~~upgrade was Moody’s view that~~ second most respected banking company in the ~~corporation’s business model will generate strong profitability,~~United States and the ~~consistency~~50th most respected company in the world, according to a survey of institutional investors published in the September 12, 2005 edition ofBarron’s. The survey ranked the world’s 100 largest companies by market capitalization. Six U.S. banking corporations made the list, with U.S. Bancorp one of only two to make the top 50 ranking.

The publication noted that ~~profitability performance is supported by improving risk~~respondents to the survey overwhelmingly cited strong management and ~~maintenance~~business strategy as the two most important criteria for ranking corporations on the list. Other criteria included competitive edge, consistent sales and profit growth, ethical business practices and product innovation.

Creating shareholder value is always our priority

In December 2005, U.S. Bancorp announced a 10 percent increase in the dividend rate on U.S. Bancorp common stock to $1.32 on an annualized basis, or $0.33 on a quarterly basis. The quarterly common stock dividend of ~~very good liquidity.~~

~~We were also pleased that~~$0.33 per common share was payable on ~~September 27, 2004, Fitch’s rating agency upgraded U.S. Bank’s ratings. Long- and short-term senior debt~~January 16, 2006 to shareholders of record at the ~~holding company,~~close of business on December 30, 2005.

That dividend action represents 34 consecutive years of increasing our dividend. Since 1993, our dividend has shown a compound annual growth rate of 19.6 percent. Our dividend program is an important part of our shareholders’ total return on their investment in U.S. Bancorp. U.S. Bancorp, ~~were upgraded to AA- and F1+, respectively, from A+ and F1, respectively. The long-term ratings of~~since 1863 through its subsidiary bank, U.S. Bank National Association, were upgraded to AA from AA-. The main driver behind the upgrade was Fitch’s view of the corporation’s solid net interest margin, diverse sources of non-interest income, disciplined expense management and improved asset quality.

~~The debt ratings established~~predecessor companies, has paid a dividend for ~~U.S. Bank by Moody’s, Standard and Poor’s, and Fitch reflect the ratings agencies’ recognition of the strong, consistent financial performance of the~~143 consecutive years.

In late 2003, our company ~~and the quality of the balance sheet.~~

~~U.S. BANCORP IS A CORPORATION~~
~~BUILT ON INTEGRITY~~

We recognize that our financial results are only as good as the respect and confidence of the public and our reputation in the industry and in the marketplace. We operate with the highest levels of honesty and integrity, and we have the controls and monitors in place to ensure that is always true. Our Corporate Governance Guidelines, our Privacy Pledge, and our Code of Ethics and Business Conduct can all be found on our internet website at usbank.com. I urge you to visit the site.

~~CREATING SHAREHOLDER VALUE~~
~~IS OUR PRIORITY~~

~~We delivered on our~~made a commitment to return ~~at least~~ 80 percent of earnings to our shareholders ~~returning virtually all excess capital to shareholders, 109 percent of earnings in 2004,~~ in the form of dividends and share ~~repurchases. We reaffirmed~~buybacks. In 2005, we returned 90 percent of earnings to our shareholders, and since we originally made that commitment, ~~with our December 2004 announcement of a 25 percent dividend increase and the authorization of a new 150-million share repurchase program.~~

~~This corporation has paid a cash dividend for 142 consecutive years, and~~ we have ~~increased the dividend for 33 consecutive years. That long-time record~~returned 98 percent of dividend increases earned U.S. Bancorp the designation of one of the S&P’s 58 “Dividend Aristocrats.” Only nine other issues have paid a dividend longer than U.S. Bancorp, which first paid a dividendour earnings to shareholders. We expect to continue to return 80 plus percent in ~~1863.~~

We2006.

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

~~Sincerely,~~

Jerry A. Grundhofer
Chairman and Chief Executive Officer
U.S. Bancorp
~~February 28, 2005~~

March 7, 2006

U.S. BANCORP5

WHOLESALE BANKING:

FIVE STAR SERVICE IN ACTION THE VALUES OF FIVE STAR SERVICE Take Ownership Make it Personal Add Value to Every Interaction Make Customer Courtesy Common Share Knowledge SHE TAKES OWNERSHIP. May Li, Manager Factoria Office, Bellevue, WA When Terrie Nixdorff needed help obtaining a debit card after experiencing an unsettling fraud situation, May Li stepped right in. With unyielding determination and extensive follow-through, May Li ensured that Terrie's situation was completely resolved. 6 U.S. BANCORP

New one-stop treasury management
product enhancesefficiency

OUR BUSINESS CUSTOMERS TOLD US WHAT’S MOST IMPORTANT TO THEM when it comes to treasury management — the highest levels of convenience, flexibility, control and speed. We listened and responded, investing significant resources and technology into an exciting new product called U.S. Bank SinglePoint.^®

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

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

KEY BUSINESS UNITS:

Middle Market Commercial Banking

Commercial Real Estate

National Corporate Banking

Correspondent Banking

Dealer Commercial Services

Community Banking

Equipment Leasing

Foreign Exchange

Government Banking

International Banking

Specialized Industries

Specialty Lending

Treasury Management

6 U.S. BANCORP

~~Teshan Lewis, Account Coordinator Corporate Payment Systems, Minneapolis, MN Teshan Lewis went above and beyond to secure a Government Purchase Card for a staff member of~~U.S. Bank provides our wholesale banking customers with the United States Air Force who was preparing for a short-notice deployment to Iraq. Teshan's personal commitment and persistence ensured the staff member received the card in time to carry out his mission. Teshan is pictured with Lt. Col. Todd Pospisil and Government Purchase Card Program Managers Laura Ball and Marie D'Angelo. HE MAKES IT PERSONAL.

SHE ADDS VALUE. Pam Paley, Relationship Manager The Private Client Group, Cincinnati, OH Pam Paley partners with Frederic H. Mayerson, Chairman and Managing General Partner of The Walnut Group, a diversified private equity investment company. Pam adds value to every interaction by consistently finding the right specialized, competitiveexpert knowledge, flexible products and ~~services designed~~comprehensive service they need to ~~meet the needs of The Walnut Group's principals. Ann Vazquez, Manager Broker Dealer Division, St. Louis, MO Since 1989, Ann Vazquez has provided unparalleled expertise~~execute their financial strategies.

Large corporations, middle market businesses, financial institutions, private sector customers and ~~professional, courteous service to Rodger Riney, Founder, President~~government entities drive growth in our economy, and CEO of Scottrade. Recently, Ann was instrumental in finding a creative credit facility solution. Coupled with her consistently personalized attention, Ann makes sure that what matters most to Scottrade matters most to U.S. Bank. SHE MAKES CUSTOMER COURTESY COMMON.

Andrew Eberhardy, Project Manager Elan Financial Services, Milwaukee, WI Andrew Eberhardy's skilled support made all the difference to Oregon-based Umpqua Bank during a recent credit card portfolio conversion. Drawing on his vast knowledge of conversion processes, Andrew offered Umpqua flexible, efficient and reliable options to guarantee their satisfaction. Andrew is pictured with Susie McEuin and Laura Schaeffer of Umpqua. HE SHARES HIS KNOWLEDGE.

~~ADVANTAGEOUS BUSINESS MIX~~
~~13.1 million customers rely on U.S. Bancorp~~we proudly serve as their financial partner. ~~From a simple personal checking account~~We’re continually improving our lending, depository, treasury management and other financial offerings to ~~sophisticated corporate transactions,~~exceed our wholesale banking customers’ service expectations.
Above:In 2005, U.S. ~~Bancorp has~~Bank launched SinglePoint, which was created from the ~~products~~perspective of our wholesale banking customer.
Left:We worked closely with treasurers, cash managers, controllers and ~~services,~~other users through interviews and test-runs to identify the ~~talent,~~features and functionality most important to them, and then incorporated that feedback into the ~~technologies and the expertise to help our customers achieve their goals.~~SinglePoint design.

~~WHOLESALE~~
~~BANKING~~

~~With relationship managers who understand the companies, the markets and the industries of our commercial, corporate and correspondent customers, no bank brings more to the table than U.S. Bank.~~

Whether it’s finding the right financing and capital for growth and expansion, accelerating receivables, expediting transactions, managing employee benefits programs or structuring transactions to finance foreign trade, U.S. Bank has the business solutions that build businesses and futures.

After several years of lackluster demand, in 2004 we saw an increase, albeit modest, in commercial and corporate lending, particularly in the areas of commercial and industrial lending and commercial real estate. Economic trends across most markets are positive overall and we expect to see continued improvement in 2005. Interest rates, while rising, are affordable, and companies appear more ready than at any time in the past several years to invest in their businesses.

Significant changes within our organization position us well to be more visible and active in every market, with more streamlined procedures and more competitive pricing. These changes augment the high level of customer service and industry expertise already provided to our customers.

~~KEY BUSINESS UNITS~~


•		~~Middle Market~~ ~~Commercial Banking~~
•		~~Commercial Real Estate~~
•		~~Corporate Banking~~
•		~~Correspondent Banking~~
•		~~Dealer Commercial Services~~
•		~~Equipment Leasing~~
•		~~Foreign Exchange~~
•		~~Government Banking~~
•		~~International Banking~~
•		~~Specialized Industries~~
•		~~Specialized Lending~~
•		~~Treasury Management~~

10U.S. BANCORP

~~PAYMENT~~
~~SERVICES~~

U.S. Bancorp is a recognized leader in the rapidly growing payments business, with customers ranging from individual credit and debit cardholders and ATM users to local and global merchants, fleet enterprises and multinational corporations with complex payment and payment processing needs.

~~KEY BUSINESS UNITS~~

•~~Corporate Payment Systems~~

•~~Merchant Payment Services~~

•~~NOVA Information Systems, Inc.~~

•~~Retail Payment Solutions (card services)~~

•~~Transaction Services~~

~~We provide innovative card-based programs, internet-based reporting tools, fully integrated payment solutions and electronic payments settlement answers across the country and around the world.~~

Payment Services is a higher growth, higher return line of business for U.S. Bancorp. We will continue to invest in the technology, acquisitions, product development and sales promotion needed to support its continued growth.

There is strong momentum in merchant processing, especially related to our new NOVA processing capabilities in Europe. Both our retail payments and corporate payments businesses are focusing on the expansion of existing relationships with current

customers. Additionally, corporate payment products and merchant processing can provide valuable benefits to middle market and small business companies, and we are increasing penetration of those customer segments for payments and processing services.

We are also investing in the hardware and technology to expand and enhance our network of U.S. Bank ATMs. Our newest generation of ATMs are among the most highly functional in the industry, with vivid, striking graphics and transaction screens and customization capabilities so that customers’ transactions are faster, easier and individualized.

PAYMENT SERVICES:

Merchant processingexpands
global footprint

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

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

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

KEY BUSINESS UNITS:

Corporate Payment Systems

Merchant Payment Services

NOVA Information Systems, Inc.

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

Transactions Services:
ATM Driving and Servicing

8 U.S. BANCORP

~~THE~~

Recent acquisitions have expanded our merchant processing globally.At year-end 2005, euroConex acquired Citibank Card Acceptance, a part of Citigroup, Inc., and added 100,000 new merchant locations in more than 30 countries, including Ireland, the U.K., Spain, France, Belgium, Italy, Germany, Poland, Austria, the Netherlands, Norway and Sweden, raising the company’s total pan-European portfolio to more than 200,000 merchant locations.

Left:U.S. Bancorp is providing bank partners and merchants across Europe with a greater array of payment processing services, including cross-border acquiring, multi-currency processing and dynamic currency conversion solutions.

Below:The transaction doubled our merchant count in Europe and is an investment in a business with great growth potential.

PRIVATE CLIENT, ~~GROUP,~~
TRUST AND ASSET MANAGEMENT:

Corporate trust and institutional
custody growth solidifies ourleadership

U.S. BANK IS A RECOGNIZED NATIONAL LEADER IN THE CORPORATE TRUST AND INSTITUTIONAL CUSTODY BUSINESSES — the largest trustee in the area of tax-exempt debt, the second largest in the area of asset-backed and mortgage-backed securities, the third largest in new corporate bond issuances, and the ninth-largest institutional custody provider.

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

This transactionstrongly complements our existing corporate trust and institutional custody businesses

, making us more competitive by increasing our scale and leveraging our existing capabilities and operational platforms. In addition to serving the specialized needs of our corporate trust and institutional custody customers, U.S. Bancorp ~~understands what it takes~~continues to ~~build, manage and preserve~~enhance our ~~clients’ wealth. From sensitive and personalized family financial management and estate planning~~top-notch service delivery to ~~sophisticated corporate trust transactions to expert advice on investments, we prepare clients for today’s realities and tomorrow’s goals.~~

~~KEY BUSINESS UNITS~~

•~~The Private Client Group~~

•~~Corporate Trust Services~~

•~~Institutional Trust & Custody~~

•~~U.S. Bancorp Asset Management, Inc.~~

•~~U.S. Bancorp Fund Services, LLC~~

~~The Private Client Group works with~~ affluent individuals and families, professional service corporations and ~~non-profit~~nonprofit organizations through The Private Client Group. Acting as a bank within a bank, providing tailored programs to meet specialized needs. Recognizing that many more U.S. Bank customers could benefit from the financial planning, investment management, personal trust and private banking expertise of The Private Client Group ~~this group is building stronger bank-wide partnerships with other U.S. Bank lines of business~~works to ~~identify~~build, manage and preserve our customers’ wealth by providing expert planning, programs and advice.
KEY BUSINESS UNITS:
The Private Client Group ~~referral opportunities.~~
~~Built on our strong technology platform and superior management,~~
Corporate Trust Services is leveraging its distribution and scale following our two most recent acquisitions. We reported to you last year about our acquisition of the State Street corporate trust business, and in June 2004 we completed the acquisition of National City’s corporate trust division, a transaction that brought
the bank $34 billion in assets under administration and 3,800 corporate clients throughout the Midwest. It is our sixth corporate trust acquisition since 1999, reflecting our approach of acquisitions to grow revenue and businesses capable of competing with anyone.
Institutional Trust & Custody
U.S. Bancorp Asset Management, Inc., a subsidiary of U.S. Bank National Association, serves as the investment advisor to the First American Funds. It provides investment management services to individuals and institutions including corporations, foundations, pension funds, public funds, and retirement plans. The firm has offices in 24 states. Asset Management distribution is expanding through increased penetration of the Institutional Market and third-party distribution. In 2004,
U.S. Bancorp ~~Asset Management launched two new mutual funds—the First American Inflation Protected Securities~~ Fund ~~and the First American~~ Services, LLC
10 U.S. ~~Treasury Money Market Fund. A retirement (R) share class was also added to a number of funds in the fund family.~~
BANCORP

Our recent acquisition of a major corporate trust and institutional custody portfolioreflects our acquisition strategy to grow revenue and create businesses capable of competing with anyone. This addition expanded our presence primarily in the mid-Atlantic and southeastern states.

Above:From Wall Street to the West Coast, U.S. Bank delivers full value to our customers and prospects. Shown here is (center) U.S. Bank corporate trust customer Christopher Schoen, Managing Director in Mortgage Finance at Credit Suisse, with Edward Kachinski, Senior Vice President, Business Development, and Barbara Nastro, Vice President, Business Development, of our New York City corporate trust office.

Left:U.S. Bank customers benefit from the significant scale of our national resources, which are delivered by local relationship managers who have a highly sophisticated understanding of area market needs.

U.S. BANCORP 11

CONSUMER BANKING:

Small Business Service Center
~~CONSUMER~~streamlines service delivery

WE LISTEN TO OUR CUSTOMERS.
~~BANKING~~
Our customers want convenience, accessibility, quality products and outstanding service. Our distribution channels—full-service banking offices, ATMs, telephone banking, and internet banking—deliver the deposit, credit, mortgage, investment and insurance products that support the goals and visions of personal andWhen our small business ~~customers.~~
banking customers said they wanted a one-stop resource for all their special banking needs and questions, we immediately began the development of our Small Business ~~momentum~~Service Center. We created a model that tackled such issues as staffing with a team of experts, ensuring the highest level of product knowledge, taking full ownership of issues, and one-and-done problem resolution, among others.
The system is designed tomake banking smooth and effortless for these valuable customers. Diverse customer service groups within the bank that may previously have worked separately now are pulled together and collaborate through the Service Center. Communication with customers has increased, and customer satisfaction scores in ~~Consumer Banking~~the pilot markets have improved significantly.
Based on the success of our Denver pilot program, the Small Business Service Center program has been expanded throughout Colorado and into the St. Louis marketplace. Expansion into additional markets is ~~strong,~~planned for 2006 to ensure that we are delivering Five Star Service to all of our small business banking customers.
KEY BUSINESS UNITS:
24-Hour Banking & Financial Sales
Business Equipment Finance
Community Banking
Community Development
Consumer Lending
Home Mortgage
In-store and Corporate On-site Banking
Investments and Insurance
Metropolitan Branch Banking
Small Business Banking
SBA Division
Workplace and Student Banking
12 U.S. BANCORP

U.S. BANCORP 13

CONSUMER BANKING:

On-site banking promotes
powerful financial partnerships

AS A RECOGNIZED INDUSTRY LEADER IN ON - SITE BANKING,U.S. Bank offers full-service branches inside corporate headquarters, healthcare facilities, university campuses, retirement centers, airport malls and ~~we continue~~other specialized locations. Our on-site banking branches set the standard for convenient and accessible service,bringing comprehensive banking options directly to our customers. Every U.S. Bank on-site branch location is specifically tailored to meet the unique financial needs of the customers located at the site — through dedicated management and support services, flexible marketing and merchandising, customized sales efforts and specialized training.

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

U.S. Bank continues to invest in ~~technologies~~our highly successful in-store banking business — which delivers all the access of traditional branches to our customers inside grocery and ~~initiatives that enhance distribution~~convenience stores — through expansion in fast-growing markets, making ours the third largest in-store network in the industry. With a full range of banking options, extended hours and ~~deliver on customer expectations.~~
Customer satisfaction remains our top priority, and new Consumer Banking product initiatives are positively impacting customer satisfaction. Enhancements to internet banking on usbank.com, again ranked number one by Speer and Associates, provide even greater flexibility, customization and functionality.
~~Significant investment in innovative image technology enables~~convenient locations, U.S. Bank ~~Internet Banking customers~~is committed to ~~instantly view~~powerful on-site and in-store banking partnerships.

KEY BUSINESS UNITS:

24-Hour Banking & Financial Sales

Business Equipment Finance

Community Banking

Community Development

Consumer Lending

Home Mortgage

In-store and Corporate On-site Banking

Investments and Insurance

Metropolitan Branch Banking

Small Business Banking

SBA Division

Workplace and Student Banking

14 U.S. BANCORP

U.S. BANCORP 15

COMMUNITY DEVELOPMENT:

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

Through the U.S. Bancorp Foundation, we provide cash contributions to nonprofit organizations in support of affordable housing, economic opportunities, education and artistic and cultural enrichment. In 2005, total charitable contributions from the U.S. Bancorp Foundation exceeded $21 million.

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

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

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

U.S. Bank connects our communities with opportunities.Recently, U.S. Bank provided community development loans totaling almost $5.6 million for the construction and permanent financing of Seniors on Broadway. This new 42-unit affordable housing and retail development is located adjacent to the Chula Vista Learning Community Charter School in San Diego County. The program helps create a valuable link between seniors and elementary school students through literacy, technology, art, after-school programs and other inter-generational activities. All units in the complex are affordable to seniors with incomes below 50% of the area median income. Our nonprofit partner is MAAC Project, a multi-purpose social service agency with a successful 40-year history of serving various communities throughout San Diego County.

16 U.S. BANCORP

FINANCIAL REVIEW 2005:

We focus on service, financial
strength, shareholdervalue

We are proud of the strides we have made in improving customer service —through expansion, added capabilities, new products and services, more ~~than 3.5 million check~~offices in more convenient locations — and ~~deposit slip images per month on their computer screens.~~in delivering the very best we have to offer to every customer, every time. We are pleased that we can show you in this report our Five Star Service up close through five examples of our initiatives.

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

F I N A ~~wide range of operational procedures have also been simplified and streamlined.~~
N C I A L S :

~~KEY BUSINESS UNITS~~


•~~24-Hour Banking &~~	•~~Investments~~Management’s Discussion and
	~~Financial Sales~~ Analysis			18	~~Insurance~~

Consolidated Financial Statements
•62	~~Business Equipment~~ ~~Finance~~		•		~~Metropolitan Branch~~ ~~Banking~~

Notes to Consolidated Financial Statements
•66	~~Community Banking~~		•		~~Small Business Banking~~

Reports of Management and Independent Accountants
•101	~~Consumer Lending~~		•		~~SBA Division~~

Five-Year Consolidated Financial Statements		104
•	~~Home Mortgage~~		•		~~Workplace and~~ ~~Student Banking~~
•	~~In-store and Corporate~~
Quarterly Consolidated Financial Data	~~On-site Banking~~	106

Supplemental Financial Data		107

Annual Report on Form 10-K		110

CEO and CFO Certifications		121

Executive Officers		124

Directors		126

Corporate Information		inside back cover

~~We continue to expand our unique Checking That Pays~~^® ~~rewards program, which gives customers who use their~~ U.S. ~~Bank Visa~~^® ~~Check Card the choice of four different reward options. In 2004, U.S. Bank rewarded customers more than $26 million in annual cash rebates, five times the $5 million rewarded in 2000.~~

BANCORP 17

~~OUR IN-STORE BANKING~~
~~NETWORK CONTINUES TO GROW~~

Our in-store branch network—the third largest in the industry—delivers all the access of traditional branches to our customers inside grocery and convenience stores. Building on the tremendous success of this lower cost distribution channel, last year U.S. Bank began a major expansion of in-store branches in fast-growing markets such as Arizona, California, Nevada and Utah. These new branches continue to exceed expectations for profitability.

Management’s Discussion and Analysis

OVERVIEW

In 2003, we opened six new Nashville Publix and 32 new Safeway, Vons, Smith’s, Pak N Save and Pavilion branches, plus additional branches with other valued partners. We continued to grow in 2004, opening 112 new in-store branches. By the end of 2005, ~~U.S. Bank will have opened 185 new in-store branches as part of the newest expansion initiative, for a total overall of 478 in-store branches in 19 states.~~

~~INITIATIVES FOR SUCCESS~~

~~INVESTING~~

~~IN OUR COMPANY FOR GROWTH AND SERVICE~~ ~~Increasing our ability to provide better customer service, offer new customer options, and develop and deliver new products keeps us ahead of the curve and ahead of the competition.~~

~~MARKET PENETRATION~~

In Consumer Banking, we have improved our automated capability to identify product recommendation and customer service opportunities at the individual customer level so we can provide more personalized service and recommend the most appropriate products.

In Corporate Payment Systems, we are dedicating resources to build middle market relationships. We have redesigned and simplified processes, applications and contracts and have been pursuing new client categories among companies with annual sales between $20 and $500 million. Our new One Card for the middle market combines the best features from our corporate and purchasing cards into one easy-to-manage program.

~~NOVA’s new Electronic Check Service processing streamlines check acceptance and mitigates risk for our customers so they can accept checks as safely and easily as card payment alternatives.~~

Gift card industry sales reached $45 billion in 2003 and are forecast to double by 2007. NOVA’s growing gift card program meets the needs of merchants in a cost-effective manner, and NOVA gift cards are processed using the same point-of-sale systems used for credit and debit card processing, further controlling costs.

14~~U.S. BANCORP~~

The Private Client Group has several initiatives in progress which leverage the franchise to develop new client relationships. Our focus is on building stronger internal partnerships with other U.S. Bancorp lines of business. We recognize that many customers already doing business with U.S. Bank could benefit from the comprehensive and specialized expertise of our Financial Planning, Private Banking, Personal Trust, Investment and Insurance experts in The Private Client Group.

Retail Payment Solutions has increased penetration of personal and small business checking account customers with U.S. Bank-branded credit and debit cards by investing in sales and training opportunities with our expanded branch network.

~~PRODUCT DEVELOPMENT~~

~~Treasury Management will launch SinglePoint~~^SM~~, a unified customer workstation in 2005, providing a single point of access for our core U.S. Bank Treasury Management~~

~~services. SinglePoint~~^SM ~~allows business customers to access information and reports, initiate and manage ACH transactions and wires, view check and deposit images and manage check fraud programs at one source.~~

We have upgraded and image-enabled key lockbox sites for both wholesale and retail payment processing, and introduced a suite of check conversion products and services including On-Site Electronic Deposit and Electronic Cash Letter.

Institutional Trust has launched Health Savings Accounts (HSA) to client companies. HSAs are tax-exempt trust or custodial accounts to be used exclusively for future medical expenses. Similar to IRAs, they are special tax-sheltered savings accounts for medical bills for those employees who qualify.
Our new generation of ATMs integrates customization and information delivery with ATM transactions. Customers will have access to personalized messages, customized “fast cash” preferences, and more. These ATMs provide a faster, easier to use, and more personal experience.

We are leveraging our expertise in Commercial Real Estate financing and capitalizing on an improving economy by opening new Commercial Real Estate offices in Phoenix, Dallas and Washington, D.C. Offering our clients greater investment choice, The Private Client Group launched Mutual Fund Open Architecture in 2004, allowing clients to access investments that complement our proprietary funds. We will continue to strategically expand Open Architecture. Retail Payment Solutions successfully entered the affinity debit and credit card market in June 2004. With a potential partner base of 7,000 or more across the country, growth prospects are excellent. U.S. Bancorp’s Elan Financial Services division now offers prepaid card processing for its financial institution clients, providing the ability for these clients to offer payroll cards and to offer or purchase gifts cards. MARKET DEVELOPMENT Our Asset Management business is performance driven, and on this foundation, we have created investment products attractive not only to our own investors, but also products that will be competitive and attractive in third party retail and institutional distribution. We will expand into these new distribution channels in 2005. U.S. Bancorp Fund Services (USBFS), long a recognized administrator for U.S.-based mutual funds, is gaining name recognition and reputation as a third party outsourcing administrator in the alternative investment industry as well. USBFS has made investments in the specialized technology and accounting systems to support servicing both the simple and complex investments held by hedge funds. NOVA continues its merchant processing expansion in Europe through its EuroConex business, headquartered in Ireland. Growing through acquisitions and alliances, EuroConex now supports more than 100,000 merchants across eight European countries. As a specialized business with notable competitive advantages, and one that benefits from economies of scale, we see considerable potential for further European expansion. NOVA also launched a Canadian merchant processing product in October 2004. We anticipate that many current U.S. customers will consolidate their U.S. and Canadian merchant processing with NOVA and that Canadian merchants will switch from fragmented processing systems to NOVA as a single source of top-rated processing and customer service.

