanyregularlyexploresopportunitiestoacquirefinancialservicesbusinessesorassetsandmayalsoconsideropportunitiestoacquireotherbanksorfinancialinstitutions.TheCompanycannotpredictthenumber,sizeortimingofacquisitions.DifficultyinintegratinganacquiredbusinessorcompanymaycausetheCompanynottorealizeexpectedrevenueincreases,costsavings,increasesingeographicorproductpresence,and/orotherprojectedbenefitsfromtheacquisition.Theintegrationcouldresultinhigherthanexpecteddepositattrition(run-off),lossofkeyemployees,disruptionoftheCompany’sbusinessorthebusinessoftheacquiredcompany,orotherwiseadverselyaffecttheCompany’sabilitytomaintainrelationshipswithcustomersandemployeesorachievetheanticipatedbenefitsoftheacquisition.Also,thenegativeeffectofanydivestituresrequiredbyregulatoryauthoritiesinacquisitionsorbusinesscombinationsmaybegreaterthanexpected.TheCompanymustgenerallyreceivefederalregulatoryapprovalbeforeitcanacquireabankorbankholdingcompany.Indeterminingwhethertoapproveaproposedbankacquisition,federalbankregulatorswillconsider,amongotherfactors,theeffectoftheacquisitiononthecompetition,financialcondition,andfutureprospects.Theregulatorsalsoreviewcurrentandprojectedcapitalratiosandlevels,thecompetence,experience,andintegrityofmanagementanditsrecordofcompliancewithlawsandregulations,theconvenienceandneedsofthecommunitiestobeserved(includingtheacquiringinstitution’srecordofcomplianceundertheCommunityReinvestmentAct)andtheeffectivenessoftheacquiringinstitutionincombatingmoneylaunderingactivities.Inaddition,theCompanycannotbecertainwhenorif,oronwhattermsandconditions,anyrequiredregulatoryapprovalswillbegranted.TheCompanymayberequiredtosellbanksorbranchesasaconditiontoreceivingregulatoryapproval.IfnewlawswereenactedthatrestricttheabilityoftheCompanyanditssubsidiariestoshareinformationaboutcustomers,theCompany’sfinancialresultscouldbenegativelyaffectedTheCompany’sbusinessmodeldependsonsharinginformationamongthefamilyofcompaniesownedbyU.S.BancorptobettersatisfytheCompany’scustomerneeds.LawsthatrestricttheabilityofthecompaniesownedbyU.S.BancorptoshareinformationaboutcustomerscouldnegativelyaffecttheCompany’srevenueandprofit.TheCompany’sbusinesscouldsufferiftheCompanyfailstoattractandretainskilledpeopleTheCompany’ssuccessdepends,inlargepart,onitsabilitytoattractandretainkeypeople.CompetitionforthebestpeopleinmostactivitiestheCompanyengagesincanbeintense.TheCompanymaynotbeabletohirethebestpeopleortokeepthem.TheCompanyreliesonothercompaniestoprovidekeycomponentsoftheCompany’sbusinessinfrastructureThirdpartyvendorsprovidekeycomponentsoftheCompany’sbusinessinfrastructuresuchasinternetconnections,networkaccessandmutualfunddistribution.WhiletheCompanyhasselectedthesethirdpartyvendorscarefully,itdoesnotcontroltheiractions.Anyproblemscausedbythesethirdparties,includingasaresultoftheirnotprovidingtheCompanytheirservicesforanyreasonortheirperformingtheirservicespoorly,couldadverselyaffecttheCompany’sabilitytodeliverproductsandservicestotheCompany’scustomersandotherwisetoconductitsbusiness.Replacingthesethirdpartyvendorscouldalsoentailsignificantdelayandexpense.SignificantlegalactionscouldsubjecttheCompanytosubstantialuninsuredliabilitiesTheCompanyisfromtimetotimesubjecttoclaimsrelatedtoitsoperations.Theseclaimsandlegalactions,includingsupervisoryactionsbytheCompany’sregulators,couldinvolvelargemonetaryclaimsandsignificantdefensecosts.Toprotectitselffromthecostoftheseclaims,theCompanymaintainsinsurancecoverageinamountsandwithdeductiblesthatitbelievesareappropriateforitsoperations.However,theCompany’sinsurancecoveragemaynotcoverallclaimsagainsttheCompanyorcontinuetobeavailabletotheCompanyatareasonablecost.Asaresult,theCompanymaybeexposedtosubstantialuninsuredliabilities,whichcouldadverselyaffecttheCompany’sresultsofoperationsandfinancialcondition.TheCompanyisexposedtoriskofenvironmentalliabilitywhenittakestitletopropertiesInthecourseoftheCompany’sbusiness,theCompanymayforecloseonandtaketitletorealestate.Asaresult,theCompanycouldbesubjecttoenvironmentalliabilitieswithrespecttotheseproperties.TheCompanymaybeheldliabletoagovernmentalentityortothirdpartiesforpropertydamage,personalinjury,investigationandclean-upcostsincurredbythesepartiesinconnectionwithenvironmentalcontaminationormayberequiredtoinvestigateorcleanup118U.S.BANCORPhazardousortoxicsubstancesorchemicalreleasesataproperty.Thecostsassociatedwithinvestigationorremediationactivitiescouldbesubstantial.Inaddition,iftheCompanyistheownerorformerownerofacontaminatedsite,itmaybesubjecttocommonlawclaimsbythirdpartiesbasedondamagesandcostsresultingfromenvironmentalcontaminationemanatingfromtheproperty.IftheCompanybecomessubjecttosignificantenvironmentalliabilities,itsfinancialconditionandresultsofoperationscouldbeadverselyaffected.AnaturaldisastercouldharmtheCompany’sbusinessNaturaldisasterscouldharmtheCompany’soperationsthroughinterferencewithcommunications,includingtheinterruptionorlossoftheCompany’swebsites,whichwouldpreventtheCompanyfromgatheringdeposits,originatingloansandprocessingandcontrollingitsflowofbusiness,aswellasthroughthedestructionoffacilitiesandtheCompany’soperational,financialandmanagementinformationsystems.TheCompanyfacessystemsfailurerisksaswellassecurityrisks,including“hacking”and“identitytheft”ThecomputersystemsandnetworkinfrastructuretheCompanyandothersusecouldbevulnerabletounforeseenproblems.Theseproblemsmayariseinbothourinternallydevelopedsystemsandthesystemsofourthird-partyserviceproviders.Ouroperationsaredependentuponourabilitytoprotectcomputerequipmentagainstdamagefromfire,powerlossortelecommunicationfailure.Anydamageorfailurethatcausesaninterruptioninouroperationscouldadverselyaffectourbusinessandfinancialresults.Inaddition,ourcomputersystemsandnetworkinfrastructurepresentsecurityrisks,andcouldbesusceptibletohackingoridentitytheft.TheCompanyreliesondividendsfromitssubsidiariesforitsliquidityneedsTheCompanyisaseparateanddistinctlegalentityfromitsbanksubsidiariesandnon-banksubsidiaries.TheCompanyreceivessubstantiallyallofitscashfromdividendspaidbyitssubsidiaries.ThesedividendsaretheprincipalsourceoffundstopaydividendsontheCompany’sstockandinterestandprincipalonitsdebt.Variousfederalandstatelawsandregulationslimittheamountofdividendsthatourbanksubsidiariesandcertainofournon-banksubsidiariesmaypaytotheCompany.Also,theCompany’srighttoparticipateinadistributionofassetsuponasubsidiary’sliquidationorreorganizationissubjecttopriorclaimsofthesubsidiary’screditors.TheCompanyhasnon-bankingbusinessesthataresubjecttovariousrisksanduncertaintiesTheCompanyisadiversifiedfinancialservicescompany,andtheCompany’sbusinessmodelisbasedonamixofbusinessesthatprovideabroadrangeofproductsandservicesdeliveredthroughmultipledistributionchannels.Inadditiontobanking,theCompanyprovidespaymentservices,investments,mortgagesandcorporateandpersonaltrustservices.AlthoughtheCompanybelievesitsdiversityhelpslessentheeffectofdownturnsinanyonesegmentofitsindustry,italsomeanstheCompany’searningscouldbesubjecttovariousspecificrisksanduncertaintiesrelatedtothesenon-bankingbusinesses.TheCompany’sstockpricecanbevolatileTheCompany’sstockpricecanfluctuatewidelyinresponsetoavarietyoffactors,including:actualoranticipatedvariationsintheCompany’squarterlyoperatingresults;recommendationsbysecuritiesanalysts;significantacquisitionsorbusinesscombinations;strategicpartnerships,jointventuresorcapitalcommitmentsbyorinvolvingtheCompanyortheCompany’scompetitors;operatingandstockpriceperformanceofothercompaniesthatinvestorsdeemcomparabletotheCompany;newtechnologyusedorservicesofferedbytheCompany’scompetitors;newsreportsrelatingtotrends,concernsandotherissuesinthefinancialservicesindustry;andchangesingovernmentregulations.Generalmarketfluctuations