~~FORWARD-LOOKING STATEMENTS~~This Annual Report and Form 10-K contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following, in addition to those contained in U.S. Bancorp’s reports on file with the SEC: (i) general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for credit losses, or a reduced demand for credit or fee-based products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; (iii) inflation, changes in securities market conditions and monetary fluctuations could adversely affect the value or credit quality of our assets, or the availability and terms of funding necessary to meet our liquidity needs; (iv) changes in the extensive laws, regulations and policies governing financial services companies could alter our business environment or affect operations; (v) the potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could present operational issues or require significant capital spending; (vi) competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments or bank regulatory reform; (vii) changes in consumer spending and savings habits could adversely affect our results of operations; (viii) changes in the financial performance and condition of our borrowers could negatively affect repayment of such borrowers’ loans; (ix) acquisitions may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated, or may result in unforeseen integration difficulties; (x) capital investments in our businesses may not produce expected growth in earnings anticipated at the time of the expenditure; and (xi) acts or threats of terrorism, and/or political and military actions taken by the U.S. or other governments in response to acts or threats of terrorism or otherwise could adversely affect general economic or industry conditions. Forward-looking statements speak only as of the date they are made, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.
~~U.S. BANCORP~~17
~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~
~~OVERVIEW~~
~~In 2004,~~ U.S. Bancorp and its subsidiaries (the “Company”) continued to demonstrate its financial strength and shareholder focus. ~~We began~~The Company achieved record earnings in 2005 and grew earnings per share, on a diluted basis, by 11.0 percent despite industry challenges related to rising interest rates. This represents the fourth consecutive year ~~with several specific financial objectives.~~that earnings growth has exceeded the Company’s long-term goal of achieving 10 percent earnings per share growth. The ~~first~~Company continues to meet this goal ~~was a~~through its focus on organic growth, investing in business initiatives that strengthen our presence and product offerings for customers, and acquiring fee-based businesses with operating scale. As a result of this focus, the Company’s fee-based revenue ~~growth. While~~grew 9.4 percent over 2004 with growth in ~~net interest~~most product categories. Fee income ~~has been challenging for the banking industry due to rising interest rates and sluggish commercial loan~~ growth ~~the Company experienced strong~~was led by growth in ~~its fee-based~~deposit service charges and revenues ~~particularly in~~generated by payment processing ~~services. The Company generated fee-based revenue growth of 11.0~~businesses. In addition, average loans outstanding rose 9.0 percent ~~in 2004. By year-end, commercial loan balances also displayed encouraging trends as the Company experienced its first~~ year-over-year ~~growth in quarterly average balances since mid-2001. Retail loans continued to display strong growth in 2004.~~despite very competitive credit pricing. In ~~2005,~~2006, the Company will continue to focus on revenue growth driven by disciplined strategic business initiatives, customer service and an emphasis on payment processing, fiduciary and trust businesses, retail banking and commercial lending. The ~~second goal~~Company’s performance was ~~to continue improving~~also driven by continued improvement in the credit quality of ~~our~~the Company’s loan portfolios. During the year, nonperforming assets declined ~~34.8~~13.9 percent from a year ago and total net charge-offs decreased to ~~.63~~.51 percent of average loans outstanding in ~~2004,~~2005, compared with ~~1.06~~.63 percent in ~~2003. By year end 2004, the credit risk profile of the Company had improved to pre-2001 levels.~~2004. In ~~2005,~~2006, the Company will continue to focus on credit quality and minimizing volatility of credit-related losses. Finally, effectively managing costs is always a goal for the ~~Company.~~Company and an important factor of financial performance. During ~~2004, our~~2005, the Company’s efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) improved to ~~45.3~~44.3 percent, compared with ~~45.6~~45.3 percent in ~~2003,~~2004, and the Company continues to be aan industry leader in the banking industry. The Company’s results for 2004 reflect the achievement of these operating objectives and help to position the Company to achieve its long-term goal of 10 percent or greater growth in earnings per diluted share.this category.

The Company’s strong performance is also reflected in ~~our~~its capital levels and the ~~improving outlook~~favorable credit ratings assigned by ~~our~~various credit rating ~~agencies relative to a year ago.~~agencies. Equity capital of the Company continued to be strong at ~~6.4~~5.9 percent of tangible common assets at December 31, ~~2004,~~2005, compared with ~~6.5~~6.4 percent at December 31, ~~2003. Credit~~2004. In 2005, credit ratings for the Company were upgraded by ~~Fitch Ratings in September 2004 and~~ Moody’s Investors ~~Service in~~Service. On January ~~2005.~~27, 2006, Standard & Poor’s Rating Services upgraded the Company’s credit ratings to AA-/A-1+. Standard & Poor’s also upgraded the Company’s primary banking subsidiaries to an AA long-term debt rating. Credit ratings assigned by various credit rating agencies reflect the ~~favorable~~ rating ~~agency views of the direction~~agencies’ recognition of the Company’s sector-leading earnings performance and lower credit ~~quality,~~ risk ~~management, liquidity and capital management practices and our ability to generate capital through earnings.~~profile.

In concert with achieving ~~our~~ stated financial objectives, the Company exceeded its objective to return at least 80 percent of earnings to shareholders in the form of dividends and share repurchases by returning ~~109~~90 percent of ~~2004~~2005 earnings to shareholders. In December ~~2004, we announced an expanded share repurchase program and~~2005, the Company further increased ~~our~~its cash dividend, resulting in a ~~25.0~~10 percent increase from the dividend rate in the fourth quarter of ~~2003. We continue~~2004. Throughout 2005, the Company continued to repurchase shares under its share repurchase program. The Company continues to affirm ~~our~~its goal of returning at least 80 percent of earnings to shareholders. During 2006, the Company will also continue its focus on its financial objectives of strong earnings growth, creating operating leverage and a strong credit risk profile, as well as its five-star customer service to further strengthen customer loyalty.

Earnings SummaryThe Company reported net income of ~~$4.2~~$4.5 billion in ~~2004,~~2005, or $2.42 per diluted share, compared with $4.2 billion, or $2.18 per diluted share, ~~compared with $3.7 billion, or $1.93 per diluted share,~~ in ~~2003. The 13.0 percent increase in earnings per diluted share principally reflected growth in fee-based revenues and lower credit costs.~~2004. Return on average assets and return on average equity were 2.21 percent and 22.5 percent, respectively, in 2005, compared with returns of 2.17 percent and 21.4 percent, respectively, in 2004, compared with returns of 1.99 percent and 19.2 percent, respectively, in 2003. Net income in 2003 included after-tax income from discontinued operations of $22.5 million, or $.01 per diluted share.2004.
    In 2004, the Company had income from continuing operations, net of tax, of $4.2 billion, or $2.18 per diluted share, compared with $3.7 billion, or $1.92 per diluted share, in 2003. The Company’s results from continuing operations in 2004 reflected slightly lower net interest income, strong fee-based revenue growth and lower credit costs. During 2004, certain elements of the Company’s operating results included the impact of management actions or specific events. In 2004, the Company undertook several asset/liability management actions in response to changing interest rates, including sales of investment securities and the prepayment of certain long-term debt. These actions enabled the Company to maintain an interest rate risk position that is relatively neutral to rising interest rates; however, the Company incurred $104.9 million of net securities losses in 2004, a net reduction of $349.7 million from 2003, and debt prepayment costs of $154.8 million in 2004. Also resulting from changes in interest rates, the Company incurred a $56.8 million impairment of its portfolio of mortgage servicing rights (“MSR”), a favorable reduction in other intangibles expenses of $151.9 million relative to 2003. Included in the provision for credit losses in 2004 was a reduction in the allowance for credit losses of $98.5 million, reflecting continued improvement in credit quality and economic conditions. In addition, the Company’s effective income tax rate declined to
18  ~~U.S. BANCORP~~
32.5 percent in 2004, from 34.4 percent in 2003, principally due to changes in estimated tax liabilities related to the resolution of certain federal and state tax examinations. Year-over-year results were also impacted by a reduction in merger and restructuring-related charges of $46.2 million, reflecting the completion of all significant business integration activities in 2003.
     Total net revenue, on a taxable-equivalent basis for 2005, was ~~$12.7 billion in~~$474 million (3.7 percent) higher than 2004 ~~compared with $12.5 billion in 2003, a year-over-year increase~~despite the adverse impact of ~~$128.6 million (1.0 percent).~~rising interest rates on product margins generally experienced by the banking industry. The increase in net revenue was comprised of a ~~3.9~~9.5 percent increase in noninterest income and a ~~1.1~~.7 percent decline in net interest income. The ~~3.9 percent net~~ increase in noninterest income was driven by ~~strong~~9.4 percent growth in ~~fee-~~fee-based revenue across the majority of fee categories and expansion in payment processing businesses from a year ago. The decline in net interest income reflected growth in average earning assets, more than offset by lower net interest margins. In 2005, average earning assets increased $10.3 billion (6.1 percent), compared with 2004, primarily due to growth in residential mortgages, commercial loans and retail loans. The net interest margin in 2005 was 3.97 percent, compared with 4.25 percent in 2004. The year-over-year decline in net interest margin reflected narrower credit spreads due to the competitive lending environment, the mix of growth in lower-spread fixed-rate credit products and the impact of changes in the yield curve from a year ago. The net interest margin also declined due to share repurchases during the year, funding incremental growth with higher cost
18  U.S. BANCORP
wholesale funding, and asset/liability decisions given rising shorter-term interest rates. Slightly higher loan fees and the increasing margin benefit of deposits and net free funds partially offset the impact of these factors during the year.
    Total noninterest expense in 2005 increased $78 million (1.3 percent), compared with 2004. Noninterest expense reflected incremental costs related to expanding the payment processing businesses, investments in in-store branches (branches located within grocery stores) and service-related business initiatives, expenses related to investments in affordable housing or other similar tax-advantaged development projects and higher medical and pension costs from a year ago. These incremental expenses were partially offset by a favorable change in impairment charges related to the mortgage servicing rights (“MSRs”) portfolio of $110 million due to changing longer-term interest rates and a $101 million reduction in debt prepayment charges, compared with 2004. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 44.3 percent in 2005, compared with 45.3 percent in 2004. The improvement in the efficiency ratio reflected these

Table 1   ~~Selected Financial Data~~SELECTED FINANCIAL DATA

Year Ended December 31 Year Ended December 31 Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data) (Dollars and Shares in Millions, Except Per Share Data) 2004 2003 2002 2001 2000 (Dollars and Shares in Millions, Except Per Share Data) 2005 2004 2003 2002 2001

Condensed Income Statement
Condensed Income Statement

Condensed Income Statement

Net interest income (taxable-equivalent basis) (a) Net interest income (taxable-equivalent basis) (a) $ 7,139.9 $ 7,217.5 $ 6,847.2 $ 6,405.2 $ 6,072.4 Net interest income (taxable-equivalent basis) (a) $ 7,088 $ 7,140 $ 7,217 $ 6,847 $ 6,405
Noninterest income Noninterest income 5,624.1 5,068.2 4,910.8 4,340.3 3,958.9 Noninterest income 6,151 5,624 5,068 4,911 4,340
Securities gains (losses), net Securities gains (losses), net (104.9 ) 244.8 299.9 329.1 8.1 Securities gains (losses), net (106 ) (105 ) 245 300 329

Total net revenue 12,659.1 12,530.5 12,057.9 11,074.6 10,039.4 Total net revenue 13,133 12,659 12,530 12,058 11,074
Noninterest expense Noninterest expense 5,784.5 5,596.9 5,740.5 6,149.0 4,982.9 Noninterest expense 5,863 5,785 5,597 5,740 6,149
Provision for credit losses Provision for credit losses 669.6 1,254.0 1,349.0 2,528.8 828.0 Provision for credit losses 666 669 1,254 1,349 2,529

Income from continuing operations before taxes 6,205.0 5,679.6 4,968.4 2,396.8 4,228.5 Income from continuing operations before taxes 6,604 6,205 5,679 4,969 2,396
Taxable-equivalent adjustment Taxable-equivalent adjustment 28.6 28.2 32.9 54.5 82.0 Taxable-equivalent adjustment 33 29 28 33 54
Applicable income taxes Applicable income taxes 2,009.6 1,941.3 1,707.5 818.3 1,422.0 Applicable income taxes 2,082 2,009 1,941 1,708 818

Income from continuing operations 4,166.8 3,710.1 3,228.0 1,524.0 2,724.5 Income from continuing operations 4,489 4,167 3,710 3,228 1,524
Discontinued operations (after-tax) Discontinued operations (after-tax) — 22.5 (22.7 ) (45.2 ) 27.6 Discontinued operations (after-tax) — — 23 (23 ) (45 )
Cumulative effect of accounting change (after-tax) Cumulative effect of accounting change (after-tax) — — (37.2 ) — — Cumulative effect of accounting change (after-tax) — — — (37 ) —

Net income $ 4,166.8 $ 3,732.6 $ 3,168.1 $ 1,478.8 $ 2,752.1 Net income $ 4,489 $ 4,167 $ 3,733 $ 3,168 $ 1,479

Per Common Share
Per Common Share

Per Common Share

Earnings per share from continuing operations Earnings per share from continuing operations $ 2.21 $ 1.93 $ 1.68 $ .79 $ 1.43 Earnings per share from continuing operations $ 2.45 $ 2.21 $ 1.93 $ 1.68 $ .79
Diluted earnings per share from continuing operations Diluted earnings per share from continuing operations 2.18 1.92 1.68 .79 1.42 Diluted earnings per share from continuing operations 2.42 2.18 1.92 1.68 .79
Earnings per share Earnings per share 2.21 1.94 1.65 .77 1.44 Earnings per share 2.45 2.21 1.94 1.65 .77
Diluted earnings per share Diluted earnings per share 2.18 1.93 1.65 .76 1.43 Diluted earnings per share 2.42 2.18 1.93 1.65 .76
Dividends declared per share (b) 1.020 .855 .780 .750 .650
Dividends declared per share Dividends declared per share 1.230 1.020 .855 .780 .750
Book value per share Book value per share 10.52 10.01 9.62 8.58 8.06 Book value per share 11.07 10.52 10.01 9.62 8.58
Market value per share Market value per share 31.32 29.78 21.22 20.93 23.25 Market value per share 29.89 31.32 29.78 21.22 20.93
Average common shares outstanding Average common shares outstanding 1,887.1 1,923.7 1,916.0 1,927.9 1,906.0 Average common shares outstanding 1,831 1,887 1,924 1,916 1,928
Average diluted common shares outstanding Average diluted common shares outstanding 1,912.9 1,936.2 1,924.8 1,940.3 1,918.5 Average diluted common shares outstanding 1,857 1,913 1,936 1,925 1,940

Financial Ratios
Financial Ratios

Financial Ratios

Return on average assets Return on average assets 2.17 % 1.99 % 1.84 % .89 % 1.74 % Return on average assets 2.21 % 2.17 % 1.99 % 1.84 % .89 %
Return on average equity Return on average equity 21.4 19.2 18.3 9.0 19.0 Return on average equity 22.5 21.4 19.2 18.3 9.0
Net interest margin (taxable-equivalent basis) Net interest margin (taxable-equivalent basis) 4.25 4.49 4.65 4.46 4.38 Net interest margin (taxable-equivalent basis) 3.97 4.25 4.49 4.65 4.46
Efficiency ratio (c) 45.3 45.6 48.8 57.2 49.7
Efficiency ratio (b) Efficiency ratio (b) 44.3 45.3 45.6 48.8 57.2

Average Balances
Average Balances

Average Balances

Loans Loans $ 122,141 $ 118,362 $ 114,453 $ 118,177 $ 118,317 Loans $ 133,105 $ 122,141 $ 118,362 $ 114,453 $ 118,177
Loans held for sale Loans held for sale 1,608 3,616 2,644 1,911 1,303 Loans held for sale 1,795 1,608 3,616 2,644 1,911
Investment securities Investment securities 43,009 37,248 28,829 21,916 17,311 Investment securities 42,103 43,009 37,248 28,829 21,916
Earning assets Earning assets 168,123 160,808 147,410 143,501 138,636 Earning assets 178,425 168,123 160,808 147,410 143,501
Assets Assets 191,593 187,630 171,948 165,944 158,481 Assets 203,198 191,593 187,630 171,948 165,944
Noninterest-bearing deposits Noninterest-bearing deposits 29,816 31,715 28,715 25,109 23,820 Noninterest-bearing deposits 29,229 29,816 31,715 28,715 25,109
Deposits Deposits 116,222 116,553 105,124 104,956 103,426 Deposits 121,001 116,222 116,553 105,124 104,956
Short-term borrowings Short-term borrowings 14,534 10,503 10,116 11,679 11,008 Short-term borrowings 19,382 14,534 10,503 10,116 11,679
Long-term debt Long-term debt 35,115 33,663 32,172 26,088 23,316 Long-term debt 36,141 35,115 33,663 32,172 26,088
Shareholders’ equity Shareholders’ equity 19,459 19,393 17,273 16,426 14,499 Shareholders’ equity 19,953 19,459 19,393 17,273 16,426

Period End Balances
Period End Balances

Period End Balances

Loans Loans $ 126,315 $ 118,235 $ 116,251 $ 114,405 $ 122,365 Loans $ 137,806 $ 126,315 $ 118,235 $ 116,251 $ 114,405
Allowance for credit losses Allowance for credit losses 2,269 2,369 2,422 2,457 1,787 Allowance for credit losses 2,251 2,269 2,369 2,422 2,457
Investment securities Investment securities 41,481 43,334 28,488 26,608 17,642 Investment securities 39,768 41,481 43,334 28,488 26,608
Assets Assets 195,104 189,471 180,027 171,390 164,921 Assets 209,465 195,104 189,471 180,027 171,390
Deposits Deposits 120,741 119,052 115,534 105,219 109,535 Deposits 124,709 120,741 119,052 115,534 105,219
Long-term debt Long-term debt 34,739 33,816 31,582 28,542 23,276 Long-term debt 37,069 34,739 33,816 31,582 28,542
Shareholders’ equity Shareholders’ equity 19,539 19,242 18,436 16,745 15,333 Shareholders’ equity 20,086 19,539 19,242 18,436 16,745
Regulatory capital ratios Regulatory capital ratios Regulatory capital ratios
Tangible common equity 6.4 % 6.5 % 5.7 % 5.9 % 6.4 % Tangible common equity 5.9 % 6.4 % 6.5 % 5.7 % 5.9 %
Tier 1 capital 8.6 9.1 8.0 7.8 7.3 Tier 1 capital 8.2 8.6 9.1 8.0 7.8
Total risk-based capital 13.1 13.6 12.4 11.9 10.7 Total risk-based capital 12.5 13.1 13.6 12.4 11.9
Leverage 7.9 8.0 7.7 7.9 7.5 Leverage 7.6 7.9 8.0 7.7 7.9
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) ~~Dividends per share have not been restated for the 2001 Firstar/ former U.S. Bancorp of Minneapolis merger.~~
~~(c)~~ Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.

U.S. BANCORP  19
~~based products~~changes and services (11.0 percent), particularly in payment processing revenue, offset by a $349.7 million reduction in gains (losses) on sales of securities. The 1.1 percent decline in net interest income reflected modest growth in average earning assets, offset by lower net interest margins. Also contributing to the year-over-year decline in net interest income was a reduction in loan fees, the result of fewer loan prepayments during a rising rate environment. In 2004, average earning assets increased $7.3 billion (4.5 percent), compared with 2003, primarily due to growth in residential mortgages, retail loans and investment securities, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The net interest margin in 2004 was 4.25 percent, compared with 4.49 percent in 2003. The decline in net interest margin primarily reflected the competitive credit pricing environment, a preference to acquire adjustable-rate securities for asset/liability management purposes, lower prepayment fees, a modest increase in the percent of total earning assets funded by wholesale sources of funding and higher rates paid on wholesale funding due to the impact of rising rates. In addition, the net interest margin declined year-over-year as a result of consolidating high credit quality, low margin loans from Stellar, a commercial loan conduit, onto the Company’s ~~balance sheet beginning in the third quarter of 2003.~~
    Total noninterest expense was $5.8 billion in 2004, compared with $5.6 billion in 2003. The increase in total noninterest expense of $187.6 million (3.4 percent), primarily reflected a $154.8 million charge relatedability to the prepayment of a portion of the Company’s long-term debt. The expense growth also reflected increases in compensation, employee benefits, professional services, marketing and business development, technology and communications and othergenerate operating expense, as well as expenses related to the expansion of the merchant acquiring business in Europe. These unfavorable variances were partially offset by a favorable change in impairment charges related to the MSR portfolio of $151.9 million and a $46.2 million reduction in merger and restructuring-related charges. Refer to “Acquisition and Divestiture Activity” for further information on the timing of acquisitions. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 45.3 percent in 2004, compared with 45.6 percent in 2003.leverage within its businesses.
    The provision for credit losses was ~~$669.6~~$666 million for ~~2004, compared with $1,254.0 million for 2003,~~2005, a decrease of ~~$584.4~~$3 million ~~(46.6~~(.4 percent)~~. The decrease in the provision for credit losses reflected~~ from 2004 due to improving credit quality reflected in lower levels of nonperforming loans, somewhat offset by the effects of a $56 million provision recorded in 2005 for charge-offs related to new bankruptcy legislation that became effective in October, 2005.
Significant Acquisitions
    On December 30, 2005, the Company acquired the corporate trust and ~~economic conditions relative to 2003. Net charge-offs during 2004 were $767.1~~institutional custody businesses of Wachovia Corporation in a cash transaction valued at $720 million ~~compared~~initially with ~~net charge-offs of $1,251.7~~an additional $80 million ~~during 2003,~~payable in one year based on business retention levels. As a ~~reduction of $484.6 million. The decline in net charge-offs was primarily the~~ result of ~~declining levels of stressed and nonperforming loans, continuing collection efforts and improving economic conditions. In response to improving credit conditions,~~this transaction, the Company ~~made a decision~~acquired approximately 14,100 new Corporate Trust client issuances with $410 billion in ~~2004 to reduce the allowance for credit losses. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming~~ assets under administration and ~~factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.~~
~~Acquisition and Divestiture Activity~~On December 31, 2003, the Company announced that it had completed the tax-free distribution of Piper Jaffray Companies representing substantially all of the Company’s capital markets business line. The Company distributed to our shareholders one share of Piper Jaffray common stock for every 100 shares of U.S. Bancorp common stock, by means of a special dividend of $685 million. This distribution did not include brokerage, financial advisory or asset management services offered to customers through other business units. The Company continues to provide asset management services to its customers through the Private Client,approximately 1,700 new Institutional Trust and Asset Management business segment and access to investment products and services through its extensive network of licensed financial advisors within the retail brokerage platform of the Consumer Banking business segment. In connectionCustody clients with ~~the spin-off of Piper Jaffray, historical financial results related to Piper Jaffray have been segregated and accounted for~~$570 billion in ~~the Company’s financial statements as discontinued operations.~~
    On June 29, 2004, the Company purchased the remaining 50 percent ownership interest in EuroConex Technologies Ltd (“EuroConex”) from the Bank of Ireland. In addition, during the second and fourth quarters of 2004, the Company completed three separate transactions to acquire merchant processing businesses in Poland, the United Kingdom and Norway. In connection with these transactions, EuroConex and its affiliates provide debit and credit card processing services to merchants, directly and through alliances with banking partners in these European markets. These transactionsassets under administration. The transaction represented total assets acquired of ~~$377~~$730 million and ~~total~~ liabilities assumed of ~~$115~~$10 million at the closing date. Included in total assets were contract and other intangibles with aan estimated fair value of ~~$163~~$227 million and goodwill of $105 million. The goodwill reflected the strategic value of these businesses to the Company’s European merchant processing business and anticipated economies of scale that will result from these transactions.
    ~~On December 31, 2002, the Company acquired the corporate trust business of State Street Bank and Trust Company (“State Street Corporate Trust”) in a cash~~
20  ~~U.S. BANCORP~~
transaction valued at $720 million. State Street Corporate Trust was a leading provider, particularly in the Northeast, of corporate trust and agency services to a variety of municipalities, corporations, government agencies and other financial institutions serving approximately 20,000 client issuances representing over $689 billion of assets under administration. The transaction represented total assets acquired of $677 million and total liabilities assumed of $39 million. Included in total assets were contract and other intangibles with a fair value of $218 million and goodwill of $520$500 million. The goodwill reflected the strategic value of the combined organization’s leadership position in the corporate trust ~~business~~ and ~~processing~~institutional custody businesses and economies of scale resulting from the transaction.
    On November 1, 2002, the Company acquired 57 branches and a related operations facility in northern California from Bay View Bank (“Bay View”), a wholly-owned subsidiary of Bay View Capital Corporation, in a cash transaction. The transaction represented total assets acquired of $853 million and total liabilities assumed (primarily retail and small business deposits) of $3.3 billion. Included in total assets were approximately $336 million of select loans primarily with depository relationships, core deposit intangibles of $56 million and goodwill of $427 million. The goodwill reflected the strategic value of expanding the Company’s market within the San Francisco Bay area.
    On April 1, 2002, the Company acquired Cleveland-based The Leader Mortgage Company, LLC (“Leader”), a wholly-owned subsidiary of First Defiance Financial Corp., in a cash transaction. The transaction represented total assets acquired of $531 million and total liabilities assumed of $446 million. Included in total assets were mortgage servicing rights and other intangibles of $173 million and goodwill of $18 million. Leader specializes in acquiring servicing of loans originated for state and local housing authorities.
Refer to Notes 3 4 and 54 of the Notes to Consolidated Financial Statements for additional information regarding ~~discontinued operations,~~ business combinations and ~~merger and restructuring-related items.~~discontinued operations.
STATEMENT OF INCOME ANALYSIS
Net Interest IncomeNet interest income, on a taxable-equivalent basis, was $7.1 billion in 2005, $7.1 billion in 2004 ~~compared with~~and $7.2 billion in 2003. Net interest income declined $52 million in 2005, reflecting growth in average earning assets, more than offset by lower net interest margins. Average earning assets were $178.4 billion for 2005, compared with $168.1 billion and $160.8 billion for 2004 and 2003, respectively. The $10.3 billion (6.1 percent) increase in average earning assets for 2005, compared with 2004, was primarily driven by increases in residential mortgages, commercial loans and ~~$6.8~~retail loans. The net interest margin in 2005 was 3.97 percent, compared with 4.25 percent and 4.49 percent in 2004 and 2003, respectively. The 28 basis point decline in the 2005 net interest margin, compared with 2004, reflected the current competitive lending environment, asset/ liability management decisions and the impact of changes in the yield curve from a year ago. Compared with 2004, credit spreads have tightened by approximately 19 basis points in 2005 across most lending products due to competitive pricing and a change in mix due to growth in lower-spread, fixed-rate credit products. The net interest margin also declined due to the impact of share repurchases, funding incremental growth of earning assets with higher cost wholesale funding, and asset/ liability management decisions designed to minimize the Company’s rate sensitivity position, including issuing longer-term fixed-rate debt and a reduction in the Company’s net receive-fixed interest rate swap position of 18.3 percent since December 31, 2004.
Table 2   ANALYSIS OF NET INTEREST INCOME

2005 2004
(Dollars in Millions) 2005 2004 2003 v 2004 v 2003
Components of net interest income

Income on earning assets (taxable-equivalent basis) (a) $ 10,584 $ 9,215 $ 9,286 $ 1,369 $ (71 )
Expense on interest-bearing liabilities 3,496 2,075 2,069 1,421 6

Net interest income (taxable-equivalent basis) $ 7,088 $ 7,140 $ 7,217 $ (52 ) $ (77 )

Net interest income, as reported $ 7,055 $ 7,111 $ 7,189 $ (56 ) $ (78 )

Average yields and rates paid

Earning assets yield (taxable-equivalent basis) 5.93 % 5.48 % 5.77 % .45 % (.29 )%
Rate paid on interest-bearing liabilities 2.37 1.53 1.60 .84 (.07 )

Gross interest margin (taxable-equivalent basis) 3.56 % 3.95 % 4.17 % (.39 )% (.22 )%

Net interest margin (taxable-equivalent basis) 3.97 % 4.25 % 4.49 % (.28 )% (.24 )%

Average balances

Investment securities $ 42,103 $ 43,009 $ 37,248 $ (906 ) $ 5,761
Loans 133,105 122,141 118,362 10,964 3,779
Earning assets 178,425 168,123 160,808 10,302 7,315
Interest-bearing liabilities 147,295 136,055 129,004 11,240 7,051
Net free funds (b) 31,130 32,068 31,804 (938 ) 264
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a federal tax rate of 35 percent.
(b) Represents noninterest-bearing deposits, allowance for loan losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity.
20  U.S. BANCORP
Slightly higher loan fees and the increasing margin benefit of deposits and net free funds partially offset these factors.
    Average loans in 2005 were higher by $11.0 billion (9.0 percent), compared with 2004, driven by growth in ~~2002.~~residential mortgages, commercial loans and retail loans of $3.7 billion (25.9 percent), $3.3 billion (8.4 percent) and $3.3 billion (7.9 percent), respectively. The significant growth in residential mortgages was, in part, due to an asset/liability management decision to retain adjustable-rate mortgage production over the last several quarters. Total average commercial real estate loans increased only 2.6 percent, relative to 2004, principally due to higher refinancing activities during the past two years given the interest rate environment.
    Average investment securities were $906 million (2.1 percent) lower in 2005, compared with 2004. The Company utilizes the investment portfolio as part of its liquidity and asset/liability management practices to minimize structural interest rate and market valuation risks associated with changing interest rates. The reduction in average investment securities in 2005 principally reflected maturities and prepayments utilized to fund earning asset growth. It also reflected the net impact of repositioning the investment portfolio as part of asset/liability risk management decisions to acquire primarily variable-rate securities to minimize the Company’s rate sensitivity position given the changing rate environment and mix of loan growth. During 2005, the Company received proceeds from prepayments and maturities of securities of $10.3 billion. In response to structural interest rate risk due to changing interest rates and the mix of loan growth, the Company also made decisions to sell $4.3 billion of securities, classified as available-for-sale, recognizing net securities losses of $106 million. In 2005, approximately $13.2 billion was reinvested in principally adjustable-rate securities, giving consideration to the Company’s asset/liability position. At December 31, 2005, the Company’s investment portfolio consisted of approximately 41 percent variable-rate securities. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of net interest income to changes in interest rates.
    Average noninterest-bearing deposits in 2005 were lower by $587 million (2.0 percent), compared with 2004. The year-over-year change in the average balances of noninterest-bearing deposits was impacted by product changes in the Consumer Banking business line. In late 2004, the Company migrated approximately $1.3 billion of noninterest-bearing deposit balances to interest checking accounts as an enhancement to its Silver Elite Checking product. Average branch-based noninterest-bearing deposits in 2005, excluding the migration of certain high-value customers to Silver Elite Checking, were higher by approximately $210 million (1.8 percent), over 2004. Average noninterest-bearing deposits in other areas, including commercial banking and Private Client, Trust and Asset Management, also increased year-over-year. These favorable variances were offset somewhat by expected declines in average noninterest-bearing deposits in corporate banking as these customers utilized their excess liquidity to fund their operations.
    Average total savings products declined $1.7 billion (2.9 percent) year-over-year, compared with 2004, due to reductions in average money market savings account balances and savings accounts, partially offset by higher interest checking balances. During 2005, average branch-based interest checking deposits increased by $2.2 billion (14.7 percent) due to strong new account growth of 9.0 percent, as well as the $1.3 billion migration of the Silver Elite Checking product. This positive variance in branch-based interest checking account deposits was partially offset by reductions in other business units. Average money market savings account balances declined year-over-year by $3.5 billion (10.8 percent), with declines in both the branches and other business lines. The decline was primarily the result of deposit pricing by the Company for money market products in relation to other fixed-rate deposit products offered. A portion of the money market balances have migrated to time deposits greater than $100,000 as rates increased on the time deposit products. Average time deposits greater than $100,000 grew $7.0 billion (51.0 percent) in 2005, compared with 2004, most notably in corporate banking, as customers migrated balances to higher rate deposits.

    The decline in net interest income in 2004, compared with 2003, reflected modest growth in average earning assets, more than offset by lower net interest margins. Also contributing to the year-over-year decline ~~in net interest income~~ was a ~~$37.6~~$38 million reduction in loan fees, the result of fewer loan prepayments in a rising rate environment. ~~Average earning assets were $168.1 billion for 2004, compared with $160.8 billion and $147.4 billion for 2003 and 2002, respectively.~~ The $7.3 billion (4.5 percent) increase in average earning assets for 2004, compared with 2003, was primarily driven by increases in residential mortgages, retail loans and investment securities, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The decline in average commercial loans ~~from a year ago~~ reflected soft loan demand in 2003 and through the third quarter of 2004. ~~The Company began to experience growth in commercial~~
~~Table 2~~   ~~Analysis of Net Interest Income~~

2004 2003
(Dollars in Millions) 2004 2003 2002 v 2003 v 2002
Components of net interest income

Income on earning assets (taxable-equivalent basis) (a) $ 9,215.1 $ 9,286.2 $ 9,526.8 $ (71.1 ) $ (240.6 )
Expense on interest-bearing liabilities 2,075.2 2,068.7 2,679.6 6.5 (610.9 )

Net interest income (taxable-equivalent basis) $ 7,139.9 $ 7,217.5 $ 6,847.2 $ (77.6 ) $ 370.3

Net interest income, as reported $ 7,111.3 $ 7,189.3 $ 6,814.3 $ (78.0 ) $ 375.0

Average yields and rates paid

Earning assets yield (taxable-equivalent basis) 5.48 % 5.77 % 6.46 % (.29 )% (.69 )%
Rate paid on interest-bearing liabilities 1.53 1.60 2.26 (.07 ) (.66 )

Gross interest margin (taxable-equivalent basis) 3.95 % 4.17 % 4.20 % (.22 )% (.03 )%

Net interest margin (taxable-equivalent basis) 4.25 % 4.49 % 4.65 % (.24 )% (.16 )%

Average balances

Investment securities $ 43,009 $ 37,248 $ 28,829 $ 5,761 $ 8,419
Loans 122,141 118,362 114,453 3,779 3,909
Earning assets 168,123 160,808 147,410 7,315 13,398
Interest-bearing liabilities 136,055 129,004 118,697 7,051 10,307
Net free funds (b) 32,068 31,804 28,713 264 3,091
~~(a)~~ ~~Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.~~
~~(b)~~ ~~Represents noninterest-bearing deposits, allowance for loan losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity.~~
~~U.S. BANCORP~~  21
~~loans in late 2004 as economic conditions continued to improve. The net interest margin in 2004 was 4.25 percent, compared with 4.49 percent and 4.65 percent in 2003 and 2002, respectively.~~ The 24 basis point decline in 2004 net interest margin, compared with 2003, primarily reflected the competitive credit pricing environment, a preference to acquire adjustable-rate securities which have lower yields and a decline in prepayment fees. The net interest margin was also impacted by a modest increase in the percent of total earning assets funded by wholesale sources of funding and higher interest rates paid on wholesale funding due to the impact of rising rates. The shift towards wholesale funding reflects, in part, slower growth in deposits as growth in mortgage banking escrows and government-related deposits declined. It also reflects asset/liability decisions to issue longer-term fixed-rate borrowings given the rising rate environment. In addition, the net interest margin declined year-over-year as a
U.S. BANCORP  21
result of consolidating high credit quality, low margin loans from ~~the Stellar~~a commercial loan conduit previously maintained by the Company onto the Company’s balance sheet beginning in the third quarter of 2003.
    ~~Total average~~Average loans ~~of $122.1 billion~~ in 2004 were $3.8 billion (3.2 percent) higher ~~compared with~~than in 2003, reflecting growth in ~~average~~ residential mortgages, ~~average~~ retail loans and ~~average~~ commercial real estate loans of $2.6 billion (22.5 percent), $3.0 billion (7.9 percent) and $.1 billion (.5 percent), respectively. Growth in these categories was offset somewhat by an overall decline in average commercial loans of $2.0 billion (4.8 percent). Although the consolidation of loans from the Stellar commercial loan conduit had a positive impact on average loan balances year-over-year, excess liquidity and improving cash flows among corporate borrowers led to the overall decrease in total commercial loans. The Company began to experience growth in average commercial loans in the fourth quarter of 2004.
Average investment securities were $5.8 billion (15.5 percent) higher in 2004, compared with 2003, reflecting the reinvestment of proceeds from declining average commercial loan balances and loans held for sale. The Company utilizes the investment portfolio as part of its overall asset/liability management practices to minimize structural interest rate and market valuation risks associated with changes in interest rates. During 2004, the Company received proceeds from prepayments and maturities of investment securities of $12.3 billion. Also, the Company made a decision to sell $8.2 billion of fixed-rate securities, classified as available-for-sale, as part of interest rate risk management actions given changes in rates during the year, recognizing a $104.9 million loss on the sale of securities.
~~Table 3~~   ~~Net Interest Income — Changes Due to Rate and Volume (a)~~

2004 v 2003 2003 v 2002
(Dollars in Millions) Volume Yield/Rate Total Volume Yield/Rate Total
Increase (decrease) in
Interest income

Investment securities $ 254.3 $ (115.5 ) $ 138.8 $ 428.4 $ (235.2 ) $ 193.2
Loans held for sale (112.2 ) 1.5 (110.7 ) 62.7 (31.1 ) 31.6
Commercial loans (110.8 ) 8.3 (102.5 ) (149.0 ) (157.8 ) (306.8 )
Commercial real estate 7.3 (48.6 ) (41.3 ) 90.2 (141.9 ) (51.7 )
Residential mortgage 160.2 (61.5 ) 98.7 232.5 (114.4 ) 118.1
Retail loans 210.4 (264.5 ) (54.1 ) 134.9 (363.9 ) (229.0 )

Total loans 267.1 (366.3 ) (99.2 ) 308.6 (778.0 ) (469.4 )
Other earning assets (13.7 ) 13.7 — 6.4 (2.4 ) 4.0

Total 395.5 (466.6 ) (71.1 ) 806.1 (1,046.7 ) (240.6 )
Interest expense

Interest checking 8.0 (21.5 ) (13.5 ) 22.6 (40.6 ) (18.0 )
Money market accounts 5.3 (87.8 ) (82.5 ) 87.7 (82.8 ) 4.9
Savings accounts 1.0 (6.8 ) (5.8 ) 3.5 (7.4 ) (3.9 )
Time certificates of deposit less than $100,000 (70.4 ) (39.2 ) (109.6 ) (146.3 ) (146.2 ) (292.5 )
Time deposits greater than $100,000 24.6 (5.5 ) 19.1 26.3 (105.5 ) (79.2 )

Total interest-bearing deposits (31.5 ) (160.8 ) (192.3 ) (6.2 ) (382.5 ) (388.7 )
Short-term borrowings 64.1 31.8 95.9 8.5 (64.6 ) (56.1 )
Long-term debt 34.7 68.2 102.9 45.0 (211.1 ) (166.1 )

Total 67.3 (60.8 ) 6.5 47.3 (658.2 ) (610.9 )

Increase (decrease) in net interest income $ 328.2 $ (405.8 ) $ (77.6 ) $ 758.8 $ (388.5 ) $ 370.3
~~(a)~~ This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis utilizing a tax rate of 35 percent. This table does not take into account the level of noninterest-bearing funding, nor does it fully reflect changes in the mix of assets and liabilities. The change in interest not solely due to changes in volume or rates has been allocated on a pro-rata basis to volume and yield/rate.
22  ~~U.S. BANCORP~~
Given the soft commercial loan demand in early 2004, the Company acquired $19.6 billion of investment securities, representing principally adjustable and shorter-term fixed-rate mortgage-backed securities, giving consideration to the Company’s overall asset/liability position. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of net interest income to changes in interest rates.
Average noninterest-bearing deposits ~~of $29.8 billion~~ in 2004 were lower by $1.9 billion (6.0 percent), compared with 2003. While average branch-based noninterest-bearing deposits increased by 2.7 percent from ~~a year ago,~~2003, mortgage-related escrow balances and business-related noninterest-bearing deposits, including corporate banking, mortgage banking and government deposits, declined. Average interest-bearing deposits ~~of $86.4 billion in 2004~~ were higher by $1.6 billion (1.8 percent), compared with 2003. The year-over-year increase in average interest-bearing deposits included increases in average savings products deposits of $2.6 billion (4.6 percent) and time deposits greater than $100,000 of $1.4 billion (11.0 percent), partially offset by a decrease in time certificates of deposit less than $100,000 of $2.4 billion (15.6 percent). The decrease in time certificates of deposit less than $100,000 was primarily due to pricing decisions by management in connection with the Company’s overall funding and risk management activities.
Average net free funds increased $.3 billion ~~from a year ago,~~in 2004, compared with 2003, including a decrease in average noninterest-bearing deposits, other liabilities and other assets of $1.9 billion (6.0 percent), $1.3 billion (16.7 percent) and $3.1 billion (10.5 percent), ~~respectively, in 2004, compared with 2003.~~respectively. The decrease in other assets and liabilities principally ~~reflects~~reflected the impact of the spin-off of Piper Jaffray Companies.
    The increase in net interest income in 2003, compared with 2002, was driven by an increase in average earning assets, growth in average net free funds and favorable changes in the Company’s average funding mix. Also contributing to the year-over-year increase in net interest income were various acquisitions, including Leader, State Street Corporate Trust and Bay View, which accounted for approximately $71.9 million of the increase during 2003. Average earning assets were $160.8 billion for 2003, compared with $147.4 billion for 2002. The $13.4 billion (9.1 percent) increase in average earning assets for 2003, compared with 2002, was primarily driven by increases in investment securities, loans held for sale, residential mortgages and retail loans, partially offset by a decline in commercial loans. The 16 basis point decline in 2003 net interest margin, compared with 2002, primarily reflected growth in lower-yielding investment securities as a percent of total earning assets, changes in loan mix and a decline in the margin benefit from net free funds due to lower average interest rates. In addition, the net interest margin declined year-over-year as a result of consolidating high credit quality, low margin loans from Stellar, a commercial loan conduit, onto the Company’s balance sheet in the third quarter of 2003. The $3.9 billion (3.4 percent) increase in total average loans for 2003, compared with 2002, reflected growth in average residential mortgages, retail loans and commercial real estate loans of $3.3 billion (39.0 percent), $1.7 billion (4.6 percent) and $1.4 billion (5.5 percent), respectively, offset somewhat by an overall decline in average commercial loans of $2.5 billion (5.7 percent). Average investment securities were $8.4 billion (29.2 percent) higher in 2003, compared with 2002, reflecting the reinvestment of proceeds from loan sales, declining commercial loan balances and deposits assumed in connection with the Bay View transaction. Average interest-bearing deposits of $84.8 billion in 2003 were higher by $8.4 billion (11.0 percent), compared with 2002. Approximately $3.0 billion of the year-over-year increase in average interest-bearing deposits was due to acquisitions, while the remaining growth was driven by increases in savings balances. The increase in savings balances reflected product initiatives, increasing government banking deposits and customer decisions to maintain liquidity. Average net free funds increased $3.1 billion from the prior year, including an increase in average noninterest-bearing deposits of $3.0 billion (10.4 percent) in 2003, compared with 2002. The increase in noninterest-bearing deposits was primarily due to mortgage banking activities during early 2003 and higher liquidity among corporate customers maintained in demand deposit balances year-over-year.
Provision for Credit LossesThe provision for credit losses is recorded to bring the allowance for credit losses to a level deemed appropriate by management based on factors discussed in the “Analysis and Determination of Allowance for Credit Losses” section. The provision for credit losses was ~~$669.6~~$666 million in 2005, compared with $669 million and $1,254 million in 2004 ~~compared with $1,254.0 million~~ and ~~$1,349.0 million in~~ 2003, ~~and 2002,~~ respectively.
    The decrease in the provision for credit losses of $3 million (.4 percent) in 2005 reflected improving levels of nonperforming loans resulting in lower total net charge-offs
Table 3   NET INTEREST INCOME — CHANGES DUE TO RATE AND VOLUME (a)

2005 v 2004 2004 v 2003
(Dollars in Millions) Volume Yield/Rate Total Volume Yield/Rate Total
Increase (decrease) in
Interest income

Investment securities $ (39 ) $ 165 $ 126 $ 263 $ (124 ) $ 139
Loans held for sale 11 4 15 (112 ) 1 (111 )
Commercial loans 185 103 288 (111 ) 9 (102 )
Commercial real estate 39 222 261 7 (49 ) (42 )
Residential mortgages 211 (22 ) 189 160 (61 ) 99
Retail loans 207 273 480 210 (264 ) (54 )

Total loans 642 576 1,218 266 (365 ) (99 )
Other earning assets 4 6 10 (14 ) 14 —

Total 618 751 1,369 403 (474 ) (71 )
Interest expense

Interest checking 6 58 64 8 (21 ) (13 )
Money market accounts (25 ) 148 123 5 (88 ) (83 )
Savings accounts — — — 1 (7 ) (6 )
Time certificates of deposit less than $100,000 3 45 48 (70 ) (40 ) (110 )
Time deposits greater than $100,000 123 297 420 25 (6 ) 19

Total interest-bearing deposits 107 548 655 (31 ) (162 ) (193 )
Short-term borrowings 88 339 427 64 32 96
Long-term debt 27 312 339 35 68 103

Total 222 1,199 1,421 68 (62 ) 6

Increase (decrease) in net interest income $ 396 $ (448 ) $ (52 ) $ 335 $ (412 ) $ (77 )
(a) This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis utilizing a tax rate of 35 percent. This table does not take into account the level of noninterest-bearing funding, nor does it fully reflect changes in the mix of assets and liabilities. The change in interest not solely due to changes in volume or rates has been allocated on a pro-rata basis to volume and yield/rate.
22  U.S. BANCORP
in 2005. Nonperforming loans, principally reflecting changes in the quality of commercial and commercial real estate loans, declined $96 million from December 31, 2004. Net charge-offs declined $82 million from 2004, the result of lower gross charge-offs within the commercial and commercial real estate loan portfolios. This improvement in commercial and commercial real estate net charge-offs was offset somewhat by higher residential and retail net charge-offs reflecting changes in the mix of these portfolios and the impact of recently enacted bankruptcy legislation.
    In 2004, the decline in the provision for credit losses of ~~$584.4~~$585 million ~~in 2004~~(46.7 percent) reflected continuing improvement in the credit quality of the loan portfolio and changing economic conditions. The changes in credit quality ~~continued to be~~were broad-based across most industries resulting in improving credit risk ratings, a decline in nonperforming assets and lower total net charge-offs. ~~While general economic conditions improved somewhat in 2003, commercial~~Commercial loan demand ~~continued to be~~was soft in most markets within the banking footprint during much of 2003 and 2004. InOverall, credit quality of the ~~fourth quarter of 2004, the Company began~~Company’s portfolios has improved since 2002 due to ~~experience growth in commercial loans, indicating that~~
~~U.S. BANCORP~~  23
better economic conditions ~~within the Company’s markets were expanding.~~and enhancements in collection efforts, underwriting and risk management practices. In response to ~~improving credit performance and economic conditions,~~these changes, the ~~Company made a decision to reduce the~~Company’s allowance for credit ~~losses.~~
    ~~The decline in the provision for credit~~ losses of $95.0 million in 2003 primarily reflected an improving credit risk profile resulting in lower nonperforming loans and commercial and retail loan losses. The decline in nonperforming loans and commercial loan net charge-offs was broad-based across most industries within the commercial loan portfolio. Retail loan delinquency ratios continued to improve across most retail loan portfolios, reflecting improving economic conditions and the Company’s ongoing collection efforts and risk management activities. These were also the principal factors resulting in lower levels of retail net charge-offs during 2003.
has trended downward since 2002. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
Noninterest IncomeNoninterest income in ~~2004~~2005 was ~~$5.5~~$6.0 billion, compared with $5.5 billion in 2004 and $5.3 billion in ~~2003~~2003. The $526 million (9.5 percent) increase in 2005 over 2004 was driven by strong organic growth in the majority of fee income categories, particularly payment processing revenues and ~~$5.2 billion~~deposit service charges.
    The growth in ~~2002.~~credit and debit card revenue of 9.9 percent was principally driven by higher customer transaction volumes and rate changes from a year ago. The corporate payment products revenue growth of 19.9 percent reflected growth in sales, card usage, rate changes and the recent acquisition of a small aviation card business. ATM processing services revenue was higher by 30.9 percent primarily due to the expansion of the ATM business in May of 2005. Merchant processing services revenue was higher by 14.1 percent in 2005, compared with 2004, reflecting an increase in merchant sales volume and business expansion in European markets. The increase in trust and investment management fees was primarily attributable to improved equity market conditions and account growth. Deposit service charges were higher by 15.0 percent year-over-year due to new account growth in the branches and higher transaction-related service activities. The growth in mortgage banking revenue was due to origination fees and gains from higher production volumes and increased servicing income. Other income increased by 24.1 percent from 2004, primarily due to higher income from equity investments and the cash surrender value of insurance products relative to 2004. Partially offsetting these positive variances year-over-year were decreases in treasury management fees and commercial products revenue of 6.4 percent and 7.4 percent, respectively. The decrease in treasury management fees was due to higher earnings credits on customers’ compensating balances, reflecting rising interest rates relative to a year ago, partially offset by growth in treasury management-related activities. Commercial products revenue declined due to reductions in non-yield loan fees, syndications and fees for letters of credit.
    In 2004, noninterest income ~~of $206.2~~increased $206 million (3.9 percent) ~~in 2004,~~, compared with 2003, ~~was~~ driven by strong organic growth in most fee-based products and services categories, ~~(11.0 percent),~~ particularly in payment processing revenue.
Table 4   NONINTEREST INCOME

2005 2004
(Dollars in Millions) 2005 2004 2003 v 2004 v 2003
Credit and debit card revenue $ 713 $ 649 $ 561 9.9 % 15.7 %
Corporate payment products revenue 488 407 361 19.9 12.7
ATM processing services 229 175 166 30.9 5.4
Merchant processing services 770 675 561 14.1 20.3
Trust and investment management fees 1,009 981 954 2.9 2.8
Deposit service charges 928 807 716 15.0 12.7
Treasury management fees 437 467 466 (6.4 ) 0.2
Commercial products revenue 400 432 401 (7.4 ) 7.7
Mortgage banking revenue 432 397 367 8.8 8.2
Investment products fees and commissions 152 156 145 (2.6 ) 7.6
Securities gains (losses), net (106 ) (105 ) 245 1.0 *
Other 593 478 370 24.1 29.2

Total noninterest income $ 6,045 $ 5,519 $ 5,313 9.5 % 3.9 %
* Not meaningful
U.S. BANCORP  23

Partially offsetting the increase in fee-based revenue growth in 2004 was a year-over-year reduction in net securities gains (losses) of ~~$349.7~~$350 million.
    ~~Credit and debit card revenue, corporate payment products revenue and ATM processing services revenue were higher~~ The growth in ~~2004, compared with 2003, by $88.6 million (15.8 percent), $45.5 million (12.6 percent) and $9.4 million (5.7 percent), respectively. Although~~ credit and debit card revenue ~~increased year-over-year, the~~was driven by higher transaction volumes and rate changes. This growth in sales volumes was somewhat muted due to the impact of the settlement of the antitrust litigation brought against VISA USA and MasterCard by Wal-Mart Stores, Inc., Sears Roebuck & Co. and other retailers, which lowered interchange rates on signature debit transactions beginning in August 2003. The year-over-year impact of VISA’s settlement on debit card revenue for 2004 was approximately ~~$32.8~~$33 million. ~~This change in the interchange rate, in addition to higher customer loyalty rewards expenses, however, were more than offset by growth in transaction volumes and other rate changes.~~ The corporate payment products revenue growth reflected growth in sales, card usage and rate changes. The favorable variance in ATM processing services revenue was also due to increases in transaction volumes and sales. Merchant processing services revenue was higher in 2004, ~~by $113.2 million (20.2 percent),~~ compared with 2003, reflecting an increase in same store sales volume, new business and ~~the recent~~ expansion of the Company’s merchant acquiring business in Europe. ~~These recent European acquisitions accounted for approximately $58.6 million of the total increase.~~ Deposit service charges increased in 2004 ~~by $90.6 million (12.7 percent),~~ primarily due to account growth, revenue enhancement initiatives and transaction-related fees. Trust and investment management fees increased ~~by $27.3 million (2.9 percent), compared with 2003,~~ as gains from equity market valuations were partially offset by lower fees, partially due to a change in mix of fund balances and customers’ migration from money market mutual funds to interest-bearing deposits with marginally better pricing. Treasury management fees were relatively flat from a year ago. Increased fees driven by a change in the Federal government’s payment methodology for treasury management services to fees for services rather than maintaining compensating balances in the third quarter of 2003 were offset by higher interest earnings credit on customers’ compensating balances and the impact of an
~~Table 4~~   ~~Noninterest Income~~

2004 2003
(Dollars in Millions) 2004 2003 2002 v 2003 v 2002
Credit and debit card revenue $ 649.3 $ 560.7 $ 517.0 15.8 % 8.5 %
Corporate payment products revenue 406.8 361.3 325.7 12.6 10.9
ATM processing services 175.3 165.9 160.6 5.7 3.3
Merchant processing services 674.6 561.4 567.3 20.2 (1.0 )
Trust and investment management fees 981.2 953.9 892.1 2.9 6.9
Deposit service charges 806.4 715.8 690.3 12.7 3.7
Treasury management fees 466.7 466.3 416.9 .1 11.8
Commercial products revenue 432.2 400.5 479.2 7.9 (16.4 )
Mortgage banking revenue 397.3 367.1 330.2 8.2 11.2
Investment products fees and commissions 156.0 144.9 132.7 7.7 9.2
Securities gains (losses), net (104.9 ) 244.8 299.9 * (18.4 )
Other 478.3 370.4 398.8 29.1 (7.1 )