,industryfactorsandgeneraleconomicandpoliticalconditionsandevents,includingterroristattacks,economicslowdownsorrecessions,interestratechanges,creditlosstrendsorcurrencyfluctuations,couldalsocausetheCompany’sstockpricetodecreaseregardlessoftheCompany’soperatingresults.WebsiteAccesstoSECReportsU.S.Bancorp’sinternetwebsitecanbefoundatusbank.com.U.S.BancorpmakesavailablefreeofchargeonitswebsiteitsannualreportsonForm10-K,quarterlyreportsonForm10-Q,currentreportsonForm8-K,andamendmentstothosereportsfiledorfurnishedpursuanttoSection13or15(d)oftheExchangeAct,aswellasallotherreportsfiledbyU.S.BancorpwiththeSEC,assoonasreasonablypracticableafterelectronicallyfiledwith,orfurnishedto,theSEC.CertificationsU.S.BancorphasfiledasexhibitstoitsannualreportonForm10-KtheChiefExecutiveOfficerandChiefFinancialOfficercertificationsrequiredbySection302oftheSarbanes-OxleyAct.U.S.BancorphasalsosubmittedtherequiredannualChiefExecutiveOfficercertificationtotheNewYorkStockExchange.GovernanceDocumentsTheCompany’sCorporateGovernanceGuidelines,CodeofEthicsandBusinessConductandBoardofDirectorscommitteechartersareavailablefreeofchargeontheCompany’swebsiteatusbank.com,byclickingon“AboutU.S.Bancorp,”then“CorporateGovernance.”ShareholdersmayrequestafreeprintedcopyofanyofthesedocumentsfromtheCompany’sinvestorrelationsdepartmentbycontactingthematinvestorrelations@usbank.comorcalling(866)775-9668.U.S.BANCORP119ExecutiveOfficersRichardK.DavisMr.DavisisChairman,PresidentandChiefExecutiveOfficerofU.S.Bancorp.Mr.Davis,50,hasservedasChairmanofU.S.BancorpsinceDecember2007,ChiefExecutiveOfficersinceDecember2006andPresidentsinceOctober2004.HealsoservedasChiefOperatingOfficerfromOctober2004untilDecember2006.FromthetimeofthemergerofFirstarCorporationandU.S.BancorpinFebruary2001untilOctober2004,Mr.DavisservedasViceChairmanofU.S.Bancorp.Fromthetimeofthemerger,Mr.DaviswasresponsibleforConsumerBanking,includingRetailPaymentSolutions(cardservices),andheassumedadditionalresponsibilityforCommercialBankingin2003.Mr.DavishasheldmanagementpositionswithourCompanysincejoiningStarBancCorporation,oneofourpredecessors,in1993asExecutiveVicePresident.JennieP.CarlsonMs.CarlsonisExecutiveVicePresidentofU.S.Bancorp.Ms.Carlson,47,hasservedasExecutiveVicePresident,HumanResourcessinceJanuary2002.Untilthattime,sheservedasExecutiveVicePresident,DeputyGeneralCounselandCorporateSecretaryofU.S.BancorpsincethemergerofFirstarCorporationandU.S.BancorpinFebruary2001.From1995untilthemerger,shewasGeneralCounselandSecretaryofFirstarCorporationandStarBancCorporation.AndrewCecereMr.CecereisViceChairmanandChiefFinancialOfficerofU.S.Bancorp.Mr.Cecere,47,hasservedasChiefFinancialOfficerofU.S.BancorpsinceFebruary2007,andViceChairmansincethemergerofFirstarCorporationandU.S.BancorpinFebruary2001.FromFebruary2001untilFebruary2007hewasresponsibleforWealthManagement&SecuritiesServices.Previously,hehadservedasanexecutiveofficeroftheformerU.S.Bancorp,includingasChiefFinancialOfficerfromMay2000throughFebruary2001.WilliamL.ChenevichMr.ChenevichisViceChairmanofU.S.Bancorp.Mr.Chenevich,64,hasservedasViceChairmanofU.S.BancorpsincethemergerofFirstarCorporationandU.S.BancorpinFebruary2001,whenheassumedresponsibilityforTechnologyandOperationsServices.Previously,heservedasViceChairmanofTechnologyandOperationsServicesofFirstarCorporationfrom1999to2001.RichardC.HartnackMr.HartnackisViceChairmanofU.S.Bancorp.Mr.Hartnack,62,hasservedinthispositionsinceApril2005,whenhejoinedU.S.BancorptoassumeresponsibilityforConsumerBanking.PriortojoiningU.S.Bancorp,heservedasViceChairmanofUnionBankofCaliforniafrom1991to2005withresponsibilityforCommunityBankingandInvestmentServices.RichardJ.HidyMr.HidyisExecutiveVicePresidentandChiefRiskOfficerofU.S.Bancorp.Mr.Hidy,45,hasservedinthesepositionssince2005.From2003until2005,heservedasSeniorVicePresidentandDeputyGeneralCounselofU.S.Bancorp,havingservedasSeniorVicePresidentandAssociateGeneralCounselofU.S.BancorpandFirstarCorporationsince1999.JosephC.HoesleyMr.HoesleyisViceChairmanofU.S.Bancorp.Mr.Hoesley,53,hasservedasViceChairmanofU.S.BancorpsinceJune2006.FromJune2002untilJune2006,heservedasExecutiveVicePresidentandNationalGroupHeadofCommercialRealEstateatU.S.Bancorp,havingpreviouslyservedasSeniorVicePresidentandGroupHeadofCommercialRealEstateatU.S.BancorpsincejoiningU.S.Bancorpin1992.PamelaA.JosephMs.JosephisViceChairmanofU.S.Bancorp.Ms.Joseph,48,hasservedasViceChairmanofU.S.BancorpsinceDecember2004.SinceNovember2004,shehasbeenChairmanandChiefExecutiveOfficerofNOVAInformationSystems,Inc.,awhollyownedsubsidiaryofU.S.Bancorp.Priortothattime,shehadbeenPresidentandChiefOperatingOfficerofNOVAInformationSystems,Inc.sinceFebruary2000.LeeR.MitauMr.MitauisExecutiveVicePresidentandGeneralCounselofU.S.Bancorp.Mr.Mitau,59,hasservedinthesepositionssince1995.Mr.MitaualsoservesasCorporateSecretary.Priorto1995hewasapartneratthelawfirmofDorsey&WhitneyLLP.JosephM.OttingMr.OttingisViceChairmanofU.S.Bancorp.Mr.Otting,50,hasservedinthispositionsinceApril2005,whenheassumedresponsibilityforCommercialBanking.Previously,heservedasExecutiveVicePresident,EastCommercialBankingGroupofU.S.BancorpfromJune2003toApril2005.HeservedasMarketPresidentofU.S.BankinOregonfromDecember2001untilJune2003.P.W.ParkerMr.ParkerisExecutiveVicePresidentandChiefCreditOfficerofU.S.Bancorp.Mr.Parker,51,hasservedinthispositionsinceOctober2007.FromMarch2005untilOctober2007,heservedasExecutiveVicePresidentofCreditPortfolioManagementofU.S.Bancorp,havingservedasSeniorVicePresidentofCreditPortfolioManagementofU.S.BancorpsinceJanuary2002.RichardB.Payne,Jr.Mr.PayneisViceChairmanofU.S.Bancorp.Mr.Payne,60,hasservedinthispositionsinceJuly2006,whenhejoinedU.S.BancorptoassumeresponsibilityforCorporateBanking.PriortojoiningU.S.Bancorp,heservedasExecutiveVicePresidentforNationalCityCorporationinCleveland,withresponsibilityforCapitalMarkets,since2001.DianeL.ThormodsgardMs.ThormodsgardisViceChairmanofU.S.Bancorp.Ms.Thormodsgard,57,hasservedasViceChairmanofU.S.BancorpsinceApril2007,whensheassumedresponsibilityforWealthManagement&SecuritiesServices.From1999untilApril2007,sheservedasPresidentofCorporateTrustandInstitutionalTrust&CustodyservicesofU.S.Bancorp,havingpreviouslyservedasChiefAdministrativeOfficerofCorporateTrustatU.S.Bancorpfrom1995to1999.120U.S.BANCORPDirectorsRichardK.Davis1,6Chairman,PresidentandChiefExecutiveOfficerU.S.BancorpMinneapolis,MinnesotaDouglasM.Baker,Jr.Chairman,PresidentandChiefExecutiveOfficerEcolabInc.St.Paul,MinnesotaVictoriaBuyniskiGluckman4,6PresidentandChiefExecutiveOfficerUnitedMedicalResources,Inc.,awhollyownedsubsidiaryofUnitedHealthGroupIncorporatedCincinnati,OhioArthurD.Collins,Jr.1,2,5ChairmanandRetiredChiefExecutiveOfficerMedtronic,Inc.Minneapolis,MinnesotaPeterH.Coors2,5ViceChairmanMolsonCoorsBrewingCompanyGolden,ColoradoJoelW.Johnson3,6RetiredChairmanandChiefExecutiveOfficerHormelFoodsCorporationAustin,MinnesotaOliviaF.Kirtley3,5BusinessConsultantLouisville,KentuckyJerryW.Levin1,2,5ChairmanandChiefExecutiveOfficerJWLevinPartnersLLCNewYork,NewYorkDavidB.O’Maley5,6Chairman,PresidentandChiefExecutiveOfficerOhioNationalFinancialServices,Inc.Cincinnati,OhioO’dellM.Owens,M.D.,M.P.H.1,3,4IndependentConsultantandHamiltonCountyCoronerCincinnati,OhioRichardG.Reiten3,4ChairmanandRetiredChiefExecutiveOfficerNorthwestNaturalGasCompanyPortland,OregonCraigD.Schnuck4,6FormerChairmanandChiefExecutiveOfficerSchnuckMarkets,Inc.St.Louis,MissouriWarrenR.Staley1,2,3RetiredChairmanandChiefExecutiveOfficerCargill,IncorporatedMinneapolis,MinnesotaPatrickT.Stokes1,2,6ChairmanandRetiredChiefExecutiveOfficerAnheuser-BuschCompanies,Inc.St.Louis,Missouri1.ExecutiveCommittee2.CompensationCommittee3.AuditCommittee4.CommunityReinvestmentandPublicPolicyCommittee5.GovernanceCommittee6.CreditandFinanceCommitteeSecuritiesDisclosures:Investorsshouldcarefullyconsiderthefund’sinvestmentobjectives,risks,charges,andexpensesbeforeinvesting.Theprospectuscontainsthisandotherinformation;call800.677.FUNDorvisitfirstamericanfunds.comforacopy.Pleasereaditcarefullybeforeinvesting.Mutualfundinvestinginvolvesrisk;principallossispossible.Investinginspecificsectorssuchasinfrastructure-relatedsecuritiesmayinvolvegreaterriskandvolatilitythanmorediversifiedinvestments.Risksincludegreaterexposuretopotentialadverseeconomic,regulatory,political,andotherchangesaffectingsuchsecurities.Foreigninvesting,especiallyinemergingmarkets,entailsadditionalrisks,includingcurrencyfluctuations,politicalandeconomicinstability,accountingchanges,andforeigntaxation.FAFAdvisors,Inc.,aregisteredinvestmentadvisorandsubsidiaryofU.S.BankNationalAssociation,servesasaninvestmentadvisortoFirstAmericanFunds.FirstAmericanFundsaredistributedbyQuasarDistributors,LLC,anaffiliateoftheinvestmentadvisor.Investmentproducts,includingsharesofmutualfunds,arenotobligationsof,orguaranteedby,anybank,includingU.S.BankoranyU.S.Bancorpaffiliate,noraretheyinsuredbytheFederalDepositInsuranceCorporation,theFederalReserveBoard,oranyotheragency.Aninvestmentinsuchproductsinvolvesinvestmentrisk,includingpossiblelossofprincipal.(1/2008)U.S.BANCORP121Corporate Information Executive Offices U.S. Bancorp 800 Nicollet Mall Minneapolis, MN 55402 Common Stock Transfer Agent and Registrar BNY Mellon Investor Services acts as our transfer agent and registrar, dividend paying agent and dividend reinvestment plan administrator, and maintains all shareholder records for the corporation. Inquiries related to shareholder records, stock transfers, changes of ownership, lost stock certiﬁcates, changes of address and dividend payment should be directed to the transfer agent at: BNY Mellon Shareowner Services P.O. Box 358015 Pittsburgh, PA 15252-8015 Phone: 888-778-1311 or 201-680-6578 Internet: bnymellon.com/shareowner For Registered or Certiﬁed Mail: BNY Mellon Shareowner Services 500 Ross St., 6th Floor Pittsburgh, PA 15219 Telephone representatives are available weekdays from 8:00 a.m. to 6:00 p.m. Central Time, and automated support is available 24 hours a day, 7 days a week. Specific information about your account is available on BNY Mellon’s internet site by clicking on the Investor ServiceDirect® link. Independent Auditor Ernst & Young LLP serves as the independent auditor for U.S. Bancorp’s ﬁnancial statements. Common Stock Listing and Trading U.S. Bancorp common stock is listed and traded on the New York Stock Exchange under the ticker symbol USB. Dividends and Reinvestment Plan U.S. Bancorp currently pays quarterly dividends on our common stock on or about the 15th day of January, April, July and October, subject to approval by our Board of Directors. U.S. Bancorp share- holders can choose to participate in a plan that provides automatic reinvestment of dividends and/or optional cash purchase of additional shares of U.S. Bancorp common stock. For more information, please contact our transfer agent, BYN Mellon Investor Services. Investor Relations Contacts Judith T. Murphy Senior Vice President, Investor Relations judith.murphy@usbank.com Phone: 612-303-0783 or 866-775-9668 Financial Information U.S. Bancorp news and ﬁnancial results are available through our website and by mail. Website For information about U.S. Bancorp, including news, ﬁnancial results, annual reports and other documents ﬁled with the Securities and Exchange Commission, access our home page on the internet at usbank.com, click on About U.S. Bancorp, then Investor /Shareholder Information. Mail At your request, we will mail to you our quarterly earnings, news releases, quarterly ﬁnancial data reported on Form 10-Q and additional copies of our