Total noninterest income $ 5,519.2 $ 5,313.0 $ 5,210.7 3.9 % 2.0 %
* Not meaningful
24  ~~U.S. BANCORP~~
~~industry-wide shift of payments from paper-based to electronic and card-based transactions.~~ During 2004, commercial products revenue increased ~~$31.7 million (7.9 percent),~~ primarily due to syndication fees and commercial leasing revenue. AnThe growth in mortgage banking revenue was due to an increase in loan servicing revenues, ~~from a year ago contributed to an increase of $30.2 million (8.2 percent) in mortgage banking revenue during 2004. The growth in mortgage servicing revenues was~~ offset somewhat by lower gains from the sale of mortgage loan production. Investment products fees and commissions revenue increased in 2004 by $11.1 million (7.7 percent), compared with 2003, primarily due to higher sales activity in the Consumer Banking business line. The increase in sales activities reflected improving equity market conditions in late 2003 and 2004. Other noninterest income increased ~~by $107.9 million (29.1 percent) from 2003,~~ principally due to improving retail lease residual values resulting in lower end-of-term residual losses, a residual value insurance recovery of ~~$17.2~~$17 million during ~~the third quarter of~~ 2004 and improving equity investment valuations.
    In 2003, noninterest income increased $102.3 million (2.0 percent), compared with 2002, driven by strong growth in payment services revenue, trust and investment management fees, deposit service charges, treasury management fees, mortgage banking revenue and investment products fees and commissions attributable to both organic growth and acquisitions. Partially offsetting the increase in noninterest income in 2003 was a year-over-year decrease in net securities gains of $55.1 million. The favorable impact on noninterest income from acquisitions, which included Leader, Bay View and State Street Corporate Trust, was approximately $122.7 million during 2003. Credit and debit card revenue, corporate payment products revenue and ATM processing services revenue were higher in 2003, compared with 2002, by $43.7 million (8.5 percent), $35.6 million (10.9 percent) and $5.3 million (3.3 percent), respectively. Credit and debit card revenue growth in 2003 was somewhat muted ($19.4 million) due to the impact of the settlement of the antitrust litigation brought against VISA USA and MasterCard by Wal-Mart Stores, Inc., Sears Roebuck & Co. and other retailers beginning in August 2003. This change in the interchange rate in the third quarter of 2003, in addition to higher customer loyalty rewards expenses, however, were more than offset by increases in transaction volumes and other pricing enhancements. Corporate payment products revenue and ATM processing services revenue were higher in 2003, primarily reflecting growth in sales and card usage during the year. Merchant processing services revenue was lower in 2003 by $5.9 million (1.0 percent), compared with 2002, primarily due to lower processing spreads resulting from pricing changes that occurred in late 2002 and changes in the mix of merchants. The favorable variance in trust and investment management fees in 2003 of $61.8 million (6.9 percent), compared with 2002, was driven by the acquisition of State Street Corporate Trust, which contributed $83.7 million in fees during 2003. Treasury management fees grew by $49.4 million (11.8 percent) in 2003, compared with 2002, with the majority of the increase occurring within the Wholesale Banking line of business. The increase in treasury management fees during 2003 was driven by growth in product sales, pricing enhancements and the relatively low earnings credit rates to customers. The growth was also driven by a change in the Federal government’s payment methodology for treasury management services from compensating balances, reflected in net interest income, to fees during the third quarter of 2003. During 2003, commercial products revenue declined $78.7 million (16.4 percent), principally reflecting lower commercial loan conduit servicing fees resulting, in part, from consolidating the Stellar commercial loan conduit. Mortgage banking revenue had a year-over-year increase of $36.9 million (11.2 percent) during 2003, principally due to higher mortgage originations, servicing and secondary market sales and the acquisition of Leader, which contributed $16.5 million of the favorable variance in 2003. Investment products fees and commissions revenue increased in 2003 by $12.2 million (9.2 percent), compared with 2002, primarily due to increased retail brokerage activity given more favorable equity capital market conditions relative to 2002. Deposit service charges increased in 2003 by $25.5 million (3.7 percent), compared with 2002, primarily due to net new growth in checking accounts and fee enhancements principally within the Consumer Banking line of business. Other noninterest income decreased by $28.4 million (7.1 percent) from 2002, which included $67.4 million of gains on the sales of two co-branded credit card portfolios.
Noninterest ExpenseNoninterest expense in ~~2004~~2005 was ~~$5.8~~$5.9 billion, compared with $5.8 billion and $5.6 billion in 2004 and ~~$5.7 billion in~~ 2003, ~~and 2002,~~ respectively. The $78 million (1.3 percent) increase in noninterest expenses in 2005, compared with 2004, was primarily driven by production-based incentives and expenses related to business initiatives, including acquisitions investments, acquired businesses, and production-based, offset by a $110 million favorable change in the MSR valuation and a $101 million decrease in debt prepayment charges. Compensation expense was higher by 5.8 percent year-over-year principally due to business expansion, including in-store branches, expanding the Company’s payment processing businesses and other product sales initiatives. Employee benefits increased 10.8 percent, year-over-year, primarily as a result of higher pension expense, medical costs, payroll taxes and other benefits. Professional services expense was higher by 11.4 percent due to increases in legal and other professional services related to business initiatives, technology development and integration costs of specific payment processing businesses. Marketing and business development expense increased 21.1 percent principally related to brand awareness, credit card and prepaid gift card programs. Technology and communications expense was higher in 2005 by 8.4 percent, reflecting depreciation of technology investments, network costs associated with the expansion of the payment processing businesses, and higher outside data processing expense associated with expanding a prepaid gift card program. Other expense declined 1.7 percent primarily due to lower operating and fraud losses and insurance costs, partially offset by increased investments in affordable housing and other tax-advantaged projects and higher merchant processing costs due to the expansion of the payment processing businesses relative to 2004.
    The noninterest expense increase of ~~$187.6~~$188 million (3.4 percent) in 2004, compared with 2003, principally reflected a ~~$154.8~~$155 million charge related to the prepayment of
Table 5   NONINTEREST EXPENSE

2005 2004
(Dollars in Millions) 2005 2004 2003 v 2004 v 2003
Compensation $ 2,383 $ 2,252 $ 2,177 5.8 % 3.4 %
Employee benefits 431 389 328 10.8 18.6
Net occupancy and equipment 641 631 644 1.6 (2.0 )
Professional services 166 149 143 11.4 4.2
Marketing and business development 235 194 180 21.1 7.8
Technology and communications 466 430 418 8.4 2.9
Postage, printing and supplies 255 248 246 2.8 .8
Other intangibles 458 550 682 (16.7 ) (19.4 )
Debt prepayment 54 155 — (65.2 ) *
Other 774 787 779 (1.7 ) 1.0

Total noninterest expense $ 5,863 $ 5,785 $ 5,597 1.3 % 3.4 %

Efficiency ratio (a) 44.3 % 45.3 % 45.6 %
(a) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.
* Not meaningful
24  U.S. BANCORP

a portion of the Company’s long-term debt, costs related to business initiatives and incremental expenses of ~~$62.8~~$63 million due to the expansion of ~~EuroConex.~~the Company’s European merchant processing business. These increases were offset somewhat by a net reduction in MSR impairments of ~~$151.9~~$152 million and lower merger and restructuring-related charges. ~~In 2003, noninterest expense included $46.2 million of merger and restructuring-related costs related to acquisitions completed in prior years.~~ Compensation expense increased ~~in 2004, compared with 2003,~~ due to increases in salaries and stock-based compensation. The increase in salaries reflected business
~~U.S. BANCORP~~  25
expansion of in-store branches, the expansion of the Company’s merchant acquiring business in Europe and other initiatives. Stock-based compensation was higher due to lower employee stock-award forfeitures relative to prior years. Employee benefits increased primarily as a result of higher payroll taxes and pension ~~expense; pension and retirement expense increased $34.6 million in 2004, principally reflecting recognition of actuarial losses resulting from lower expected returns in prior years.~~expense. Marketing and business development increased ~~$13.2 million in 2004, compared with 2003, related~~due to corporate brand advertising and an increase in product marketing campaigns. Technology and communications expense was higher year-over-year, ~~by $12.2 million in 2004, compared with 2003,~~ reflecting technology investments that increased software amortization and the write-off of capitalized software being replaced. ~~Included in 2004 results were charges of $154.8 million related to the prepayment of a portion of the Company’s long-term debt.~~ Other expense increased ~~$54.1 million~~ in 2004, compared with ~~2003. The increase was~~2003, related to higher fraud and operating losses, insurance costs, operating costs associated with affordable housing investments and merchant processing costs for payment services products, the result of the ~~EuroConex~~ expansion of the payment processing business and increases in transaction volume year-over-year.
    The decrease in noninterest expense in 2003, compared with 2002, of $143.6 million (2.5 percent) was primarily the result of business initiatives, cost savings from integration activities and lower merger and restructuring-related charges, partially offset by an increase in MSR impairments, incremental pension and retirement expense of $39.9 million and expenses related to acquisitions. Noninterest expense related to merger and restructuring-related charges declined by $275.0 million (85.6 percent) in 2003, compared with 2002. The decline in merger and restructuring-related charges was primarily due to the completion of integration activities in 2002 associated with the merger of Firstar and the former U.S. Bancorp of Minneapolis (“USBM”). During 2003, noninterest expense included an MSR impairment of $208.7 million, a net increase of $22.6 million, compared with 2002. The year-over-year changes in the valuation of MSRs were caused by fluctuations in mortgage interest rates and related prepayment speeds due to refinancing activities. Acquisitions in 2002, including Leader, Bay View and State Street Corporate Trust, accounted for an increase of $124.9 million in noninterest expense from 2002 to 2003.
Pension PlansBecause of the long-term nature of pension plans, the administration and accounting for pensions is complex and can be impacted by several factors, including investment and funding policies, accounting methods and the plan’s actuarial assumptions. The Company and its Compensation Committee have an established process for evaluating the plans, their performance and significant plan assumptions, including the assumed discount rate and the long-term rate of return (“LTROR”). At least annually, an independent consultant is engaged to assist ~~U.S. Bancorp’s~~the Company’s Compensation Committee in evaluating plan objectives, funding policies and investment policies considering its long-term investment time horizon and asset allocation strategies. Note 1918 of the Notes to Consolidated Financial Statements provides further information on funding practices, investment policies and asset allocation strategies.
    Periodic pension expense (or credits) includes service costs, interest costs based on the assumed discount rate, the expected return on plan assets based on an actuarially derived market-related value and amortization of actuarial gains and losses. The Company’s pension accounting policy follows guidance outlined in Statement of Financial Accounting Standards No. 87, “Employer’s Accounting for Pension ~~Plans” (“SFAS 87”),~~Plans,” and reflects the long-term nature of benefit obligations and the investment horizon of
~~Table 5~~   ~~Noninterest Expense~~

2004 2003
(Dollars in Millions) 2004 2003 2002 v 2003 v 2002
Compensation $ 2,252.2 $ 2,176.8 $ 2,167.5 3.5 % .4 %
Employee benefits 389.4 328.4 317.5 18.6 3.4
Net occupancy and equipment 630.8 643.7 658.7 (2.0 ) (2.3 )
Professional services 148.9 143.4 129.7 3.8 10.6
Marketing and business development 193.5 180.3 171.4 7.3 5.2
Technology and communications 429.6 417.4 392.1 2.9 6.5
Postage, printing and supplies 248.4 245.6 243.2 1.1 1.0
Other intangibles 550.1 682.4 553.0 (19.4 ) 23.4
Merger and restructuring-related charges — 46.2 321.2 * (85.6 )
Debt prepayment 154.8 — (.2 ) * *
Other 786.8 732.7 786.4 7.4 (6.8 )

Total noninterest expense $ 5,784.5 $ 5,596.9 $ 5,740.5 3.4 % (2.5 )%

Efficiency ratio (a) 45.3 % 45.6 % 48.8 %
~~(a)~~ ~~Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.~~
* ~~Not meaningful~~
26  ~~U.S. BANCORP~~
plan assets. This accounting guidance has the effect of reducing earnings volatility related to short-term changes in interest rates and market valuations. Actuarial gains and losses include the impact of plan amendments and various unrecognized gains and losses which are deferred and amortized over the future service periods of active employees. The actuarially derived market-related value utilized to determine the expected return on plan assets is based on fair value adjusted for the difference between expected returns and actual performance of plan assets. The unrealized difference between actual experience and expected returns is included in the actuarially derived market-related value ratably over a five-year period. At September 30, ~~2004,~~2005, the accumulated unrecognized gain approximated $206 million, compared with an accumulated unrecognized loss ~~approximated~~of approximately $139 million ~~and will ratably impact the actuarially derived market-related value of plan assets through 2009.~~at September 30, 2004. The impact to pension expense of the unrecognized asset gains or losses will incrementally increase (decrease) pension costs in each year from ~~2005~~2006 to ~~2009,~~2010, by approximately ~~$28.9~~$30 million, ~~$39.4~~$(3) million, ~~$6.3~~$(21) million, ~~$(11.4)~~$(13) million and ~~$(4.1)~~$(9) million, respectively. This assumes that the performance of plan assets equals the assumed LTROR. Actual results will vary depending on the performance of plan assets and changes to assumptions required in the future. Refer to Note 1 of the Notes to Consolidated Financial Statements for further discussion of the Company’s accounting policies for pension plans.
    In ~~2004,~~2005, the Company recognized a pension cost of ~~$9.0~~$33 million compared with a pension ~~credits~~cost of ~~$23.9~~$9 million in ~~2003~~2004 and ~~$63.8~~pension credit of $24 million in ~~2002.~~2003. The ~~$32.9~~$24 million increase in pension costs in 2005 was driven by recognition of deferred actuarial (gains) losses and the impact of a lower discount rate. In 2004, ~~was~~pension costs increased by $33 million, compared with 2003, driven by a recognition of deferred actuarial (gains) losses and the impact of a lower discount rate, partially offset by the benefit of higher investment income related to ~~the~~ pension contributions made in 2003. In 2003, pension costs increased by $39.9 million, compared with 2002, driven by a $46.4 million reduction in the expected return on assets and a lower discount rate utilized to determine the projected benefit obligation given the declining rate environment. Also, contributing to the increase in pension costs was a one-time curtailment gain in 2002 of $9.0 million related to a nonqualified pension plan compared with a settlement loss of $3.5 million related to nonqualified pension payments in 2003. Somewhat offsetting the increase in pension costs was an expected benefit of approximately $19.0 million associated with lower interest costs related to cash balance accounts and actual changes in employment demographics, such as retirement age.
    In ~~2005,~~2006, the Company anticipates that pension costs will increase by approximately ~~$23.5~~$48 million. The increase will be primarily driven by the lower discount rate and amortization of unrecognized actuarial losses from prior ~~years.~~years, accounting for approximately $12 million and $39 million of the anticipated increase, respectively.
U.S. BANCORP  25
Note 1918 of the Notes to Consolidated Financial Statements provides a summary of the significant pension plan assumptions. Because of the subjective nature of plan assumptions, a sensitivity analysis to hypothetical changes in the LTROR and the discount rate is provided below:

Base Base
LTROR 6.9% 7.9% 8.9% 9.9% 10.9% 6.9% 7.9% 8.9% 9.9% 10.9%
Incremental benefit (cost) $ (43.8 ) $ (21.9 ) $ — $ 21.9 $ 43.7 $ (43 ) $ (22 ) $ — $ 22 $ 43
Percent of 2004 net income (.65 )% (.33 )% — % .33 % .65 %
Percent of 2005 net income (.59 )% (.30 )% — % .30 % .59 %

Base Base
Discount rate 4.0% 5.0% 6.0% 7.0% 8.0% 3.7% 4.7% 5.7% 6.7% 7.7%
Incremental benefit (cost) $ (57.0 ) $ (30.9 ) $ — $ 35.4 $ 73.5 $ (91 ) $ (45 ) $ — $ 40 $ 75
Percent of 2004 net income (.85 )% (.46 )% — % .53 % 1.09 %
Percent of 2005 net income (1.26 )% (.62 )% — % .55 % 1.04 %
    Due to the complexity of forecasting pension plan activities, the accounting method utilized for pension plans, management’s ability to respond to factors impacting the plans and the hypothetical nature of this information, the actual changes in periodic pension costs could be ~~significantly~~ different than the information provided in the sensitivity analysis.
Income Tax ExpenseThe provision for income taxes was ~~$2,009.6~~$2,082 million (an effective rate of 31.7 percent) in 2005, compared with $2,009 million (an effective rate of 32.5 percent) in 2004 ~~compared with $1,941.3~~and $1,941 million (an effective rate of ~~34.4~~34.3 percent) in ~~2003 and $1,707.5 million (an effective rate of 34.6 percent) in 2002.~~2003. The ~~improvement~~decrease in the effective tax rate from 2004 primarily reflects higher tax exempt income from investment securities and insurance products and incremental tax credits generated from investments in ~~2004, compared with 2003,~~affordable housing and similar tax-advantaged projects.
    Included in 2005 was ~~primarily due to changes in estimated~~a reduction of income tax ~~liabilities~~expense of ~~$90.0~~$94 million related to the resolution of federal income tax examinations covering substantially all of the Company’s legal entities for the years 2000 through 2002. Included in 2004 was a reduction in income tax expense of $90 million related to the resolution of federal income tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999 and ~~$16.3~~$16 million related to the resolution of a state tax examination for tax years through 2000. The ~~improvement in the~~Company anticipates its effective tax rate ~~in 2003, compared with 2002, was primarily driven by a change in unitary state tax apportionment factors driven by a shift in business mix as a result of~~for the ~~impact of acquisitions, market demographics, the mix of product revenue and an increase in federal and state tax credits.~~foreseeable future to approximate 33 percent.
    For further information on income taxes, refer to Note 2120 of the Notes to Consolidated Financial Statements.
Table 6   LOAN PORTFOLIO DISTRIBUTION

2005 2004 2003 2002 2001
Percent Percent Percent Percent Percent
At December 31 (Dollars in Millions) Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
Commercial

Commercial $ 37,844 27.5 % $ 35,210 27.9 % $ 33,536 28.4 % $ 36,584 31.5 % $ 40,472 35.4 %
Lease financing 5,098 3.7 4,963 3.9 4,990 4.2 5,360 4.6 5,858 5.1

Total commercial 42,942 31.2 40,173 31.8 38,526 32.6 41,944 36.1 46,330 40.5
Commercial real estate

Commercial mortgages 20,272 14.7 20,315 16.1 20,624 17.4 20,325 17.5 18,765 16.4
Construction and development 8,191 6.0 7,270 5.7 6,618 5.6 6,542 5.6 6,608 5.8

Total commercial real estate 28,463 20.7 27,585 21.8 27,242 23.0 26,867 23.1 25,373 22.2
Residential mortgages

Residential mortgages 14,538 10.5 9,722 7.7 7,332 6.2 6,446 5.6 5,746 5.0
Home equity loans, first liens 6,192 4.5 5,645 4.5 6,125 5.2 3,300 2.8 2,083 1.8

Total residential mortgages 20,730 15.0 15,367 12.2 13,457 11.4 9,746 8.4 7,829 6.8
Retail

Credit card 7,137 5.2 6,603 5.2 5,933 5.0 5,665 4.9 5,889 5.1
Retail leasing 7,338 5.3 7,166 5.7 6,029 5.1 5,680 4.9 4,906 4.3
Home equity and second mortgages 14,979 10.9 14,851 11.8 13,210 11.2 13,572 11.6 12,235 10.7
Other retail
Revolving credit 2,504 1.8 2,541 2.0 2,540 2.1 2,650 2.3 2,673 2.3
Installment 3,582 2.6 2,767 2.2 2,380 2.0 2,258 1.9 2,292 2.0
Automobile 8,112 5.9 7,419 5.9 7,165 6.1 6,343 5.5 5,660 5.0
Student 2,019 1.4 1,843 1.4 1,753 1.5 1,526 1.3 1,218 1.1

Total other retail 16,217 11.7 14,570 11.5 13,838 11.7 12,777 11.0 11,843 10.4

Total retail 45,671 33.1 43,190 34.2 39,010 33.0 37,694 32.4 34,873 30.5

Total loans $ 137,806 100.0 % $ 126,315 100.0 % $ 118,235 100.0 % $ 116,251 100.0 % $ 114,405 100.0 %
26  U.S. BANCORP  27
BALANCE SHEET ANALYSIS
Average earning assets were $178.4 billion in 2005, compared with $168.1 billion in ~~2004, compared with $160.8 billion in 2003.~~2004. The increase in average earning assets of ~~$7.3~~$10.3 billion ~~(4.5~~(6.1 percent) was primarily driven by growth in residential mortgages, ~~retail loans and investment securities, partially offset by a decline in~~ commercial loans and ~~loans held for sale related to mortgage banking activities.~~retail loans. The ~~increase~~change in average earning assets was principally funded by increases of ~~$1.6~~$5.4 billion in interest-bearing deposits and ~~$5.5~~$5.9 billion in wholesale funding.
    For average balance information, refer to Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages ~~112~~108 and ~~113.~~109.
LoansThe Company’s total loan portfolio was ~~$126.3~~$137.8 billion at December 31, ~~2004,~~2005, an increase of ~~$8.1~~$11.5 billion ~~(6.8~~(9.1 percent) from December 31, ~~2003.~~2004. The increase in total loans was driven by ~~strong~~ growth in residential mortgages (34.9 percent), commercial loans (6.9 percent), retail loans ~~(10.7 percent) and residential mortgages (14.2 percent) and to a lesser extent by commercial loans (4.3~~(5.7 percent) and commercial real estate loans ~~(1.3~~(3.2 percent). The increase in retail loans was across most loan categories while the increase in residential mortgages was primarily the result of asset/liability management decisions to retain a greater portion of the Company’s adjustable-rate loan production. Table 6 provides a summary of the loan distribution by product ~~type.~~type while Table 810 provides a summary of selected loan maturity distribution by loan category. Average total loans increased ~~$3.8~~$11.0 billion ~~(3.2~~(9.0 percent) in ~~2004,~~2005, compared with ~~2003. Growth~~2004. The increase was due to growth in ~~average retail~~residential mortgages, commercial loans and ~~residential mortgages, compared to 2003, was partially offset by a decline in average commercial~~retail loans.
~~Table 6~~   ~~Loan Portfolio Distribution~~

2004 2003 2002 2001 2000
Percent Percent Percent Percent Percent
At December 31 (Dollars in Millions) Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
Commercial

Commercial $ 35,210 27.9 % $ 33,536 28.4 % $ 36,584 31.5 % $ 40,472 35.4 % $ 47,041 38.5 %
Lease financing 4,963 3.9 4,990 4.2 5,360 4.6 5,858 5.1 5,776 4.7

Total commercial 40,173 31.8 38,526 32.6 41,944 36.1 46,330 40.5 52,817 43.2

Commercial real estate

Commercial mortgages 20,315 16.1 20,624 17.4 20,325 17.5 18,765 16.4 19,466 15.9
Construction and development 7,270 5.7 6,618 5.6 6,542 5.6 6,608 5.8 6,977 5.7

Total commercial real estate 27,585 21.8 27,242 23.0 26,867 23.1 25,373 22.2 26,443 21.6

Residential mortgages

Residential mortgages 9,722 7.7 7,332 6.2 6,446 5.6 5,746 5.0 * *
Home equity loans, first liens 5,645 4.5 6,125 5.2 3,300 2.8 2,083 1.8 * *

Total residential mortgages 15,367 12.2 13,457 11.4 9,746 8.4 7,829 6.8 9,397 7.7

Retail

Credit card 6,603 5.2 5,933 5.0 5,665 4.9 5,889 5.1 6,012 4.9
Retail leasing 7,166 5.7 6,029 5.1 5,680 4.9 4,906 4.3 4,153 3.4
Home equity and second mortgages 14,851 11.8 13,210 11.2 13,572 11.6 12,235 10.7 11,956 9.7
Other retail
Revolving credit 2,541 2.0 2,540 2.1 2,650 2.3 2,673 2.3 2,750 2.2
Installment 2,767 2.2 2,380 2.0 2,258 1.9 2,292 2.0 2,186 1.8
Automobile 7,419 5.9 7,165 6.1 6,343 5.5 5,660 5.0 5,609 4.6
Student 1,843 1.4 1,753 1.5 1,526 1.3 1,218 1.1 1,042 .9

Total other retail 14,570 11.5 13,838 11.7 12,777 11.0 11,843 10.4 11,587 9.5

Total retail 43,190 34.2 39,010 33.0 37,694 32.4 34,873 30.5 33,708 27.5

Total loans $ 126,315 100.0 % $ 118,235 100.0 % $ 116,251 100.0 % $ 114,405 100.0 % $ 122,365 100.0 %
* ~~Information not available~~
28  ~~U.S. BANCORP~~
CommercialCommercial loans, including lease financing, ~~totaled $40.2~~increased $2.8 billion (6.9 percent) at December 31, ~~2004,~~2005, compared with ~~$38.5 billion at~~ December 31, ~~2003, an increase of~~
~~$1.6 billion (4.3 percent).~~2004. The increase in commercial loans was driven by new customer relationships and increases in
~~corporate card balances and to a lesser extent, increased utilization under lines of credit by commercial customers. The growth of corporate and industrial~~ mortgage banking and corporate card ~~loan categories was tempered somewhat~~balances. Average commercial loans increased by ~~lower mortgage loans held for sale from a year ago~~$3.3 billion (8.4 percent) in 2005, compared with 2004, primarily due to ~~declining mortgage banking volume. Although~~an increase in commercial loan demand driven by general economic conditions ~~experienced some improvement~~ in 2003, commercial loan demand continued to be soft in the Company’s markets throughout the first half of 2004. As a result, average commercial loans in 2004 decreased by $2.0 billion (4.8 percent) from 2003, despite the positive impact on average balances from the consolidation of loans from the Stellar commercial loan conduit in the third
~~Table 7~~  2005. ~~Commercial Loans by Industry Group and Geography~~

December 31, 2004 December 31, 2003
Industry Group (Dollars in Millions) Loans Percent Loans Percent
Consumer products and services $ 8,073 20.1 % $ 6,858 17.8 %
Financial services 4,784 11.9 4,469 11.6
Commercial services and supplies 3,870 9.6 3,785 9.8
Capital goods 3,825 9.5 4,598 11.9
Agriculture 2,601 6.5 2,907 7.6
Property management and development 2,334 5.8 1,653 4.3
Paper and forestry products, mining and basic materials 1,905 4.7 1,415 3.7
Consumer staples 1,887 4.7 1,817 4.7
Health care 1,826 4.6 1,532 4.0
Private investors 1,630 4.1 1,629 4.2
Transportation 1,592 4.0 1,758 4.6
Energy 730 1.8 708 1.8
Information technology 644 1.6 729 1.9
Other 4,472 11.1 4,668 12.1

Total $ 40,173 100.0 % $ 38,526 100.0 %
Geography

California $ 3,786 9.4 % $ 4,091 10.6 %
Colorado 2,064 5.1 1,820 4.7
Illinois 2,549 6.3 2,121 5.5
Minnesota 6,649 16.6 6,527 16.9
Missouri 2,525 6.3 2,742 7.1
Ohio 2,528 6.3 2,361 6.1
Oregon 1,441 3.6 1,500 3.9
Washington 2,695 6.7 2,767 7.2
Wisconsin 2,604 6.5 2,874 7.5
Iowa, Kansas, Nebraska, North Dakota, South Dakota 3,455 8.6 3,760 9.8
Arkansas, Indiana, Kentucky, Tennessee 1,747 4.3 1,549 4.0
Idaho, Montana, Wyoming 830 2.1 744 1.9
Arizona, Nevada, Utah 926 2.3 829 2.2

Total banking region 33,799 84.1 33,685 87.4
Outside the Company’s banking region 6,374 15.9 4,841 12.6

Total $ 40,173 100.0 % $ 38,526 100.0 %
~~Table 8~~   ~~Selected Loan Maturity Distribution~~

Over One
One Year Through Over Five
December 31, 2004 (Dollars in Millions) or Less Five Years Years Total
Commercial $ 19,283 $ 18,141 $ 2,749 $ 40,173
Commercial real estate 7,378 14,280 5,927 27,585
Residential mortgages 974 2,698 11,695 15,367
Retail 13,312 19,619 10,259 43,190

Total loans $ 40,947 $ 54,738 $ 30,630 $ 126,315
Total of loans due after one year with
Predetermined interest rates $ 40,042
Floating interest rates $ 45,326
~~U.S. BANCORP~~  29
quarter of 2003. Commercial loans began to display encouraging trends in the Company’s markets during the fourth quarter of 2004 with quarterly average commercial loan balances increasing for the first time since the second quarter of 2001.
    Table 7 provides a summary of commercial loans by industry and geographical locations.
Table 7   COMMERCIAL LOANS BY INDUSTRY GROUP AND GEOGRAPHY

December 31, 2005 December 31, 2004
Industry Group (Dollars in Millions) Loans Percent Loans Percent
Consumer products and services $ 8,723 20.3 % $ 8,073 20.1 %
Financial services 5,416 12.6 4,784 11.9
Commercial services and supplies 4,326 10.1 3,870 9.6
Capital goods 3,881 9.0 3,825 9.5
Property management and development 3,182 7.4 2,334 5.8
Agriculture 2,693 6.3 2,601 6.5
Healthcare 2,064 4.8 1,826 4.6
Paper and forestry products, mining and basic materials 1,990 4.6 1,905 4.7
Consumer staples 1,785 4.2 1,887 4.7
Transportation 1,565 3.7 1,592 4.0
Private investors 1,477 3.4 1,630 4.1
Energy 842 2.0 730 1.8
Information technology 700 1.6 644 1.6
Other 4,298 10.0 4,472 11.1

Total $ 42,942 100.0 % $ 40,173 100.0 %
Geography

California $ 3,561 8.3 % $ 3,786 9.4 %
Colorado 2,578 6.0 2,064 5.1
Illinois 2,919 6.8 2,549 6.3
Minnesota 6,806 15.8 6,649 16.6
Missouri 2,056 4.8 2,525 6.3
Ohio 2,640 6.2 2,528 6.3
Oregon 1,649 3.8 1,441 3.6
Washington 2,404 5.6 2,695 6.7
Wisconsin 2,421 5.6 2,604 6.5
Iowa, Kansas, Nebraska, North Dakota, South Dakota 3,721 8.7 3,455 8.6
Arkansas, Indiana, Kentucky, Tennessee 2,214 5.2 1,747 4.3
Idaho, Montana, Wyoming 825 1.9 830 2.1
Arizona, Nevada, Utah 1,163 2.7 926 2.3

Total banking region 34,957 81.4 33,799 84.1
Outside the Company’s banking region 7,985 18.6 6,374 15.9

Total $ 42,942 100.0 % $ 40,173 100.0 %
U.S. BANCORP  27
Table 8   COMMERCIAL REAL ESTATE BY PROPERTY TYPE AND GEOGRAPHY

�� December 31, 2005 December 31, 2004
Property Type (Dollars in Millions) Loans Percent Loans Percent
Business owner occupied $ 9,221 32.4 % $ 8,551 31.0 %
Multi-family 3,843 13.5 3,903 14.1
Commercial property
Industrial 1,025 3.6 1,103 4.0
Office 2,306 8.1 2,676 9.7
Retail 3,558 12.5 3,586 13.0
Other 2,704 9.5 2,359 8.6
Homebuilders 3,899 13.7 2,952 10.7
Hotel/motel 1,423 5.0 1,848 6.7
Health care facilities 484 1.7 607 2.2

Total $ 28,463 100.0 % $ 27,585 100.0 %
Geography

California $ 5,806 20.4 % $ 5,252 19.0 %
Colorado 1,366 4.8 1,181 4.3
Illinois 1,025 3.6 996 3.6
Minnesota 1,765 6.2 1,721 6.2
Missouri 1,452 5.1 1,525 5.5
Ohio 1,537 5.4 1,975 7.2
Oregon 1,736 6.1 1,730 6.3
Washington 2,846 10.0 2,855 10.3
Wisconsin 1,679 5.9 1,768 6.4
Iowa, Kansas, Nebraska, North Dakota, South Dakota 1,935 6.8 2,003 7.3
Arkansas, Indiana, Kentucky, Tennessee 1,565 5.5 1,710 6.2
Idaho, Montana, Wyoming 1,110 3.9 880 3.2
Arizona, Nevada, Utah 2,362 8.3 1,948 7.1

Total banking region 26,184 92.0 25,544 92.6
Outside the Company’s banking region 2,279 8.0 2,041 7.4

Total $ 28,463 100.0 % $ 27,585 100.0 %
Commercial Real EstateThe Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction loans, ~~was $27.6 billion~~increased $878 million (3.2 percent) at December 31, ~~2004,~~2005, compared with ~~$27.2 billion at~~ December 31, ~~2003, a modest increase of $343 million (1.3 percent).~~2004. Specifically, construction and development loans increased by ~~$652~~$921 million ~~(9.9~~(12.7 percent) as developers continued to take advantage of relatively low interest rates. Commercial mortgages outstanding decreased modestly by ~~$309~~$43 million ~~(1.5~~(.2 percent) as growth in Small Business Administration (“SBA”) real estate mortgages was more than offset by reductions in traditional commercial real estate ~~mortgages.~~mortgages due to refinancing activities. Average commercial real estate loans increased by ~~$125~~$697 million ~~(.5~~(2.6 percent) in ~~2004,~~2005, compared with ~~2003,~~2004, primarily driven by growth in ~~SBA commercial real estate mortgage~~construction and development loans. Table 98 provides a summary of commercial real estate by property type and geographical locations.
    The Company maintains the real estate construction designation until the completion of the construction phase and, if retained, the loan is reclassified to the commercial mortgage category. Approximately ~~$638~~$187 million of construction loans were permanently financed and reclassified to the commercial mortgage loan category in ~~2004.~~2005. At year-end ~~2004, $202~~2005, $219 million of tax-exempt industrial development loans were secured by real estate. The Company’s commercial real estate mortgages and construction loans had unfunded commitments of $9.8 billion at December 31, 2005, compared with $7.9 billion at December 31, ~~2004, compared with $7.3 billion at December 31, 2003.~~2004. The Company also finances the operations of real estate developers and other entities with operations related to real estate. These loans are not secured directly by real estate and are subject to terms and conditions similar to commercial loans. These loans were included in the commercial loan category and totaled ~~$1.1~~$1.9 billion at December 31, ~~2004.~~2005.
Residential MortgagesResidential mortgages held in the loan portfolio ~~were $15.4 billion~~ at December 31, ~~2004, an increase of $1.9~~2005, increased $5.4 billion ~~(14.2~~(34.9 percent) from December 31,
~~Table 9~~   ~~Commercial Real Estate by Property Type and Geography~~

  December 31, 2004 December 31, 2003
Property Type (Dollars in Millions) Loans Percent Loans Percent
Business owner occupied $ 8,551 31.0 % $ 8,037 29.5 %
Multi-family 3,903 14.1 3,868 14.2
Commercial property
Industrial 1,103 4.0 1,280 4.7
Office 2,676 9.7 3,078 11.3
Retail 3,586 13.0 3,487 12.8
Other 2,359 8.6 2,452 9.0
Homebuilders 2,952 10.7 2,098 7.7
Hotel/motel 1,848 6.7 2,234 8.2
Health care facilities 607 2.2 708 2.6

Total $ 27,585 100.0 % $ 27,242 100.0 %
Geography

California $ 5,252 19.0 % $ 4,380 16.1 %
Colorado 1,181 4.3 1,139 4.2
Illinois 996 3.6 1,095 4.0
Minnesota 1,721 6.2 1,536 5.6
Missouri 1,525 5.5 1,741 6.4
Ohio 1,975 7.2 2,193 8.0
Oregon 1,730 6.3 1,771 6.5
Washington 2,855 10.3 2,956 10.9
Wisconsin 1,768 6.4 1,921 7.1
Iowa, Kansas, Nebraska, North Dakota, South Dakota 2,003 7.3 2,138 7.8
Arkansas, Indiana, Kentucky, Tennessee 1,710 6.2 1,817 6.7
Idaho, Montana, Wyoming 880 3.2 874 3.2
Arizona, Nevada, Utah 1,948 7.1 1,722 6.3

Total banking region 25,544 92.6 25,283 92.8
Outside the Company’s banking region 2,041 7.4 1,959 7.2

Total $ 27,585 100.0 % $ 27,242 100.0 %
30  ~~U.S. BANCORP~~

~~2003.~~ 2004. The increase ~~in residential mortgages~~ was primarily the result of asset/liability risk management decisions to retain a greater portion of the Company’s adjustable-rate loan ~~production. This growth was partially offset by approximately $.5 billion~~production and an increase in ~~residential loan sales during 2004 primarily representing fixed-rate mortgage loans.~~consumer finance originations. Average residential mortgages increased ~~$2.6~~$3.7 billion ~~(22.5~~(25.9 percent) ~~to $14.3 billion~~ in ~~2004,~~2005, primarily due to retaining adjustable-rate residential mortgages ~~throughout 2004 and growth~~beginning in ~~first-lien home equity loans of 20.0 percent.~~mid-2004.
28  U.S. BANCORP
Table 9   RESIDENTIAL MORTGAGES AND RETAIL LOANS BY GEOGRAPHY

Residential Mortgages Retail Loans
At December 31, 2005 (Dollars in Millions) Loans Percent Loans Percent
California $ 1,351 6.5 % $ 5,292 11.6 %
Colorado 1,406 6.8 2,381 5.2
Illinois 1,402 6.8 2,354 5.2
Minnesota 2,350 11.3 5,026 11.1
Missouri 1,549 7.4 2,517 5.5
Ohio 1,487 7.2 3,335 7.3
Oregon 964 4.6 1,986 4.3
Washington 1,245 6.0 2,217 4.9
Wisconsin 1,136 5.5 2,532 5.5
Iowa, Kansas, Nebraska, North Dakota, South Dakota 1,536 7.4 3,125 6.8
Arkansas, Indiana, Kentucky, Tennessee 1,570 7.6 3,421 7.5
Idaho, Montana, Wyoming 489 2.4 1,293 2.8
Arizona, Nevada, Utah 1,161 5.6 1,833 4.0

Total banking region 17,646 85.1 37,312 81.7
Outside the Company’s banking region 3,084 14.9 8,359 18.3

Total $ 20,730 100.0 % $ 45,671 100.0 %
RetailTotal retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, ~~were $43.2~~increased $2.5 billion (5.7 percent) at December 31, ~~2004,~~2005, compared with ~~$39.0 billion at~~ December 31, ~~2003.~~2004. The increase ~~of $4.2 billion (10.7 percent)~~ was driven by an increase in ~~home equity lines of credit, credit cards, retail leasing,~~ automobile loans and installment loans, credit cards, home equity loans, student loans and retail leasing, which increased ~~$2,275~~$1.5 billion, $534 million, ~~$670~~$352 million, ~~$1,137 million, $254~~$176 million and ~~$387~~$172 million, respectively, during ~~2004.~~2005. The increases in these loan categories were offset somewhat by a reduction in home equity ~~loans~~lines of ~~$634~~credit of $223 million during the year. Average retail loans increased ~~$3.0~~$3.3 billion (7.9 percent) ~~to $41.2 billion~~ in ~~2004,~~2005, reflecting growth in home equity lines, installment loans, retail leasing ~~installment loans~~ and credit card. Of the total retail loans and residential mortgages outstanding, approximately ~~87.4~~82.8 percent ~~are~~were to customers located in the Company’s primary banking regions. Table 9 provides a geographic summary of residential mortgages and retail loans outstanding as of December 31, 2005.
Loans Held for SaleAt December 31, ~~2004,~~2005, loans held for sale, consisting of residential mortgages to be sold in the secondary market, were $1.7 billion, compared with $1.4 ~~billion. This asset category was essentially unchanged relative to~~billion at December 31, 2004. Average loans held for sale ~~at December 31, 2003, despite $4.4~~were $1.8 billion in 2005, compared with $1.6 billion in 2004. The balance of loans held for sale is primarily a function of mortgage loan production during the past ninety days. During the fourth quarter of ~~2004,~~2005, mortgage loan production was approximately $6.1 billion compared with ~~$3.9~~$4.4 billion ~~in fourth quarter 2003. Average loans held for sale declined to $1.6 billion in 2004, compared with $3.6 billion in 2003, due to~~during the ~~impact~~same period of ~~rising interest rates on mortgage loan production.~~2004.
Investment SecuritiesThe Company uses its investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, generates interest and dividend income from the investment of excess funds depending on loan demand, provides liquidity and is used as collateral for public deposits and wholesale funding sources. While it is the Company’s intent to hold its investment securities indefinitely, the Company may take actions in response to structural changes in the balance sheet and related interest rate risks and to meet liquidity requirements.
    At December 31, ~~2004,~~2005, investment securities, both available-for-sale and held-to-maturity, totaled ~~$41.5~~$39.8 billion, compared with ~~$43.3~~$41.5 billion at December 31, ~~2003.~~2004. The ~~$1.9~~$1.7 billion ~~(4.3~~(4.1 percent) ~~year-over-year~~ decrease primarily reflected ~~the sale~~purchases of ~~$8.2~~$13.2 billion of ~~fixed-rate investment~~ securities, ~~along with~~more than offset by sales, maturities and ~~prepayments of $12.3 billion, partially offset by purchases of $19.6 billion of securities. Investment~~ prepayments. During 2005,
Table 10   SELECTED LOAN MATURITY DISTRIBUTION

Over One
One Year Through Over Five
December 31, 2005 (Dollars in Millions) or Less Five Years Years Total
Commercial $ 18,928 $ 20,717 $ 3,297 $ 42,942
Commercial real estate 8,076 14,073 6,314 28,463
Residential mortgages 898 2,630 17,202 20,730
Retail 14,005 19,845 11,821 45,671

Total loans $ 41,907 $ 57,265 $ 38,634 $ 137,806
Total of loans due after one year with
Predetermined interest rates $ 44,503
Floating interest rates $ 51,396
U.S. BANCORP  29
securities ~~purchases~~transactions were principally ~~adjustable and shorter-term fixed-rate mortgage-backed securities, giving consideration~~related to ~~the Company’s overall~~ asset/liability ~~position, actual and projected changes in the mix and characteristics of the balance sheet and in interest rates.~~management decisions. At December 31, ~~2004,~~2005, approximately ~~38.9~~41 percent of the investment securities portfolio represented adjustable-rate financial instruments, compared with ~~22.2~~39 percent ~~as of~~at December 31, ~~2003.~~2004. Adjustable-rate financial instruments include variable-rate collateralized mortgage obligations, mortgage-backed securities, agency securities, adjustable-rate money market accounts and asset-backed securities. Average investment securities were ~~$43.0~~$.9 billion (2.1 percent) lower in ~~2004,~~2005, compared with ~~$37.2 billion in 2003.~~2004. The ~~increase~~decline principally ~~reflects~~reflected the ~~timing~~net impact of ~~securities transactions in early 2004~~repositioning the investment portfolio as ~~proceeds from loan repayments and deposit growth were reinvested in this asset category.~~part of asset/liability risk management decisions to acquire variable-rate securities.
    The weighted-average yield of the available-for-sale portfolio was ~~4.43~~4.89 percent at December 31, 2004, compared with 4.27 percent at December 31, 2003. The average maturity of the available-for-sale portfolio declined to 4.5 years at December 31, 2004, down from 5.1 years at December 31, 2003. The relative mix of the type of investment securities maintained in the portfolio is provided in Table 10. At December 31, 2004, the available-for-sale portfolio included a $271 million net unrealized loss, compared with a net unrealized loss of $259 million at December 31, 2003.
~~Deposits~~Total deposits were $120.7 billion at December 31, 2004, an increase of $1.7 billion (1.4 percent) from December 31, 2003. The increase in total deposits was primarily the result of an increase in time deposits greater than $100,000, partially offset by decreases in noninterest-bearing deposits, savings deposits and time certificates of deposit less than $100,000. Average total deposits were $116.2 billion in 2004, declining $331 million from $116.6 billion in 2003. The decline in average total deposits was primarily due to lower average noninterest-bearing deposits and time certificates of deposit less than $100,000. The reductions in these categories were offset somewhat by growth in average savings deposits and time deposits greater than $100,000.
    Noninterest-bearing deposits were $30.8 billion at December 31, 2004, compared with $32.5 billion at December 31, 2003, a decrease of $1.7 billion (5.3 percent). The decrease in noninterest-bearing deposits was primarily attributable to declining deposits related to corporate business deposits, mortgage banking businesses and
~~U.S. BANCORP~~  31
government banking deposits in the Wholesale Banking business line relative to a year ago. The decline also included certain product changes to migrate high-value customers with balances of $1.3 billion to the Company’s Silver Elite interest checking product to further enhance
customer retention. Corporate business deposits are declining as business customers utilize their deposit liquidity to fund business growth. Mortgage banking activities continue to decline directly related to the upward movement in interest rates since mid-2003. Government banking deposits have also declined. Average noninterest-bearing deposits were $29.8 billion in 2004, a decrease of $1.9 billion (6.0 percent), compared with 2003. While average branch-based noninterest-bearing deposits increased 2.7 percent from a year ago, business-related noninterest-bearing deposits, including government, corporate banking and mortgage banking deposits, and mortgage-related escrow balances declined.
    ~~Interest-bearing savings deposits totaled $59.4 billion at December 31, 2004, a decrease of $1.7 billion (2.7 percent)~~2005,

Table 1011   ~~Investment Securities~~INVESTMENT SECURITIES

Available-for-Sale Held-to-Maturity Available-for-Sale Held-to-Maturity
Weighted- Weighted- Weighted- Weighted-
Average Weighted- Average Weighted- Average Weighted- Average Weighted-
Amortized Fair Maturity in Average Amortized Fair Maturity in Average Amortized Fair Maturity in Average Amortized Fair Maturity in Average
December 31, 2004 (Dollars in Millions) Cost Value Years Yield (d) Cost Value Years Yield (d)
December 31, 2005 (Dollars in Millions) December 31, 2005 (Dollars in Millions) Cost Value Years Yield (c) Cost Value Years Yield (c)
U.S. Treasury and agencies
U.S. Treasury and agencies

U.S. Treasury and agencies

Maturing in one year or less (a) $ 601 $ 593 .19 3.24 % $ — $ — — — % Maturing in one year or less $ 101 $ 101 .72 4.63 % $ — $ — — — %
Maturing after one year through five years 56 58 3.09 4.98 — — — — Maturing after one year through five years 41 41 2.67 5.96 — — — —
Maturing after five years through ten years 27 28 7.52 4.47 — — — — Maturing after five years through ten years 29 30 7.34 5.65 — — — —
Maturing after ten years (a) — — — — — — — — Maturing after ten years 325 317 14.58 5.71 — — — —

Total $ 684 $ 679 .72 3.43 % $ — $ — — — % Total $ 496 $ 489 10.36 5.51 % $ — $ — — — %

Mortgage-backed securities (b)

Mortgage-backed securities (a)
Mortgage-backed securities (a)

Maturing in one year or less $ 1,716 $ 1,721 .57 4.01 % $ — $ — — — % Maturing in one year or less $ 379 $ 381 .70 5.70 % $ — $ — — — %
Maturing after one year through five years 24,849 24,724 3.25 4.34 11 11 3.07 5.30 Maturing after one year through five years 20,606 20,208 3.61 4.65 8 8 3.05 5.08
Maturing after five years through ten years 12,742 12,588 6.51 4.70 — — — — Maturing after five years through ten years 13,629 13,342 7.19 4.93 — — — —
Maturing after ten years 502 504 14.06 3.85 — — — — Maturing after ten years 3,547 3,583 13.38 5.69 — — — —

Total $ 39,809 $ 39,537 4.31 4.43 % $ 11 $ 11 3.07 5.30 % Total $ 38,161 $ 37,514 5.77 4.86 % $ 8 $ 8 3.05 5.08 %

Asset-backed securities (b)

Asset-backed securities (a)
Asset-backed securities (a)

Maturing in one year or less $ 39 $ 39 .65 5.61 % $ — $ — — — % Maturing in one year or less $ 12 $ 12 .74 5.40 % $ — $ — — — %
Maturing after one year through five years 25 25 2.36 5.26 — — — — Maturing after one year through five years — — — — — — — —
Maturing after five years through ten years — — — — — — — — Maturing after five years through ten years — — — — — — — —
Maturing after ten years — — — — — — — — Maturing after ten years — — — — — — — —

Total $ 64 $ 64 1.31 5.47 % $ — $ — — — % Total $ 12 $ 12 .74 5.40 % $ — $ — — — %

Obligations of state and political subdivisions
Obligations of state and political subdivisions

Obligations of state and political subdivisions

Maturing in one year or less $ 67 $ 67 .31 7.28 % $ 12 $ 12 .33 6.37 %
Maturing in one year or less $ 101 $ 102 .39 7.38 % $ 10 $ 10 .25 6.44 % Maturing after one year through five years 59 61 2.31 7.24 23 24 3.30 6.65
Maturing after one year through five years 97 101 2.49 7.24 35 37 2.66 6.55 Maturing after five years through ten years 231 231 9.40 6.42 15 17 7.92 7.68
Maturing after five years through ten years 6 7 6.38 7.82 19 20 6.90 6.57 Maturing after ten years 283 278 15.49 6.25 34 35 15.15 6.57
Maturing after ten years 1 1 16.77 5.33 34 36 13.66 6.68

Total $ 640 $ 637 10.49 6.51 % $ 84 $ 88 8.51 6.76 %
Total $ 205 $ 211 1.65 7.32 % $ 98 $ 103 7.09 6.59 %

Other debt securities
Other debt securities

Other debt securities

Maturing in one year or less $ 8 $ 8 1.11 3.10 % $ — $ — — — % Maturing in one year or less $ 301 $ 301 .08 3.65 % $ 5 $ 5 .57 6.16 %
Maturing after one year through five years 86 86 2.35 11.00 18 18 3.23 5.20 Maturing after one year through five years 12 12 1.28 3.82 11 11 3.46 5.23
Maturing after five years through ten years — — — — — — — — Maturing after five years through ten years 15 15 10.00 5.30 1 1 6.25 4.15
Maturing after ten years 499 490 22.35 2.98 — — — — Maturing after ten years 626 621 21.69 5.15 — — — —

Total $ 593 $ 584 19.16 4.15 % $ 18 $ 18 3.23 5.20 % Total $ 954 $ 949 14.44 4.66 % $ 17 $ 17 2.73 5.45 %

Other investments
Other investments
$ 270 $ 279 — — % $ — $ — — — %
Other investments
$ 58 $ 58 — — % $ — $ — — — %

Total investment securities (c) $ 41,625 $ 41,354 4.45 4.43 % $ 127 $ 132 6.19 6.28 %
Total investment securities (b) Total investment securities (b) $ 40,321 $ 39,659 6.10 4.89 % $ 109 $ 113 7.21 6.44 %
(a) In January 2005, approximately $450 million of floating-rate agency notes with an original maturity of June 2023 were called by the issuer. These notes are classified in the table as maturing in one year or less.
~~(b)~~ Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
~~(c)~~(b) The weighted-average maturity of the ~~available-for-sale~~available for sale investment securities was ~~5.12~~4.45 years at December 31, ~~2003~~2004, with a corresponding weighted-average yield of ~~4.27%.~~4.43 percent. The ~~weighted- average~~weighted-average maturity of the held-to-maturity investment securities was ~~6.16~~6.19 years at December 31, ~~2003~~2004, with a corresponding weighted-average yield of ~~6.05%.~~6.28 percent.
~~(d)~~(c) Average yields are presented on a fully-taxable equivalent ~~basis.~~basis under a tax rate of 35 percent. Yields on available-for-sale and held-to-maturity securities are computed based on historical cost balances. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity.