annual reports. Please contact: U.S. Bancorp Investor Relations 800 Nicollet Mall Minneapolis, MN 55402 investorrelations@usbank.com Phone: 866-775-9668 Media Requests Steven W. Dale Senior Vice President, Media Relations steve.dale@usbank.com Phone: 612-303-0784 Privacy U.S. Bancorp is committed to respecting the privacy of our customers and safeguarding the ﬁnancial and personal information provided to us. To learn more about the U.S. Bancorp commitment to protecting privacy, visit usbank.com and click on Privacy Pledge. Code of Ethics U.S. Bancorp places the highest importance on honesty and integrity. Each year, every U.S. Bancorp employee certiﬁes compliance with the letter and spirit of our Code of Ethics and Business Conduct, the guiding ethical standards of our organization. For details about our Code of Ethics and Business Conduct, visit usbank.com and click on About U.S. Bancorp, then Ethics at U.S. Bank. Diversity U.S. Bancorp and our subsidiaries are committed to developing and maintaining a workplace that reﬂects the diversity of the communities we serve. We support a work environment where individual differences are valued and respected and where each individual who shares the fundamental values of the company has an opportunity to contribute and grow based on individual merit. Equal Employment Opportunity/Affirmative Action U.S. Bancorp and our subsidiaries are committed to providing Equal Employment Opportunity to all employees and applicants for employment. In keeping with this commitment, employment decisions are made based upon performance, skill and abilities, not race, color, religion, national origin or ancestry, gender, age, disability, veteran status, sexual orientation or any other factors protected by law. The corpo- ration complies with municipal, state and federal fair employment laws, including regulations applying to federal contractors. U.S. Bancorp, including each of our subsidiaries, is an Equal Opportunity Employer committed to creating a diverse workforce. The paper utilized in this annual report is certified by the Forest Stewardship Council. The paper contains a mix of pulp that is derived from FSC certified well- managed forests, post-consumer recycled paper fibers and other controlled sources. U.S. Bank, Member FDIC U.S. Bancorp invests for growth by building deeper relationships with our 14.9 million customers, developing innovative products and services, expanding our delivery capabilities and enlarging the depth and breadth of our distribution systems. U.S. Bancorp, with total assets of Southwest and Northwest. Our $238 billion at year-end 2007, is a company’s diverse business mix of diverse multi-state financial services products and services are provided holding company serving more than through four major lines of business: 14.9 million customers. U.S. Bancorp Wholesale Banking, Payment is the parent company of U.S. Bank, Services, Wealth Management & the sixth-largest commercial bank Securities Services and Consumer in the nation. U.S. Bancorp offers Banking. Information about these regional consumer and business businesses can be found throughout banking and wealth management this report. U.S. Bancorp is head- services, national wholesale and quartered in Minneapolis, Minnesota. trust services and global payments U.S. Bancorp employs more than services. U.S. Bank operates 54,000 people. 2,518 banking offices in 24 states, primarily in the lower and upper Visit U.S. Bancorp online at Midwest and throughout the usbank.com U.S. Bancorp 800 Nicollet Mall Minneapolis, MN 55402 usbank.com U S . . B a n c o r p 2 0 0 7 A n n u a l R e p o r t Building Deeper Customer Relationships Innovating Products and Services Expanding Capabilities and Distribution 2007 Annual Report

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