2004 2003 2005 2004
Amortized Percent Amortized Percent Amortized Percent Amortized Percent
At December 31 (Dollars in Millions) Cost of Total Cost of Total
(Dollars in Millions) (Dollars in Millions) Cost of Total Cost of Total
U.S. Treasury and agencies U.S. Treasury and agencies $ 684 1.6 % $ 1,634 3.7 % U.S. Treasury and agencies $ 496 1.2 % $ 684 1.6 %
Mortgage-backed securities Mortgage-backed securities 39,820 95.4 40,243 92.3 Mortgage-backed securities 38,169 94.4 39,820 95.4
Asset-backed securities Asset-backed securities 64 .2 250 .6 Asset-backed securities 12 .1 64 .2
Obligations of state and political subdivisions Obligations of state and political subdivisions 303 .7 473 1.1 Obligations of state and political subdivisions 724 1.8 303 .7
Other securities and investments 881 2.1 993 2.3
Other debt securities and investments Other debt securities and investments 1,029 2.5 881 2.1

Total investment securities $ 41,752 100.0 % $ 43,593 100.0 % Total investment securities $ 40,430 100.0 % $ 41,752 100.0 %

32  30  U.S. BANCORP
compared with 4.43 percent at December 31, 2004. The average maturity of the available-for-sale portfolio increased to 6.10 years at December 31, 2005, up from 4.45 years at December 31, 2004. The relative mix of the type of investment securities maintained in the portfolio is provided in Table 11. At December 31, 2005, the available-for-sale portfolio included a $662 million net unrealized loss, compared with a net unrealized loss of $271 million at December 31, 2004.
DepositsTotal deposits were $124.7 billion at December 31, 2005, compared with $120.7 billion at December 31, 2004, resulting from increases in time deposits greater than $100,000, time certificates of deposit less than $100,000 and noninterest-bearing deposits, partially offset by a decrease in money market savings accounts. Average total deposits in 2005 increased $4.8 billion (4.1 percent) from 2004, reflecting growth in average time deposits greater than $100,000 and interest checking accounts. The increases in these categories were offset somewhat by lower average money market savings account balances and lower noninterest-bearing deposits.
    Noninterest-bearing deposits at December 31, 2005, increased $1.5 billion (4.7 percent) from December 31, ~~2003.~~2004. The ~~decrease~~increase was primarily attributable to increasing deposits related to corporate business deposits, mortgage banking businesses and government banking deposits in ~~interest-bearing~~the Wholesale Banking business line relative to a year ago. Corporate business deposits increased due to new customer relationships and business customers utilizing less of their deposit liquidity to fund business growth. Average noninterest-bearing deposits in 2005 decreased $.6 billion (2.0 percent), compared with 2004.
    Interest-bearing savings deposits decreased $2.6 billion (4.3 percent) at December 31, 2005, compared with December 31, 2004. The decrease was primarily due to ~~decreases~~a decrease in money market ~~accounts of $3.5 billion (10.4 percent), partially offset by an increase of $1.8~~savings accounts. The $2.5 billion (8.3 percent) ~~in interest checking. The increase in interest checking reflects the migration of noninterest-bearing deposits to the Silver Elite interest checking product. The~~ decrease in money market savings account balances ~~in part, reflects~~reflected the Company’s deposit pricing decisions ~~by the Company~~in selected markets, given ~~the profitability~~excess customer liquidity throughout 2004 and a migration of ~~certain business accounts and modest commercial loan growth and business~~some customer ~~decisions to utilize deposit liquidity during 2004. A portion of money market~~ balances ~~migrated~~ to time deposits greater than $100,000 as ~~interest~~ rates increased ~~for these~~on time deposit products. Average interest-bearing savings deposits ~~were $59.7~~in 2005 decreased $1.7 billion ~~in 2004, an increase of $2.6 billion (4.6~~(2.9 percent), compared with ~~2003. The increase in average interest-bearing savings deposits from 2003 to~~ 2004, ~~was~~ primarily driven by ~~increases in interest checking of $1.8 billion (9.6 percent), along with increases~~a reduction in money market ~~accounts~~savings account balances of ~~$.5~~$3.5 billion ~~(1.7~~(10.8 percent) ~~and savings accounts~~offset by higher interest checking account balances of ~~$.3~~$1.9 billion ~~(4.5~~(8.8 percent).
Table 12   DEPOSITS
The composition of deposits was as follows:

2005 2004 2003 2002 2001
Percent Percent Percent Percent Percent
December 31 (Dollars in Millions) Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
Noninterest-bearing deposits $ 32,214 25.8 % $ 30,756 25.5 % $ 32,470 27.3 % $ 35,106 30.4 % $ 31,212 29.7 %
Interest-bearing deposits
Interest checking 23,274 18.7 23,186 19.2 21,404 18.0 17,467 15.1 15,251 14.5
Money market savings 27,934 22.4 30,478 25.2 34,025 28.6 27,753 24.0 24,835 23.6
Savings accounts 5,602 4.5 5,728 4.8 5,630 4.7 5,021 4.4 4,637 4.4

Total of savings deposits 56,810 45.6 59,392 49.2 61,059 51.3 50,241 43.5 44,723 42.5
Time certificates of deposit less than $100,000 13,214 10.6 12,544 10.4 13,690 11.5 17,973 15.5 20,724 19.7
Time deposits greater than $100,000
Domestic 14,341 11.5 11,956 9.9 5,902 4.9 9,427 8.2 7,286 6.9
Foreign 8,130 6.5 6,093 5.0 5,931 5.0 2,787 2.4 1,274 1.2

Total interest-bearing deposits 92,495 74.2 89,985 74.5 86,582 72.7 80,428 69.6 74,007 70.3

Total deposits $ 124,709 100.0 % $ 120,741 100.0 % $ 119,052 100.0 % $ 115,534 100.0 % $ 105,219 100.0 %
The maturity of time certificates of deposit less than $100,000 and time deposits greater than $100,000 was as follows:

Time Certificates of Time Deposits
December 31, 2005 (Dollars in Millions) Deposit Less Than $100,000 Greater Than $100,000 Total
Three months or less $ 2,560 $ 17,115 $ 19,675
Three months through six months 2,705 2,234 4,939
Six months through one year 3,478 1,509 4,987
2007 2,914 983 3,897
2008 801 254 1,055
2009 535 230 765
2010 212 133 345
Thereafter 9 13 22

Total $ 13,214 $ 22,471 $ 35,685
U.S. BANCORP  31
    Interest-bearing time deposits ~~were $30.6 billion~~ at December 31, ~~2004,~~2005, increased $5.1 billion (16.6 percent), compared with ~~$25.5 billion at~~ December 31, ~~2003, an increase of $5.1 billion (19.9 percent).~~2004. The increase ~~in interest-bearing time deposits~~ was driven by ~~an increase~~increases of ~~$6.2~~$4.4 billion ~~(52.5~~(24.5 percent) and $.7 billion (5.3 percent) in time deposits greater than $100,000 ~~partially offset by a decrease in the higher cost~~and time certificates of deposits less than $100,000, ~~of $1.1 billion (8.4 percent).~~respectively. Changes in these deposit categories were principally due to pricing decisions based on the relative cost of funding. ~~Time certificates of deposit less than $100,000 were essentially unchanged in the fourth quarter and represent a source of fixed-rate funding in a rising rate environment.~~ Average time deposits greater than $100,000 increased ~~$1.4~~$7.0 billion ~~(11.0~~(51.0 percent) and average time certificates of deposit less than $100,000 ~~declined $2.4 billion (15.6~~increased $125 million (1.0 percent) ~~during~~in 2005, compared with 2004. Time deposits greater than $100,000 are largely viewed as purchased funds and are managed to levels deemed appropriate given alternative funding sources.
BorrowingsThe Company utilizes both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $20.2 billion at December 31, 2005, compared with $13.1 billion at December 31, ~~2004, compared with $10.9 billion at December 31, 2003.~~2004. Short-term funding is managed, within approved liquidity policies, to levels deemed appropriate given alternative funding sources. The increase of ~~$2.2~~$7.1 billion in short-term borrowings reflected wholesale funding associated with the Company’s earning asset ~~growth.~~growth and asset/ liability management activities.
    Long-term debt was $37.1 billion at December 31, 2005, compared with $34.7 billion at December 31, 2004, ~~compared with $33.8 billion at December 31, 2003, an increase~~reflecting the issuances of ~~$.9 billion. The increase in long-term debt~~
~~Table 11~~   ~~Deposits~~
~~The composition of deposits was as follows:~~

2004 2003 2002 2001 2000
Percent Percent Percent Percent Percent
December 31 (Dollars in Millions) Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
Noninterest-bearing deposits $ 30,756 25.5 % $ 32,470 27.3 % $ 35,106 30.4 % $ 31,212 29.7 % $ 26,633 24.3 %
Interest-bearing deposits
Interest checking 23,186 19.2 21,404 18.0 17,467 15.1 15,251 14.5 13,982 12.8
Money market accounts 30,478 25.2 34,025 28.6 27,753 24.0 24,835 23.6 23,899 21.8
Savings accounts 5,728 4.8 5,630 4.7 5,021 4.4 4,637 4.4 4,516 4.1

Total of savings deposits 59,392 49.2 61,059 51.3 50,241 43.5 44,723 42.5 42,397 38.7
Time certificates of deposit less than $100,000 12,544 10.4 13,690 11.5 17,973 15.5 20,724 19.7 25,780 23.5
Time deposits greater than $100,000
Domestic 11,956 9.9 5,902 4.9 9,427 8.2 7,286 6.9 11,221 10.3
Foreign 6,093 5.0 5,931 5.0 2,787 2.4 1,274 1.2 3,504 3.2

Total interest-bearing deposits 89,985 74.5 86,582 72.7 80,428 69.6 74,007 70.3 82,902 75.7

Total deposits $ 120,741 100.0 % $ 119,052 100.0 % $ 115,534 100.0 % $ 105,219 100.0 % $ 109,535 100.0 %
~~The maturity of time certificates of deposit less than $100,000 and time deposits greater than $100,000 was as follows:~~

Time Certificates of Time Deposits
December 31, 2004 (Dollars in Millions) Deposit Less Than $100,000 Greater Than $100,000 Total
Three months or less $ 2,324 $ 14,097 $ 16,421
Three months through six months 1,961 1,325 3,286
Six months through one year 2,536 940 3,476
2006 2,998 825 3,823
2007 1,579 445 2,024
2008 614 188 802
2009 521 220 741
Thereafter 11 9 20

Total $ 12,544 $ 18,049 $ 30,593
~~U.S. BANCORP~~  33
~~was primarily driven by the issuance of $12.2~~$5.5 billion of bank notes, ~~and~~$4.5 billion of convertible senior debentures, $.5 billion of medium-term notes, $.9 billion of subordinated debt, $1.0 billion of junior subordinated ~~notes, partially offset by maturities~~debentures and the addition of ~~$8.0 billion and prepayments of $4.7~~$3.1 billion of Federal Home Loan Bank (“FHLB”) ~~advances. The prepayments of FHLB~~ advances, ~~during the first and fourth quarters of 2004~~offset by long-term debt maturities, repayments and the ~~issuance~~impact of ~~predominantly fixed-rate funding were principally done in connection with asset/liability management activities.~~the tender offer completed during 2005. Refer to Note 1514 of the Notes to Consolidated Financial Statements for additional information regarding long-term debt and the “Liquidity Risk Management” section for discussion of liquidity management of the Company.
CORPORATE RISK PROFILE
OverviewManaging risks is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit, residual, operational, interest rate, market and liquidity risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Residual risk is the potential reduction in the end-of-term value of leased assets or the residual cash flows related to asset securitization and other off-balance sheet structures. Operational risk includes risks related to fraud, legal and compliance risk, processing errors, technology, breaches of internal controls and business continuation and disaster recovery risk. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Rate movements can affect the repricing of assets and liabilities differently, as well as their market value. Market risk arises from fluctuations in interest rates, foreign exchange rates, and equity prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities that are accounted for on a mark-to-market basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. In addition, corporate strategic decisions, as well as the risks described above, could give rise to reputation risk. Reputation risk is the risk that negative publicity or press, whether true or not, could result in costly litigation or cause a decline in the Company’s stock value, customer base or revenue.
Credit Risk ManagementThe Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans experiencing deterioration of credit quality. The credit risk management strategy also includes a credit risk assessment process, independent of business line managers, that performs assessments of compliance with commercial and consumer credit policies, risk ratings, and other critical credit information. The Company strives to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels for probable loan losses inherent in the portfolio. Commercial banking operations rely on ~~a strong credit culture that combines~~ prudent credit policies and procedures and individual lender and business line manager accountability. Lenders are assigned lending ~~grades~~authority based on their level of experience and customer service requirements. ~~Lending grades represent the level of approval authority for the amount of credit exposure and level of risk.~~ Credit officers reporting to an independent credit administration function have higher levels of lending ~~grades~~authority and support the business units in their credit decision process. Loan decisions are documented as to the borrower’s business, purpose of the loan, evaluation of the repayment source and the associated risks, evaluation of collateral, covenants and monitoring requirements, and risk rating rationale. The Company utilizes a credit risk rating system to measure the credit quality of individual commercial loan transactions. The Company uses the risk rating system for regulatory reporting, determining the frequency of review of the credit exposures, and evaluation and determination of the specific allowance for commercial credit losses. The Company regularly forecasts potential changes in risk ratings, nonperforming status and potential
32  U.S. BANCORP

for loss and the estimated impact on the allowance for credit losses. In the Company’s retail banking operations, standard credit scoring systems are used to assess credit risks of consumer, small business and small-ticket leasing customers and to price consumer products accordingly. The Company conducts the underwriting and collections of its retail products in loan underwriting and servicing centers specializing in certain retail products. Forecasts of delinquency levels, bankruptcies and losses in conjunction with projection of estimated losses by delinquency categories and vintage information are regularly prepared and are used to evaluate underwriting and collection and determine the specific allowance for credit losses for these products. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments. The Company also engages in non-lending activities that may give rise to credit risk, including interest rate swap and option contracts for balance sheet hedging purposes, foreign exchange transactions, deposit overdrafts and interest rate swap contracts for customers, and settlement risk, including Automated Clearing House transactions, and the processing of credit card transactions for merchants. These activities are also subject to credit review, analysis and approval processes.
34  ~~U.S. BANCORP~~
Economic ~~Overview~~and Other FactorsIn evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors. Beginning in 2000, the domestic economy experienced slower growth. During 2001, corporate earnings weakened and credit quality indicators among certain industry sectors deteriorated. The stagnant economic growth was evidenced by the Federal Reserve Board’s (“FRB”) actions to stimulate economic growth through a series of interest rate reductions from mid-2001 through late 2002. In addition, events of September 11, 2001, had a profound impact on credit quality due to changes in consumer confidence and related spending, governmental priorities and business activities. In response to decliningSince mid-2003, economic conditions company-specific portfolio trends, and the Firstar/ USBM merger, the Company initiated several actions during 2001 including aligning the risk management practices and charge-off policies of the companies and restructuring and disposing of certain portfolios that did not align with the credit risk profile of the combined company. The Company also implemented accelerated loan workout strategies for certain commercial credits and increased the provision for credit losses in 2001.
    By the end of 2002, economic conditions had stabilized somewhat, although the banking sector continued to experience elevated levels of nonperforming assets and net charge-offs, especially with respect to certain industry segments. Unemployment rates had increased slightly and consumer spending and confidence levels had declined during that year. Economic conditions began to improve in early to mid-2003have steadily improved as evidenced by stronger earnings across many corporate sectors, higher equity valuations, and stronger retail sales and consumer ~~spending, and improving economic indicators. Also,~~spending. In late 2003, unemployment rates stabilized and began to decline from a high of 6.13 percent in ~~late 2003.~~the third quarter of that year. However, the banking industry continued to have elevated levels of nonperforming assets and net charge-offs in 2003 compared with the late 1990’s. Conditions within certain industries, including manufacturing and airline transportation sectors, lagged behind the growth in the broader economy especially in some markets served by the Company.
    During 2004, unemployment rates and bankruptcy levels continued to improve. The trends related to consumer spending for retail goods and services ~~continued to expand~~expanded throughout the year. While corporate profits ~~continued to be~~were strong, the index of corporate profits retreated somewhat in the second quarter of 2004. As a result, equity markets stalled in the second and third quarters of 2004 due to uncertainty related to corporate profits and world events. Within the Company’s customer base, commercial loan demand continued to be somewhat soft through mid-2004. In the fourth quarter of 2004, most economic indicators again began to expand and commercial loan balances for the Company displayed year-over-year quarterly growth for the first time since mid-2001.
    Economic conditions continued to improve in 2005, as reflected in strong expansion of the gross domestic product index, lower unemployment rates, favorable trends related to corporate profits and consumer spending for retail goods and services. The Federal Reserve Bank pursued a measured approach to increasing short-term rates in an effort to prevent an acceleration of inflation and maintain the current rate of economic growth.
    In addition to economic factors, changes in regulations and legislation can have an impact on the credit performance of the loan portfolios. During 2005, the Company began implementing higher minimum balance payment requirements for its credit card customers in response to industry guidance issued by the banking regulatory agencies. This industry guidance was provided to minimize the likelihood that minimum balance payments would not be sufficient to cover interest, fees and a portion of the principal balance of a credit card loan resulting in negative amortization, or increasing account balances. Also, new bankruptcy legislation was enacted in October 2005, making it more difficult for borrowers to have their debts forgiven during bankruptcy proceedings. While these changes may have a long term benefit, the lending industry may experience increasing levels of nonperforming loans, restructured loans and delinquencies over the short-term related to consumer credit.
Credit DiversificationThe Company manages its credit risk, in part, through diversification of its loan portfolio. As part of its normal business activities, it offers a broad array of traditional commercial lending products and specialized products such as asset-based lending, commercial lease financing, agricultural credit, warehouse mortgage lending, commercial real estate, health care and correspondent banking. The Company also offers an array of retail lending products including credit cards, retail leases, home equity, revolving credit, lending to students and other consumer loans. These retail credit products are primarily offered through the branch office network, ~~specialized trust,~~ home mortgage and loan production offices, indirect distribution channels, such as automobile dealers and a consumer finance division. The Company monitors and manages the portfolio diversification by industry, customer and geography. Table 6 provides information with respect to the overall product diversification and changes in the mix during ~~2004.~~2005.
    The commercial portfolio reflects the Company’s focus on serving small business customers, middle market and
U.S. BANCORP  33
larger corporate businesses throughout its 24-state banking region and large national customers within certain niche industry groups. Table 7 provides a summary of the significant industry groups and geographic locations of commercial loans outstanding at December 31, ~~2004~~2005 and ~~2003.~~2004. The commercial loan portfolio is diversified among various industries with somewhat higher concentrations in consumer products and services, financial services, commercial services and supplies, capital goods (including manufacturing and commercial construction-related businesses), property management and development and agricultural industries. Additionally, the commercial portfolio is diversified across the Company’s geographical markets with ~~84.1~~81.4 percent of total commercial loans within the 24-state banking region. Credit relationships outside of the Company’s banking region are reflected within the corporate banking, mortgage banking, auto dealer and leasing businesses focusing on large national customers and specifically targeted ~~industries including the mortgage banking and the leasing businesses.~~industries. Loans to mortgage banking customers are primarily warehouse lines which are collateralized with the underlying mortgages. The Company regularly monitors its mortgage collateral position to manage its risk exposure.
    Certain industry segments within the commercial loan portfolio, including transportation and manufacturing have experienced economic stress since 2001. Additionally, highly leveraged enterprise-value financings have under-performed
~~U.S. BANCORP~~  35
due to changes in cash flows during softer economic conditions. At December 31, 2004, the transportation sector represented 4.0 percent of the total commercial loan portfolio. Since 2001, the sector has been impacted by airline travel, slower economic activity and changes in fuel prices. In general, the credit risk profile of the trucking, railroad and shipping segments have improved from a year ago; however, the airline segment continues to be sluggish. At year-end 2004, the Company’s transportation portfolio consisted of airline and airfreight businesses (28.2 percent of the sector), trucking businesses (46.4 percent of the sector) and the remainder in the railroad and shipping businesses (25.4 percent of the sector). Capital goods represented 9.5 percent of the total commercial portfolio at December 31, 2004. Included in this sector were approximately 21.5 percent of loans related to building products while engineering and construction equipment and machinery businesses were 34.8 percent and 30.2 percent, respectively. During 2004, economic conditions improved and production levels increased resulting in an improvement in the credit quality of the manufacturing sectors from a year ago. With respect to certain construction and building-related businesses, the recent changes in the interest rate environment may somewhat hamper their future profitability; however, these credits continued to perform well as of December 31, 2004.
    Within its commercial lending business, the Company also provides financing to enable customers to grow their businesses through acquisitions of existing businesses, buyouts or other recapitalizations. During a business cycle with slower economic growth, businesses with leveraged capital structures may experience insufficient cash flows to service their debt. The Company manages leveraged enterprise-value financings by maintaining well-defined underwriting standards, portfolio diversification and actively managing the customer relationship. Regardless of these actions, leveraged enterprise-value financings often exhibit stress during a recession or period of slow economic growth and will have higher inherent loss rates than other commercial loans. The Company actively monitors the credit quality of these customers and develops action plans accordingly. Such leveraged enterprise-value financings approximated $1.7 billion in loans outstanding at December 31, 2004, compared with approximately $1.8 billion outstanding at December 31, 2003. The Company’s portfolio of highly leveraged enterprise-value financings is included in Table 7 and is diversified among industry groups similar to the total commercial loan portfolio, except for higher concentrations in telecommunications and cable.
The commercial real estate portfolio reflects the Company’s focus on serving business owners within its footprint as well as regional and national investment-based real estate. At December 31, ~~2004,~~2005, the Company had commercial real estate loans of ~~$27.6~~$28.5 billion, or ~~21.8~~20.7 percent of total loans, compared with ~~$27.2~~$27.6 billion at December 31, ~~2003.~~2004. Within commercial real estate loans, different property types have varying degrees of credit risk. Table 98 provides a summary of the significant property types and geographic locations of commercial real estate loans outstanding at December 31, ~~2004~~2005 and ~~2003.~~2004. At December 31, ~~2004,~~2005, approximately ~~31.0~~32.4 percent of the commercial real estate loan portfolio represented business owner-occupied properties that tend to exhibit credit risk characteristics similar to the middle market commercial loan portfolio. Generally, the investment-based real estate mortgages are diversified among various property types with somewhat higher concentrations in multi-family, office and retail properties. While investment-based commercial real estate continues to perform with relatively strong occupancy levels and cash flows, these categories of loans can be adversely impacted during a rising rate environment. Included in commercial real estate at year end ~~2004~~2005 was approximately ~~$.4~~$.5 billion in loans related to land held for development and ~~$1.4~~$1.9 billion of loans related to residential and commercial acquisition and development properties. These loans are subject to quarterly monitoring for changes in local market conditions due to a higher credit risk profile. Acquisition and development loans continued to perform well with strong market conditions; however, these loans can be adversely impacted by a slow down in the housing market and softening of demand. The commercial real estate portfolio is diversified across the Company’s geographical markets with ~~92.6~~92.0 percent of total commercial real estate loans outstanding at December 31, ~~2004,~~2005, within the 24-state banking region.
    Residential mortgages are originated through the Company’s branches, loan production offices, a wholesale network of originators and a consumer finance company. Within the residential mortgage portfolio approximately 71 percent had a loan-to-value of 80 percent or less at the date of origination (39 percent of the consumer finance company portfolio and 86 percent of the traditional mortgage portfolio). Interest-only mortgages at December 31, 2005 represent 18 percent of the residential mortgage portfolio (20 percent of the consumer finance company portfolio and 17 percent of the traditional mortgage portfolio). The Company does not have any residential mortgages whose payment schedule would cause balances to increase over time. The retail loan portfolio principally reflects the Company’s focus on consumers within its footprint of branches and certain niche lending activities that are nationally focused. Within the Company’s retail loan portfolio approximately 83.1 percent of the credit card balances relate to bank branch, co-branded and affinity programs that generally experience better credit quality performance than portfolios generated through national direct mail programs. At December 31, 2005, approximately 84.7 percent of the student loan portfolio is federally guaranteed through various programs reducing its risk profile. Table 9 provides a geographical summary of the residential mortgage and retail loan portfolios.
~~Analysis of Nonperforming Assets~~Loan Delinquencies~~The level of nonperforming assets represents a key~~ Trends in delinquency ratios represent an indicator, among other considerations, of credit risk within the ~~potential~~Company’s loan portfolios. The entire balance of an account is considered delinquent if the minimum payment contractually required to be made is not received by the specified date on the billing statement. The Company measures delinquencies, both including and excluding nonperforming loans, to enable comparability with other companies. Advances made pursuant to servicing agreements to Government National Mortgage Association (“GNMA”) mortgage pools whose repayments of principal and interest are substantially insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs are excluded from delinquency statistics. In addition, under certain situations, a retail customer’s account may be re-aged to remove it from delinquent status. Generally, the intent of a re-aged account is to assist customers who have recently overcome temporary financial difficulties, and have demonstrated both the ability and willingness to resume regular payments. To qualify for ~~future credit losses. Nonperforming assets include nonaccrual loans, restructured loans~~re-
34  U.S. BANCORP
aging, the account must have been open for at least one year and cannot have been re-aged during the preceding 365 days. An account may not ~~performing~~be re-aged more than two times in ~~accordance with~~a five year period. To qualify for re-aging, the customer must also have made three regular minimum monthly payments within the last 90 days. In addition, the Company may re-age the retail account of a customer who has experienced longer-term financial difficulties and apply modified, concessionary terms and conditions to the account. Such additional re-ages are limited to one in a five year period, must meet the qualifications for re-aging described above, except that the customer’s three consecutive minimum monthly payments may be based on the modified terms and ~~other real estate~~conditions applied to the account, and continue to be reported in restructured loans. All re-aging strategies must be independently approved by the Company’s credit administration function and are limited to credit card and other ~~nonperforming assets owned by the Company. Interest payments collected from assets on nonaccrual status~~retail accounts. Commercial loans are ~~typically applied against the principal balance and~~ not ~~recorded as income. At~~subject to re-aging policies.
    Accruing loans 90 days or more past due totaled $253 million at December 31, 2005, compared with $294 million at December 31, 2004, ~~total~~and $329 million at December 31, 2003. These loans were not included in nonperforming assets ~~were $748.4 million, compared with $1,148.1 million at year-end 2003~~ and ~~$1,373.5 million at year-end 2002.~~continue to accrue interest because they are adequately secured by collateral, and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. The ratio of ~~total nonperforming assets~~90 day delinquent loans to total loans ~~and other real estate decreased to .59~~was .18 percent at December 31, ~~2004,~~2005, compared with ~~.97 percent and 1.18~~..23 percent at ~~the end of 2003 and 2002, respectively.~~
    ~~The $399.7 million decrease in total nonperforming assets in 2004 reflected a decrease of $374.3 million in nonperforming commercial and commercial real estate loans~~December 31, 2004.

36  ~~U.S. BANCORP~~
~~and a $8.0 million decrease in nonperforming~~To monitor credit risk associated with retail loans, ~~partially offset by an increase~~the Company also monitors delinquency ratios in the various stages of ~~$2.8 million~~collection. In general, delinquency ratios for retail loans continued to improve relative to December 31, 2004, reflecting the Company’s ongoing improvement in nonperforming residential mortgages. The decrease in nonperforming assets in 2004 was broad-based across most industry sectors within the commercial loan portfolio including capital goods, consumer-related sectors, manufacturingcollection efforts, underwriting, risk management and certain segments of transportation. While airline travel has increased from a year ago, the industry continues to be economically stressed and has had difficulty improving cash flows from operations. Certain health care facilities providers continue to experience operational stress leading to some deterioration in credit quality within that sector. While nonperforming assets are expected to continue to decline slightly during the next few quarters, the ongoing level of nonperforming assets is not expected to decline much further after mid-2005.
    The $225.4 million decrease in total nonperforming assets in 2003, as compared with 2002, reflected a decrease of $204.9 million in nonperforming commercial and commercial real estate loans, a decrease of $11.5 million in nonperforming residential mortgages and a $.9 million decrease in nonperforming retail loans. The decrease in nonperforming assets in 2003 was also broad-based across most industry sectors within the commercial loan portfolio including capital goods, consumer-related sectors, manufacturing, telecommunications, and certain segments of transportation.stable economic conditions.

Table 12   ~~Nonperforming Assets (a)~~

At December 31, (Dollars in Millions) 2004 2003 2002 2001 2000

Commercial

Commercial $ 289.5 $ 623.5 $ 760.4 $ 526.6 $ 470.4
Lease financing 90.6 113.3 166.7 180.8 70.5

Total commercial 380.1 736.8 927.1 707.4 540.9

Commercial real estate

Commercial mortgages 174.6 177.6 174.6 131.3 105.5
Construction and development 25.3 39.9 57.5 35.9 38.2

Total commercial real estate 199.9 217.5 232.1 167.2 143.7
Residential mortgages
43.3 40.5 52.0 79.1 56.9

Retail

Credit card — — — — 8.8
Retail leasing — .4 1.0 6.5 —
Other retail 17.2 24.8 25.1 41.1 15.0

Total retail 17.2 25.2 26.1 47.6 23.8

Total nonperforming loans 640.5 1,020.0 1,237.3 1,001.3 765.3
Other real estate
72.2 72.6 59.5 43.8 61.1
Other assets
35.7 55.5 76.7 74.9 40.6

Total nonperforming assets $ 748.4 $ 1,148.1 $ 1,373.5 $ 1,120.0 $ 867.0

Restructured loans accruing interest (b) $ 10.2 $ 18.0 $ 1.4 $ — $ —
Accruing loans 90 days or more past due $ 294.0 $ 329.4 $ 426.4 $ 462.9 $ 385.2
Nonperforming loans to total loans .51 % .86 % 1.06 % .88 % .63 %
Nonperforming assets to total loans plus other real estate .59 % .97 % 1.18 % .98 % .71 %
Net interest lost on nonperforming loans $ 42.1 $ 67.4 $ 65.4 $ 63.0 $ 50.8
~~Changes in Nonperforming Assets~~

Commercial and Retail and
(Dollars in Millions) Commercial Real Estate Residential Mortgages (d) Total
Balance December 31, 2003
$ 1,013.3 $ 134.8 $ 1,148.1
Additions to nonperforming assets
New nonaccrual loans and foreclosed properties 650.7 41.5 692.2
Advances on loans 39.0 — 39.0

Total additions 689.7 41.5 731.2
Reductions in nonperforming assets
Paydowns, payoffs (498.3 ) (24.1 ) (522.4 )
Net sales (132.0 ) — (132.0 )
Return to performing status (106.1 ) (15.3 ) (121.4 )
Charge-offs (c) (347.3 ) (7.8 ) (355.1 )

Total reductions (1,083.7 ) (47.2 ) (1,130.9 )

Net reductions in nonperforming assets (394.0 ) (5.7 ) (399.7 )

Balance December 31, 2004
$ 619.3 $ 129.1 $ 748.4
~~(a)~~ ~~Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.~~
~~(b)~~ ~~Nonaccrual restructured loans are included in the respective nonperforming loan categories and excluded from restructured loans accruing interest.~~
~~(c)~~ ~~Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.~~
~~(d)~~ ~~Residential mortgage information excludes changes related to residential mortgages serviced by others.~~
~~U.S. BANCORP~~  37
~~Table~~ 13   ~~Delinquent Loan Ratios as a Percent of Ending Loan Balances~~DELINQUENT LOAN RATIOS AS A PERCENT OF ENDING LOAN BALANCES

At December 31, At December 31, At December 31,
90 days or more past dueexcludingnonperforming loans 90 days or more past dueexcludingnonperforming loans 2004 2003 2002 2001 2000 90 days or more past dueexcludingnonperforming loans 2005 2004 2003 2002 2001
Commercial
Commercial

Commercial

Commercial .05 % .06 % .14 % .14 % .11 % Commercial .06 % .05 % .06 % .14 % .14 %
Lease financing .02 .04 .10 .45 .02 Lease financing — .02 .04 .10 .45

Total commercial .05 .06 .14 .18 .10 Total commercial .05 .05 .06 .14 .18
Commercial real estate
Commercial real estate

Commercial real estate

Commercial mortgages — .02 .03 .03 .07 Commercial mortgages — — .02 .03 .03
Construction and development — .03 .07 .02 .03 Construction and development — — .03 .07 .02

Total commercial real estate — .02 .04 .02 .06 Total commercial real estate — — .02 .04 .02
Residential mortgages
Residential mortgages
.46 .61 .90 .78 .62
Residential mortgages
.32 .46 .61 .90 .78
Retail
Retail

Retail

Credit card 1.74 1.68 2.09 2.18 1.70 Credit card 1.26 1.74 1.68 2.09 2.18
Retail leasing .08 .14 .19 .11 .20 Retail leasing .04 .08 .14 .19 .11
Other retail .29 .41 .54 .74 .62 Other retail .22 .29 .41 .54 .74

Total retail .47 .56 .72 .90 .76 Total retail .36 .47 .56 .72 .90

Total loans .23 % .28 % .37 % .40 % .31 % Total loans .18 % .23 % .28 % .37 % .40 %

At December 31, At December 31, At December 31,
90 days or more past dueincludingnonperforming loans 90 days or more past dueincludingnonperforming loans 2004 2003 2002 2001 2000 90 days or more past dueincludingnonperforming loans 2005 2004 2003 2002 2001
Commercial Commercial .99 % 1.97 % 2.35 % 1.71 % 1.13 % Commercial .69 % .99 % 1.97 % 2.35 % 1.71 %
Commercial real estate Commercial real estate .73 .82 .90 .68 .60 Commercial real estate .55 .73 .82 .90 .68
Residential mortgages (a) Residential mortgages (a) .74 .91 1.44 1.79 1.23 Residential mortgages (a) .55 .74 .91 1.44 1.79
Retail Retail .51 .62 .79 1.03 .83 Retail .50 .51 .62 .79 1.03

Total loans .74 % 1.14 % 1.43 % 1.28 % .94 % Total loans .58 % .74 % 1.14 % 1.43 % 1.28 %
(a) Delinquent loan ratios exclude advances made pursuant to servicing agreements to Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Including the guaranteed amounts, the ratio of residential mortgages 90 days or more past due was 4.35 percent, 5.19 percent, and 6.07 percent at December 31, 2005, 2004 and 2003, respectively. Information prior to 2003 is not available.

    The Company had $68.2 million and $58.5 million of restructured loans as of December 31, 2004 and 2003, respectively. Commitments to lend additional funds under restructured loans were $11.9 million and $8.2 million as of December 31, 2004 and 2003, respectively. Restructured loans performing under the restructured terms beyond a specific timeframe are reported as accruing. Of the Company’s total restructured loans at December 31, 2004, $10.2 million were reported as accruing.
    Accruing loans 90 days or more past due totaled $294.0 million at December 31, 2004, compared with $329.4 million at December 31, 2003, and $426.4 million at December 31, 2002. These loans were not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. The ratio of delinquent loans to total loans declined to ..23 percent at December 31, 2004, compared with ..28 percent at December 31, 2003. Improving economic conditions and the Company’s continued focus on improving the credit process were the primary factors for the favorable change from a year ago. Given the relative level of loans 90 days or more past due, the Company does not anticipate significant reductions in future periods.
    ~~To monitor credit risk associated with retail loans, the Company monitors delinquency ratios in the various stages of collection including nonperforming status.~~
38  U.S. BANCORP  35
    The following table provides summary delinquency information for residential mortgages and retail loans:

As a Percent As a Percent
of Ending Loan of Ending Loan
Amount Balances Amount Balances
December 31 December 31
December 31
(Dollars in Millions) (Dollars in Millions) 2004 2003 2004 2003 (Dollars in Millions) 2005 2004 2005 2004
Residential Mortgages

Residential mortgages
Residential mortgages

30-89 days $ 108.3 $ 102.9 .70 % .76 % 30-89 days $ 112 $ 108 .55 % .70 %
90 days or more 70.2 82.5 .46 .61 90 days or more 67 70 .32 .46
Nonperforming 43.3 40.5 .28 .30 Nonperforming 48 43 .23 .28

Total
$ 221.8 $ 225.9 1.44 % 1.68 %
Total
$ 227 $ 221 1.10 % 1.44 %
Retail
Retail

Retail

Credit Card

Credit card

30-89 days $ 142.4 $ 150.9 2.16 % 2.54 % 30-89 days $ 147 $ 142 2.06 % 2.15 %
90 days or more 114.8 99.5 1.74 1.68 90 days or more 90 115 1.26 1.74
Nonperforming — — — — Nonperforming 49 — .69 —

Total
$ 257.2 $ 250.4 3.90 % 4.22 %
Total
$ 286 $ 257 4.01 % 3.89 %

Retail Leasing

Retail leasing

30-89 days $ 59.4 $ 78.8 .83 % 1.31 % 30-89 days $ 43 $ 59 .59 % .83 %
90 days or more 5.6 8.2 .08 .14 90 days or more 3 6 .04 .08
Nonperforming — .4 — .01 Nonperforming — — — —

Total
$ 65.0 $ 87.4 .91 % 1.45 %
Total
$ 46 $ 65 .63 % .91 %

Other Retail

Other retail

30-89 days $ 223.6 $ 311.9 .76 % 1.15 % 30-89 days $ 206 $ 224 .66 % .76 %
90 days or more 84.3 110.2 .29 .41 90 days or more 70 84 .22 .29
Nonperforming 17.2 24.8 .05 .09 Nonperforming 17 17 .06 .05

Total
$ 325.1 $ 446.9 1.10 % 1.65 %
Total
$ 293 $ 325 .94 % 1.10 %
Nonperforming AssetsThe level of nonperforming assets represents another indicator of the potential for future credit losses. The Company’s continued focus on improving the credit process and improving economic conditions since mid-2003 were the primary factors in reducing the overall credit risk profile during the past several years. Recent changes in regulation and bankruptcy laws may effect delinquency levels in the short-term.
    ~~The decline~~Nonperforming assets include nonaccrual loans, restructured loans not performing in ~~residential mortgage delinquencies~~accordance with modified terms, other real estate and other nonperforming assets owned by the Company. Interest payments collected from assets on nonaccrual status are typically applied against the principal balance and not recorded as income. At December 31, ~~2003,~~2005, total nonperforming assets were $644 million, compared with $748 million at year-end 2004 and $1,148 million at year-end 2003. The ratio of total nonperforming assets to total loans and other real estate decreased to .47 percent at December 31, 2005, compared with .59 percent and ..97 percent at the end of 2004 and 2003, respectively. The $104 million decrease in total nonperforming assets in 2005 principally reflected decreases in nonperforming commercial and commercial real estate loans, partially offset by increases in nonperforming retail loans and residential mortgages. The decrease in nonperforming commercial loans in 2005 was broad-based across most industry sectors within the ~~general improvement~~commercial loan portfolio including capital goods, consumer-related sectors, manufacturing and certain segments of transportation. The transportation industry, particularly the airline industry, continues to be economically stressed and has had difficulty improving cash flows from operations. While airline travel continues to improve, the recovery of the industry has been prolonged due to intense competition from low-cost providers, the nature of their cost structure and rising fuel prices. The reduction in ~~economic conditions, collection efforts~~nonperforming commercial real estate loans during 2005, was broad-based and ~~the effect of portfolio growth on delinquency ratios reported on a concurrent basis. The decline in~~extended across most property types. Nonperforming retail ~~loan delinquencies~~loans increased by $49 million from a year ago, primarily due to implementing a program for customers having financial difficulties meeting recent minimum balance payment requirements. Retail customers that meet certain criteria may have the terms of their credit card and other loan agreements modified to allow amortization of their balances over a period of up to 60 months. The Company has considered these loans in the determination of the allowance for credit losses.
36  U.S. BANCORP
Residential mortgage loans on nonaccrual status increased slightly during 2005 primarily reflecting growth in the portfolio. As a percentage of loan balances, nonperforming residential mortgages declined to .23 percent at December 31, 2005 compared with .28 percent at December 31, 2004.
    The $400 million decrease in total nonperforming assets in 2004, as compared with 2003, reflected ~~improving economic conditions~~decreases in nonperforming commercial, commercial real estate and retail loans, partially offset by an increase in nonperforming residential mortgages. The decrease in nonperforming assets in 2004 was also broad-based across most industry sectors within the commercial loan portfolio including capital goods, consumer-related sectors, manufacturing and certain segments of transportation.
    Included in nonperforming loans were restructured commercial, commercial real estate and retail loans of $75 million and $58 million at December 31, 2005 and 2004, respectively. Commitments to lend additional funds under restructured loans were $9 million at December 31, 2005, compared with $12 million as ~~well~~of December 31, 2004. Restructured loans performing under the restructured terms beyond a specified timeframe are reported as ~~ongoing collection efforts, risk management actions taken by the Company~~“restructured loans” and ~~the effect of portfolio growth on delinquency ratios reported on a concurrent basis.~~accrue interest.
Restructured Loans Accruing Interest On a case-by-case basis, management determines whether an account that experiences financial difficulties should be modified as to its
Table 14   NONPERFORMING ASSETS (a)

At December 31, (Dollars in Millions) 2005 2004 2003 2002 2001
Commercial

Commercial $ 231 $ 289 $ 624 $ 760 $ 526
Lease financing 42 91 113 167 181

Total commercial 273 380 737 927 707

Commercial real estate

Commercial mortgages 134 175 178 175 131
Construction and development 23 25 40 57 36

Total commercial real estate 157 200 218 232 167
Residential mortgages
48 43 40 52 79

Retail

Credit card 49 — — — —
Retail leasing — — — 1 7
Other retail 17 17 25 25 41

Total retail 66 17 25 26 48

Total nonperforming loans 544 640 1,020 1,237 1,001
Other real estate
71 72 73 59 44
Other assets
29 36 55 77 75

Total nonperforming assets $ 644 $ 748 $ 1,148 $ 1,373 $ 1,120

Accruing loans 90 days or more past due $ 253 $ 294 $ 329 $ 426 $ 463
Nonperforming loans to total loans .39 % .51 % .86 % 1.06 % .87 %
Nonperforming assets to total loans plus other real estate .47 % .59 % .97 % 1.18 % .98 %
Net interest lost on nonperforming loans $ 30 $ 42 $ 67 $ 65 $ 63
Changes in Nonperforming Assets

Commercial and Retail and
(Dollars in Millions) Commercial Real Estate Residential Mortgages (c) Total
Balance December 31, 2004
$ 619 $ 129 $ 748
Additions to nonperforming assets
New nonaccrual loans and foreclosed properties 397 101 498
Advances on loans 35 — 35

Total additions 432 101 533
Reductions in nonperforming assets
Paydowns, payoffs (265 ) (29 ) (294 )
Net sales (78 ) — (78 )
Return to performing status (66 ) (11 ) (77 )
Charge-offs (b) (185 ) (3 ) (188 )

Total reductions (594 ) (43 ) (637 )

Net additions (reductions) in nonperforming assets (162 ) 58 (104 )

Balance December 31, 2005
$ 457 $ 187 $ 644
(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.
(c) Residential mortgage information excludes changes related to residential mortgages serviced by others.
U.S. BANCORP  37
interest rate or repayment terms to maximize the Company’s collection of its balance. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are excluded from restructured loans once repayment performance, in accordance with the modified agreement, has been demonstrated over several payment cycles. Loans that have interest rates reduced below comparable market rates remain classified as restructured loans; however, interest income is accrued at the reduced rate as long as the customer complies with the revised terms and conditions.
    The following table provides a summary of restructured loans that continue to accrue interest:

As a Percent
of Ending Loan
Amount Balances
December 31
(Dollars in Millions) 2005 2004 2005 2004
Commercial $ 6 $ 14 .01 % .03 %
Residential mortgages 59 44 .28 .29
Credit card 218 138 3.05 2.09
Other retail 32 31 .08 .08

Total
$ 315 $ 227 .23 % .18 %
Analysis of Loan Net Charge-OffsTotal loan net charge-offs ~~decreased $484.6~~were $685 million ~~to $767.1~~in 2005, compared with $767 million in 2004 ~~compared with $1,251.7~~and $1,252 million in ~~2003 and $1,373.0 million in 2002.~~2003. The ratio of total loan net charge-offs to average loans was .51 percent in 2005, compared with .63 percent in 2004 ~~compared with~~and 1.06 percent in ~~2003 and 1.20 percent in 2002.~~2003. The overall level of net charge-offs in 2005 and 2004 reflected improving economic conditions and the Company’s ~~ongoing~~ efforts to reduce the overall risk profile of the organization, improved economic conditions, higher commercial loan recoveries, refinancing by higher risk customers with other companies and higher asset valuations. Net charge-offs are expected to increase modestly as the level of commercial loan recoveries declines to more normalized levels in 2005. Theportfolio through ongoing improvement in ~~net charge-offs in 2003, compared with 2002, was due to credit~~collection efforts underwriting and risk ~~management initiatives taken by the Company that improved the credit risk profile of the loan portfolio.~~management. These ~~initiatives along with better economic conditions~~factors have resulted in improving credit ~~risk classifications~~quality, lower gross charge-offs and ~~lower~~high levels of ~~nonperforming assets and consumer~~commercial loan ~~delinquencies.~~recoveries.
    Commercial and commercial real estate loan net charge-offs for ~~2004~~2005 were ~~$195.7~~$90 million ~~(.29~~(.13 percent of average loans outstanding), compared with ~~$608.7~~$196 million (.29 percent of average loans outstanding) in 2004 and $609 million (.89 percent of average loans outstanding) in 2003. The year-over-year improvement in net charge-offs was broad-based across most industries within the commercial loan portfolio. The Company anticipates commercial loan recoveries will decline somewhat over the next several quarters causing commercial loan net charge-offs to stabilize or slightly increase in 2006. The decrease in commercial and commercial real estate loan net charge-offs in 2004, when compared with 2003, was broad-based and extended across most industries within the commercial loan portfolio and reflected higher levels of commercial loan recoveries principally within the Wholesale Banking line of business.
    Retail loan net charge-offs in 2005 were $559 million (1.26 percent of average loans outstanding), compared with $542 million (1.32 percent of average loans outstanding) in 2004 and $616 million (1.61 percent of average loans outstanding) in 2003. Higher levels of retail loan net charge-offs in 2005, compared with 2004, reflected approximately $56 million of charge-offs related to the new bankruptcy legislation. The Company anticipates that the higher level of

Table 1415   ~~Net Charge-offs as a Percent of Average Loans Outstanding~~NET CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS OUTSTANDING

Year Ended December 31 Year Ended December 31 2004 2003 2002 2001 2000 Year Ended December 31 2005 2004 2003 2002 2001
Commercial
Commercial

Commercial

Commercial .12 % .29 % 1.34 % 1.29 % 1.62 %
Commercial .29 % 1.34 % 1.29 % 1.62 % .56 % Lease financing .85 1.42 1.65 2.67 1.95
Lease financing 1.42 1.65 2.67 1.95 .46

Total commercial .20 .43 1.38 1.46 1.66
Total commercial .43 1.38 1.46 1.66 .55
Commercial real estate
Commercial real estate

Commercial real estate

Commercial mortgages .09 .14 .17 .21 .03 Commercial mortgages .03 .09 .14 .17 .22
Construction and development .13 .16 .11 .17 .11 Construction and development (.04 ) .13 .16 .11 .17

Total commercial real estate .10 .14 .15 .20 .05 Total commercial real estate .01 .10 .14 .15 .20

Residential mortgages
Residential mortgages
.20 .23 .23 .15 .11
Residential mortgages
.20 .20 .23 .23 .15

Retail
Retail

Retail

Credit card 4.14 4.61 4.98 4.80 4.18 Credit card 4.20 4.14 4.62 4.97 4.80
Retail leasing .59 .86 .72 .65 .41 Retail leasing .35 .59 .86 .72 .64
Home equity and second mortgages .54 .70 .74 .85 * Home equity and second mortgages .46 .54 .70 .73 .85
Other retail 1.22 1.60 2.10 2.16 1.32 Other retail 1.20 1.21 1.60 2.11 2.16

Total retail 1.32 1.61 1.85 1.94 1.69 Total retail 1.26 1.32 1.61 1.85 1.94

Total loans (a) .63 % 1.06 % 1.20 % 1.31 % .70 % Total loans (a) .51 % .63 % 1.06 % 1.20 % 1.31 %
(a) In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category based on the lower of cost or fair value. At the time of transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies and methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses was reported separately as a reduction of the allowance for credit losses under “Losses from loan sales/transfers.” Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been ~~$1,875.8~~$1,876 million (1.59 percent of average loans) for the year ended December 31, 2001.
* ~~Information not available~~

38  U.S. BANCORP  39
~~(.89 percent~~bankruptcy filings that occurred in late 2005 will result in lower bankruptcy filings through the first half of average loans outstanding) in 2003 and $679.9 million (.98 percent of average loans outstanding) in 2002. The improvement from 2003 was broad-based and extended across most industries within the commercial loan portfolio and reflected higher levels of commercial loan recoveries principally within the Wholesale Banking line of business. These higher levels of recoveries are not expected2006 before returning to continue throughout 2005. The decrease in commercial and commercial real estate loan net charge-offs in 2003, when compared with 2002, was experienced within most industries in the commercial portfolio. In addition, net charge-offs related to the equipment-leasing portfolio declined to 1.65 percent of average leases outstanding from 2.67 percent in 2002. In 2002, higher levels of net charge-offs related to the leasing portfolio included airline and other transportation related losses.
    Retail loan net charge-offs in 2004 were $542.7 million (1.32 percent of average loans outstanding), compared with $616.1 million (1.61 percent of average loans outstanding) in 2003 and $674.0 million (1.85 percent of average loans outstanding) in 2002.more normalized levels. Lower levels of retail loan net charge-offs in 2004, compared with 2003, principally reflected changes by the Company in underwriting, ongoing collection efforts and other risk management activities. The decline also reflected lower delinquency ratios from ~~a year ago~~2003 as the economy continued to improve. Lower levels of retail loan net charge-offs in 2003, compared with 2002, were primarily due to the implementation of uniform underwriting standards and processes across the entire Company, improvement in ongoing collection efforts and changes in other risk management practices. The favorable change in credit card losses also reflected the impact of two portfolio sales in late 2002.
    The Company’s retail lending business utilizes several distinct business processes and channels to originate retail credit including traditional branch credit, indirect lending and a consumer finance division. Each distinct underwriting and origination activity manages unique credit risk characteristics and prices its loan production commensurate with the differing risk profiles. Within Consumer Banking, U.S. Bank Consumer Finance (“USBCF”) participates in all facets of the Company’s consumer lending activities. USBCF specializes in serving channel-specific and alternative lending markets in residential mortgages, home equity and installment loan financing. USBCF manages loans originated through a broker network, correspondent relationships and U.S. Bank branch offices. Generally, loans managed by the Company’s consumer finance division exhibit higher credit risk characteristics, but are priced commensurate with the differing risk profile.
    The following table provides an analysis of net charge-offs as a percentage of average loans outstanding managed by the consumer finance division, compared with traditional branch related loans:

Average Loan Percent of Average Loan Percent of
Amount Average Loans Amount Average Loans
Year Ended December 31 Year Ended December 31
Year Ended December 31
(Dollars in Millions) (Dollars in Millions) 2004 2003 2004 2003 (Dollars in Millions) 2005 2004 2005 2004
Consumer finance (a)

Consumer Finance (a)
Consumer Finance (a)

Residential mortgages $ 4,531 $ 3,499 .44 % .44 % Residential mortgages $ 5,947 $ 4,531 .52 % .44 %
Home equity and second mortgages 2,412 2,350 2.07 2.38 Home equity and second mortgages 2,431 2,412 1.81 2.07
Other retail 414 360 5.04 4.76 Other retail 393 414 5.09 5.07
Traditional branch

Traditional Branch
Traditional Branch

Residential mortgages $ 12,089 $ 9,791 .04 % .09 %
Residential mortgages $ 9,791 $ 8,197 .09 % .14 % Home equity and second mortgages 12,514 11,628 .19 .22
Home equity and second mortgages 11,628 10,889 .22 .34 Other retail 15,165 14,007 1.10 1.10
Other retail 14,007 13,270 1.10 1.52
Total Company
Total Company

Total Company

Residential mortgages $ 14,322 $ 11,696 .20 % .23 % Residential mortgages $ 18,036 $ 14,322 .20 % .20 %
Home equity and second mortgages 14,040 13,239 .54 .70 Home equity and second mortgages 14,945 14,040 .46 .54
Other retail 14,421 13,630 1.22 1.60 Other retail 15,558 14,421 1.20 1.21
(a) Consumer finance category included credit originated and managed by USBCF, as well as home equity ~~loans~~ and second mortgages with a loan-to-value greater than 100 percent that were originated in the branches.
U.S. BANCORP  39
Table 16   SUMMARY OF ALLOWANCE FOR CREDIT LOSSES

(Dollars in Millions) 2005 2004 2003 2002 2001
Balance at beginning of year $ 2,269 $ 2,369 $ 2,422 $ 2,457 $ 1,787

Charge-offs

Commercial
Commercial 140 244 556 559 779
Lease financing 76 110 139 189 144

Total commercial 216 354 695 748 923
Commercial real estate
Commercial mortgages 16 29 44 41 50
Construction and development 3 13 13 9 13

Total commercial real estate 19 42 57 50 63
Residential mortgages 39 33 30 23 16
Retail
Credit card 313 282 282 305 294
Retail leasing 38 49 57 45 34
Home equity and second mortgages 83 89 105 108 113
Other retail 241 225 268 312 329

Total retail 675 645 712 770 770

Total charge-offs 949 1,074 1,494 1,591 1,772

Recoveries

Commercial
Commercial 95 144 70 67 61
Lease financing 34 41 55 40 30

Total commercial 129 185 125 107 91
Commercial real estate
Commercial mortgages 10 11 16 9 9
Construction and development 6 4 2 2 1

Total commercial real estate 16 15 18 11 10
Residential mortgages 3 4 3 4 3
Retail
Credit card 35 30 27 25 23
Retail leasing 12 10 7 6 5
Home equity and second mortgages 15 13 12 11 13
Other retail 54 50 50 54 80

Total retail 116 103 96 96 121

Total recoveries 264 307 242 218 225

Net Charge-offs

Commercial
Commercial 45 100 486 492 718
Lease financing 42 69 84 149 114

Total commercial 87 169 570 641 832
Commercial real estate
Commercial mortgages 6 18 28 32 41
Construction and development (3 ) 9 11 7 12

Total commercial real estate 3 27 39 39 53
Residential mortgages 36 29 27 19 13
Retail
Credit card 278 252 255 280 271
Retail leasing 26 39 50 39 29
Home equity and second mortgages 68 76 93 97 100
Other retail 187 175 218 258 249

Total retail 559 542 616 674 649

Total net charge-offs 685 767 1,252 1,373 1,547

Provision for credit losses 666 669 1,254 1,349 2,529
Losses from loan sales/transfers (a) — — — — (329 )
Acquisitions and other changes 1 (2 ) (55 ) (11 ) 17

Balance at end of year $ 2,251 $ 2,269 $ 2,369 $ 2,422 $ 2,457

Components

Allowance for loan losses $ 2,041 $ 2,080 $ 2,184
Liability for unfunded credit commitments 210 189 185

Total allowance for credit losses $ 2,251 $ 2,269 $ 2,369

Allowance for credit losses as a percentage of
Period-end loans 1.63 % 1.80 % 2.00 % 2.08 % 2.15 %
Nonperforming loans 414 355 232 196 245
Nonperforming assets 350 303 206 176 219
Net charge-offs (a) 329 296 189 176 159
(a) In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category based on the lower of cost or fair value. At the time of the transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies and methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses was reported separately as a reduction of the allowance for credit losses under “Losses from loan sales/transfers.” Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been $1,876 million for the year ended 2001. Additionally, the allowance as a percent of net charge-offs would have been 131 percent for the year ended December 31, 2001.
40  U.S. BANCORP
Analysis and Determination of the Allowance for Credit LossesThe allowance for loan losses provides coverage for probable and estimable losses inherent in the Company’s loan and lease portfolio. Management evaluates the allowance each quarter to determine that it is adequate to cover these inherent losses. The evaluation of each element and the overall allowance is based on a continuing assessment of problem loans, recent loss experience and other factors, including regulatory guidance and economic conditions. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments, which is included in other liabilities in the Consolidated Balance Sheet. Both the allowance for loan losses and the liability for unfunded credit commitments are included in the Company’s analysis of credit losses.

40  ~~U.S. BANCORP~~
~~Table 15~~   ~~Summary of Allowance for Credit Losses~~

(Dollars in Millions) 2004 2003 2002 2001 2000
Balance at beginning of year $ 2,368.6 $ 2,422.0 $ 2,457.3 $ 1,786.9 $ 1,710.3
Charge-offs

Commercial
Commercial 243.5 555.6 559.2 779.0 319.8
Lease financing 110.6 139.3 188.8 144.4 27.9

Total commercial 354.1 694.9 748.0 923.4 347.7
Commercial real estate
Commercial mortgages 29.1 43.9 40.9 49.5 15.8
Construction and development 12.5 13.0 8.8 12.6 10.3

Total commercial real estate 41.6 56.9 49.7 62.1 26.1
Residential mortgages 32.5 30.3 23.1 15.8 13.7
Retail
Credit card 281.5 282.1 304.9 294.1 235.8
Retail leasing 49.0 57.0 45.2 34.2 14.8
Home equity and second mortgages 89.6 105.0 107.9 112.7 *
Other retail 225.2 267.9 311.9 329.1 379.5

Total retail 645.3 712.0 769.9 770.1 630.1

Total charge-offs 1,073.5 1,494.1 1,590.7 1,771.4 1,017.6
Recoveries

Commercial
Commercial 143.9 70.0 67.4 60.6 64.0
Lease financing 41.5 55.3 39.9 30.4 7.2

Total commercial 185.4 125.3 107.3 91.0 71.2
Commercial real estate
Commercial mortgages 11.1 15.8 9.1 9.1 10.8
Construction and development 3.5 2.0 1.4 .8 2.6

Total commercial real estate 14.6 17.8 10.5 9.9 13.4
Residential mortgages 3.8 3.4 4.0 3.2 1.3
Retail
Credit card 29.6 27.3 24.6 23.4 27.5
Retail leasing 9.6 7.0 6.3 4.5 2.0
Home equity and second mortgages 13.8 12.1 10.6 12.9 *
Other retail 49.6 49.5 54.4 80.0 76.8

Total retail 102.6 95.9 95.9 120.8 106.3

Total recoveries 306.4 242.4 217.7 224.9 192.2
Net Charge-offs

Commercial
Commercial 99.6 485.6 491.8 718.4 255.8
Lease financing 69.1 84.0 148.9 114.0 20.7

Total commercial 168.7 569.6 640.7 832.4 276.5
Commercial real estate
Commercial mortgages 18.0 28.1 31.8 40.4 5.0
Construction and development 9.0 11.0 7.4 11.8 7.7

Total commercial real estate 27.0 39.1 39.2 52.2 12.7
Residential mortgages 28.7 26.9 19.1 12.6 12.4
Retail
Credit card 251.9 254.8 280.3 270.7 208.3
Retail leasing 39.4 50.0 38.9 29.7 12.8
Home equity and second mortgages 75.8 92.9 97.3 99.8 *
Other retail 175.6 218.4 257.5 249.1 302.7

Total retail 542.7 616.1 674.0 649.3 523.8

Total net charge-offs 767.1 1,251.7 1,373.0 1,546.5 825.4

Provision for credit losses 669.6 1,254.0 1,349.0 2,528.8 828.0
Losses from loan sales/transfers (a) — — — (329.3 ) —
Acquisitions and other changes (1.8 ) (55.7 ) (11.3 ) 17.4 74.0

Balance at end of year $ 2,269.3 $ 2,368.6 $ 2,422.0 $ 2,457.3 $ 1,786.9

Components

Allowance for loan losses $ 2,080.4 $ 2,183.6
Liability for unfunded credit commitments (b) 188.9 185.0

Total allowance for credit losses $ 2,269.3 $ 2,368.6

Allowance for credit losses as a percentage of
Period-end loans 1.80 % 2.00 % 2.08 % 2.15 % 1.46 %
Nonperforming loans 354 232 196 245 233
Nonperforming assets 303 206 176 219 206
Net charge-offs (a) 296 189 176 159 216
~~(a)~~ In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category based on the lower of cost or fair value. At the time of the transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies and methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses was reported separately as a reduction of the allowance for credit losses under “Losses from loan sales/transfers.” Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been $1,875.8 million for the year ended 2001. Additionally, the allowance as a percent of net charge-offs would have been 131 percent for the year ended December 31, 2001.
~~(b)~~ During 2004, the Company reclassified the portion of its allowance for credit losses related to commercial off-balance sheet loan commitments and letters of credit to a separate liability account included in other liabilities in the Consolidated Balance Sheet. Amounts for 2003 have been restated.
* ~~Information not available~~
~~U.S. BANCORP~~  41
~~Table 16~~   ~~Elements of the Allowance for Credit Losses~~

Allowance Amount Allowance as a Percent of Loans
December 31 (Dollars in Millions) 2004 2003 2002 2001 2000 2004 2003 2002 2001 2000
Commercial

Commercial $ 663.6 $ 696.1 $ 776.4 $ 1,068.1 $ 418.8 1.88 % 2.08 % 2.12 % 2.64 % .89 %
Lease financing 105.8 90.4 107.6 107.5 17.7 2.13 1.81 2.01 1.84 .31

Total commercial 769.4 786.5 884.0 1,175.6 436.5 1.92 2.04 2.11 2.54 .83
Commercial real estate

Commercial mortgages 131.1 169.7 152.9 176.6 42.7 .65 .82 .75 .94 .22
Construction and development 40.2 58.8 53.5 76.4 17.7 .55 .89 .82 1.16 .25

Total commercial real estate 171.3 228.5 206.4 253.0 60.4 .62 .84 .77 1.00 .23
Residential mortgages
33.1 33.3 34.2 21.9 11.6 .22 .25 .35 .28 .12
Retail

Credit card 283.2 267.9 272.4 295.2 265.6 4.29 4.52 4.81 5.01 4.42
Retail leasing 43.8 47.1 44.0 38.7 27.2 .61 .78 .77 .79 .65
Home equity and second mortgages 87.9 100.5 114.7 88.6 107.7 .59 .76 .85 .72 .90
Other retail 195.4 234.8 268.6 282.8 250.3 1.34 1.70 2.10 2.39 2.16

Total retail 610.3 650.3 699.7 705.3 650.8 1.41 1.67 1.86 2.02 1.93

Total allocated allowance 1,584.1 1,698.6 1,824.3 2,155.8 1,159.3 1.25 1.43 1.57 1.89 .95
Available for other factors 685.2 670.0 597.7 301.5 627.6 .54 .57 .51 .26 .51

Total allowance $ 2,269.3 $ 2,368.6 $ 2,422.0 $ 2,457.3 $ 1,786.9 1.80 % 2.00 % 2.08 % 2.15 % 1.46 %
At December 31, ~~2004,~~2005, the allowance for credit losses was ~~$2,269.3~~$2,251 million ~~(1.80~~(1.63 percent of loans). This compares with an allowance of ~~$2,368.6~~$2,269 million (1.80 percent of loans) at December 31, 2004, and $2,369 million (2.00 percent of loans) at December 31, ~~2003, and $2,422.0 million (2.08 percent of loans) at December 31, 2002.~~2003. The ratio of the allowance for credit losses to nonperforming loans was ~~354~~414 percent at year-end 2005, compared with 355 percent at year-end 2004 ~~compared with~~and 232 percent at year-end ~~2003 and 196 percent at year-end 2002.~~2003. The ratio of the allowance for credit losses to loan net charge-offs was 329 percent at year-end 2005, compared with 296 percent at year-end 2004 ~~compared with~~and 189 percent at year-end ~~2003 and 176 percent at year-end 2002.~~2003. Management determined that the allowance for credit losses was adequate at December 31, ~~2004.~~2005.
    Several factors were taken into consideration in evaluating the allowance for credit losses ~~in 2004,~~at December 31, 2005, including the ~~improving credit~~ risk profile of the portfolios and ~~declining~~loan net charge-offs during the period, the ~~lower~~ level of nonperforming assets, ~~and relative size of~~ accruing loans 90 days or more past due and ~~improving~~ delinquency ratios ~~in most loan categories~~ compared with December 31, ~~2003.~~2004. Management also considered the uncertainty related to certain industry sectors, including the ~~transportation sector,~~airline industry, and the extent of credit exposure to ~~highly leveraged enterprise-value~~other borrowers within the portfolio. In addition, concentration risks associated with commercial real estate and the mix of loans, including credit cards, loans originated through the consumer finance division and ~~lower~~ residential mortgages balances, and their relative credit ~~risk was evaluated compared with other banks.~~risks were evaluated. Finally, the Company considered current economic conditions that might impact the ~~improving economic trends, including improving corporate earnings, changes in unemployment rates, the level of bankruptcies and general economic indicators.~~portfolio. Management determines the allowance that is required for specific loan categories based on relative risk characteristics of the loan portfolio. On an ongoing basis, management evaluates its methods for determining the allowance for each element of the portfolio and makes enhancements considered appropriate. Table 1617 shows the amount of the allowance for credit losses by portfolio category.
    The allowance recorded for commercial and commercial real estate loans is based on a regular review of individual credit relationships. The Company’s risk rating process is an integral component of the methodology utilized ~~in determining~~to determine these elements of the allowance for credit losses. An allowance for credit losses is established for pools of commercial and commercial real estate loans and unfunded commitments based on the risk ratings assigned. An analysis of the migration of commercial and commercial real estate loans and actual loss experience throughout the business cycle is also conducted quarterly to assess the exposure for credits with similar risk characteristics. During 2004, the Company enhanced the process of determining specific allowances for commercial and commercial real estate credit facilities by further segmenting these portfolios based upon risk characteristics and historical performance. Additionally, the Company reassessed the historical timeframe considered in developing inherent loss ratios to more effectively consider the implications of the last business cycle. These enhancements had the effect of increasing inherent loss ratios for higher risk leveraged financings and transportation leases while
42  ~~U.S. BANCORP~~
reducing inherent loss rates for commercial real estate and traditional corporate lending. On a composite basis, inherent loss rates for commercial credit facilities increased slightly for most risk rating categories relative to a year ago. In addition to its risk rating process, the Company separately analyzes the carrying value of impaired loans to determine whether the carrying value is less than or equal to the appraised collateral value or the present value of expected cash flows. Based on this analysis, an allowance for credit losses may be specifically established for impaired loans. The allowance established for commercial and commercial real estate loan portfolios, including impaired commercial and commercial real estate loans, was ~~$940.7~~$929 million at December 31, 2005, compared with $941 million and $1,015 million at December 31, 2004 ~~compared with $1,015.0 million~~ and ~~$1,090.4 million at December 31,~~ 2003, ~~and 2002,~~ respectively. The decline in the allowance for commercial and commercial real estate loans of ~~$74.3~~$12 million at December 31, 2005, compared with December 31, 2004, reflected a ~~$143.1~~$21 million reduction ~~due~~related to ~~improvements~~changes in ~~the risk classifications,~~loss severity rates, offset somewhat by the impact of growth in the portfolios and a ~~$68.8~~$9 million increase related to changes in ~~loss severity rates. The increase in loss severity rates is driven by enhancements to the Company’s migration analysis offset somewhat by recent loss experience.~~risk classifications.
    The allowance recorded for the residential mortgages and retail loan portfolios is based on an analysis of product mix, credit scoring and risk composition of the portfolio, loss and bankruptcy experiences, economic conditions and historical and expected delinquency and charge-off statistics for each homogenous group of loans. Based on this information and analysis, an allowance was established approximating a rolling twelve-month estimate of net charge-offs. The allowance established for residential mortgages was ~~$33.1~~$39 million at December 31, 2005, compared with $33 million at December 31, 2004 ~~compared with $33.3 million~~ and ~~$34.2 million at December 31,~~ 2003, ~~and 2002,~~ respectively. The ~~slight decrease~~increase in the allowance for the residential mortgage portfolio year-over-year was primarily due to ~~lower expected loss severity resulting from the more uniform underwriting processes and standards associated with~~growth of the portfolio ~~partially offset by inherent losses due to growth in the first lien home equity portfolio~~ during ~~2004.~~2005. The allowance established for retail loans was ~~$610.3~~$558 million at December 31, 2005, compared with $610 million and $651 million at December 31, 2004 ~~compared with $650.3 million~~ and ~~$699.7 million at December 31,~~ 2003, ~~and 2002,~~ respectively. The decline in the allowance for the retail portfolio in ~~2004~~2005 reflected improved credit quality favorably impacting inherent loss ratios and declining delinquency trends, partially offset by the impact of portfolio growth.
U.S. BANCORP  41
    Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolios. This is due to several factors, including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses from larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogeneous groups of loans, loan portfolio concentrations, and other subjective considerations are among other factors. Because of these subjective factors, the process utilized to determine each element of the allowance for credit losses by specific loan category has some imprecision. As such, the Company estimates a range of inherent losses in the portfolio based on statistical analyses and management judgment, and maintains an “allowance available for other factors” that is related to but not allocated to a specific loan category. ~~The~~A statistical analysis attempts to measure the extent of imprecision by determining the volatility of losses over time across loan categories. Also, management judgmentally considers loan concentrations, risks associated with specific industries, the stage of the business cycle, economic conditions and other qualitative factors. Based on this process, the amount of the allowance available for other factors was ~~$685.2~~$725 million at December 31, 2005, compared with $685 million at December 31, 2004, ~~compared with $670.0~~and $670 million at December 31, ~~2003 and $597.7 million at December 31, 2002.~~2003. At December 31, ~~2004,~~2005, approximately ~~$500~~$592 million was related to estimated imprecision as described above. Of this amount, commercial and commercial real estate represented approximately 7268 percent while residential and retail loans represented approximately 2832 percent. The remaining allowance available for other factors of ~~$185~~$133 million was related to concentration risk, including risks associated with the sluggish airline industry, relative size of the consumer finance and commercial real estate portfolios, ~~and~~ highly leveraged enterprise-value credits, uncertainty regarding credit card losses during the transition to higher minimum balance payments and other qualitative factors. Given the many subjective factors affecting the credit portfolio, changes in the allowance for other factors may not directly coincide with changes in the risk ratings or the credit portfolio.
    Although the Company determines the amount of each element of the allowance separately and this process is an important credit management tool, the entire allowance for credit losses is available for the entire loan portfolio. The actual amount of losses incurred can vary significantly from the estimated amounts. Refer to Note 1 of the Notes to Consolidated Financial Statements for accounting policies related to the allowance for credit losses.
Residual Risk ManagementThe Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a

Table 17   ELEMENTS OF THE ALLOWANCE FOR CREDIT LOSSES

Allowance Amount Allowance as a Percent of Loans
December 31 (Dollars in Millions) 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001
Commercial

Commercial $ 656 $ 664 $ 696 $ 776 $ 1,068 1.73 % 1.89 % 2.08 % 2.12 % 2.64 %
Lease financing 105 106 90 108 108 2.06 2.14 1.80 2.01 1.84

Total commercial 761 770 786 884 1,176 1.77 1.92 2.04 2.11 2.54

Commercial real estate

Commercial mortgages 115 131 170 153 177 .57 .64 .82 .75 .94
Construction and development 53 40 59 53 76 .65 .55 .89 .81 1.15

Total commercial real estate 168 171 229 206 253 .59 .62 .84 .77 1.00

Residential mortgages
39 33 33 34 22 .19 .21 .25 .35 .28

Retail

Credit card 284 283 268 272 295 3.98 4.29 4.52 4.80 5.01
Retail leasing 24 44 47 44 39 .33 .61 .78 .77 .79
Home equity and second mortgages 62 88 101 115 88 .41 .59 .76 .85 .72
Other retail 188 195 235 269 283 1.16 1.34 1.70 2.11 2.39

Total retail 558 610 651 700 705 1.22 1.41 1.67 1.86 2.02

Total allocated allowance 1,526 1,584 1,699 1,824 2,156 1.11 1.26 1.43 1.57 1.89
Available for other factors 725 685 670 598 301 .52 .54 .57 .51 .26

Total allowance $ 2,251 $ 2,269 $ 2,369 $ 2,422 $ 2,457 1.63 % 1.80 % 2.00 % 2.08 % 2.15 %
42  U.S. BANCORP  43
lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. Commercial lease originations are subject to the same well-defined underwriting standards referred to in the “Credit Risk Management” section which includes an evaluation of the residual risk. Retail lease residual risk is mitigated further by originating longer-term vehicle leases and effective end-of-term marketing of off-lease vehicles. Also, to reduce the financial risk of potential changes in vehicle residual values, the Company maintains residual value insurance. The catastrophic insurance maintained by the Company provides for the potential recovery of losses on individual vehicle sales in an amount equal to the difference between: (a) 105 percent or 110 percent of the average wholesale auction price for the vehicle at the time of sale and (b) the vehicle residual value specified by the Automotive Lease Guide (an authoritative industry source) at the inception of the lease. The potential recovery is calculated for each individual vehicle sold in a particular policy year and is reduced by any gains realized on vehicles sold during the same period. The Company will receive claim proceeds under this insurance program if, in the aggregate, there is a net loss for such period. In addition, the Company obtains separate residual value insurance for all vehicles at lease inception where end of lease term settlement is based solely on the residual value of the individual leased vehicles. Under this program, the potential recovery is computed for each individual vehicle sold and does not allow the insurance carrier to offset individual determined losses with gains from other leases. This individual vehicle coverage is included in the calculation of minimum lease payments when making the capital lease assessment. To reduce the risk associated with collecting insurance claims, the Company monitors the financial viability of the insurance carrier based on insurance industry ratings and available financial information.
    Included in the retail leasing portfolio was approximately ~~$4.0~~$4.3 billion of retail leasing residuals at December 31, ~~2004,~~2005, compared with ~~$3.3~~$4.0 billion at December 31, ~~2003.~~2004. The Company monitors concentrations of leases by manufacturer and vehicle “make and model.” At year-end ~~2004,~~2005, no vehicle-type concentration exceeded five percent of the total number of vehicles in the aggregate portfolio. Because retail residual valuations tend to be less volatile for longer-term leases, relative to the estimated residual at inception of the lease, the Company actively manages lease origination production to achieve a longer-term portfolio. At December 31, ~~2004,~~2005, the weighted-average origination term of the portfolio was 5251 months. ~~During~~Since early 2003, the ~~period from 1998 through 2002, the used vehicle~~wholesale market experienced pricing stress that adversely impacted lease residual valuations. Several factors contributed to this competitive business cycle. Aggressive leasing programs by automobile manufacturers and competitors within the banking industry included a marketing focus on monthly lease payments, enhanced residuals at lease inception, shorter-term leases and low mileage leases. These practices created a cyclical oversupply of certain off-lease vehicles causing significant declines in used vehicle prices during that period. Since late 2002, residual values for used ~~cars have improved. Economic pressures during 2001 and 2002 moderated new car sales volumes to some degree. As~~vehicles has been in a ~~result, production levels declined from record levels~~period of sustained recovery, resulting in ~~2000, reducing~~ the ~~supply~~improvement of ~~newer model years. Another factor that has affected~~ residual values is the growth of “certified” used car programs. Certified cars are low mileage, newer model vehicles that have been inspected, reconditioned, and usually have a warranty program. The Company’s exposure to residual values has benefited from certified car programs that receive premium pricing from dealers at auction. In addition, competition within the new car market continues to cause manufacturers to offer a record number of different makes and models in an attempt to target smaller segments of the consumer market. Also, consumers are purchasing vehicles with more content as former optional equipment becomes standard on more vehicles. These trends tend to favorably impact vehicle prices. Within the new car market, higher levels of incentive spending continue to exist. While this supports higher sales volumes, certain vehicle models will continue to see some downward pressure on the initial residual values of new leases, reducing the risk of end-of-term residual valuation losses as lessees purchase off-lease vehicles.values. Within vehicle categories, ~~residual~~wholesale values for automobiles have performed better than trucks, experiencing an increase in average wholesale prices of ~~5.2%~~13.6 percent during ~~2004,~~2005, while trucks have seen ~~a decline~~an increase of ~~1.6%.~~2.8 percent. The ~~decline~~smaller increase in truck values is attributed to a market decline in demand for full size, midsize, and luxury sport utility vehicles. These models have not experienced price ~~declines~~increases as great as automobiles due to ~~increased competition in the segment as well as~~ the impact of higher gas prices on consumer buying ~~patterns. These factors, along~~patterns, an oversupply in the marketplace, and the emergence of the crossover segments. The improvement in the used car marketplace combined with the mix of the Company’s lease residual portfolio have reduced the exposure to retail lease residual impairments relative to a year ago.
    At December 31, ~~2004,~~2005, the commercial leasing portfolio had ~~$769~~$678 million of residuals, compared with ~~$816~~$769 million at December 31, ~~2003.~~2004. At year-end ~~2004,~~2005, lease residuals related to trucks and other transportation equipment were ~~29.8~~25.1 percent of the total residual portfolio. Railcars represented ~~16.5~~17.7 percent of the aggregate portfolio, while ~~aircraft and~~ business and office equipment and aircraft were ~~16.3~~17.2 percent and ~~12.7~~16.6 percent, respectively. No other significant concentrations of more than 10 percent existed at December 31, ~~2004.~~2005. In ~~2004, reduced airline travel~~2005, residual values in general improved or remained stable. The transportation industry residual values improved for marine, rail and
44  ~~U.S. BANCORP~~
~~higher fuel costs continued~~ corporate aircraft. Commercial aircraft continues to ~~adversely impact aircraft~~experience lower values due to the abundance of supply and ~~transportation equipment lease residual values.~~technological efficiencies on newer models.
Operational Risk ManagementOperational risk represents the risk of loss resulting from the Company’s operations, including, but not limited to, the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements and business continuation and disaster recovery. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity.
    The Company operates in many different businesses in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of the Company’s objectives. In the event of a breakdown in the internal control system, improper operation of systems or improper employees’ actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation.
U.S. BANCORP  43
    The Company manages operational risk through a risk management framework and its internal control processes. Within this framework, the Corporate Risk Committee (“Risk Committee”) provides oversight and assesses the most significant operational risks facing the Company within its business lines. Under the guidance of the Risk Committee, enterprise risk management personnel establish policies and interact with business lines to monitor significant operating risks on a regular basis. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. Business managers maintain a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, safeguarding of assets from misuse or theft, and ensuring the reliability of financial and other data. Business managers ensure that the controls are appropriate and are implemented as designed.
    Each business line within the Company has designated risk managers. These risk managers are responsible for, among other things, coordinating the completion of ongoing risk assessments and ensuring that operational risk management is integrated into business decision-making activities. Business continuation and disaster recovery planning is also critical to effectively manage operational risks. Each business unit of the Company is required to develop, maintain and test these plans at least annually to ensure that recovery activities, if needed, can support mission critical functions including technology, networks and data centers supporting customer applications and business operations. The Company’s internal audit function validates the system of internal controls through risk-based, regular and ongoing audit procedures and reports on the effectiveness of internal controls to executive management and the Audit Committee of the Board of Directors.
    Customer-related business conditions may also increase operational risk or the level of operational losses in certain transaction processing business units, including merchant processing activities. Ongoing risk monitoring of customer activities and their financial condition and operational processes serve to mitigate customer-related operational risk. Refer to Note 2423 of the Notes to Consolidated Financial Statements for further discussion on merchant processing.
    While the Company believes that it has designed effective methods to minimize operational risks, there is no absolute assurance that business disruption or operational losses would not occur in the event of a disaster. On an ongoing basis, management makes process changes and investments to enhance its systems of internal controls and business continuity and disaster recovery plans.
Interest Rate Risk ManagementIn the banking industry, changes in interest rates is a significant risk ~~exists related to changes in interest rates.~~that can impact earnings, market valuations and safety and soundness of an entity. To minimize the volatility of net interest income and of the market value of assets and liabilities, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Policy Committee (“ALPC”) and approved by the Board of Directors. ALPC has the responsibility for approving and ensuring compliance with ALPC management policies, including interest rate risk exposure. The Company uses Net Interest Income Simulation Analysis and Market Value of Equity Modeling for measuring and analyzing consolidated interest rate risk.
Net Interest Income Simulation AnalysisOne of the primary tools used to measure interest rate risk and the effect of interest rate changes on rate sensitive income and net interest income is simulation analysis. The monthly analysis incorporates substantially all of the Company’s assets and liabilities and off-balance sheet instruments, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on interest rate sensitive income of a 300 basis point upward or downward gradual change of market interest rates over a one-year period. The simulations also estimate the effect of immediate and sustained parallel shifts in the yield curve of 50 basis points as well as the effect of immediate and sustained flattening
~~U.S. BANCORP~~  45
~~Sensitivity of Net Interest Income and Rate Sensitive Income~~

December 31, 2004 December 31, 2003
Down 50 Up 50 Down 300 Up 300 Down 50 Up 50 Down 300 Up 300
Immediate Immediate Gradual Gradual Immediate Immediate Gradual Gradual
Net interest income (.49 )% .04 % *% (.19 )% 1.30 % .19 % *% (.02 )%
Rate sensitive income (.40 )% (.13 )% *% (.69 )% .74 % .01 % *% (.54 )%
* ~~Given the current level of interest rates, a downward 300 basis point scenario can not be computed.~~
or steepening of the yield curve. These simulations include assumptions about how the balance sheet is likely to be affected by changes in loan and deposit growth. Assumptions are made to project interest rates for new loans and deposits based on historical analysis, management’s outlook and repricing strategies. These assumptions are validated on a periodic basis. A sensitivity analysis is provided for key variables of the simulation. The results are reviewed by ALPC monthly and are used to guide ~~hedging~~asset/liability management strategies. ~~ALPC policy guidelines limit the estimated change in interest rate sensitive income to 5.0 percent of forecasted interest rate sensitive income over the succeeding 12 months.~~
    The table ~~above~~on page 45 summarizes the interest rate risk of net interest income and rate sensitive income based on forecasts over the succeeding 12 months. At December 31, ~~2004,~~2005, the Company’s overall interest rate risk position was ~~substantively neutral~~liability sensitive to changes in interest rates. Rate sensitive income includes net interest income as well as other income items that are sensitive to interest rates, including asset management fees, mortgage banking and the impact from compensating deposit balances. The Company manages its interest rate risk position by holding assets on the balance sheet with desired interest rate risk characteristics, implementing certain pricing strategies for loans and
44  U.S. BANCORP
deposits and through the selection of derivatives and various funding and investment portfolio strategies. The Company manages the overall interest rate risk profile within policy limits. ALPC policy guidelines limit the estimated change in interest rate sensitive income to 5.0 percent of forecasted interest rate sensitive income over the succeeding 12 months. At December 31, ~~2004~~2005 and ~~2003,~~2004, the Company was within its policy guidelines.
Market Value of Equity ModelingThe Company also utilizes the market value of equity as a measurement tool in managing interest rate sensitivity. The market value of equity measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. ALPC guidelines limit the change in market value of equity in a 200 basis point parallel rate shock to 15 percent of the market value of equity assuming interest rates at December 31, ~~2004.~~2005. The up 200 basis point scenario resulted in a ~~2.7~~6.8 percent decrease in the market value of equity at December 31, ~~2004,~~2005, compared with a ~~3.1~~2.7 percent decrease at December 31, ~~2003.~~2004. The down 200 basis point scenario resulted in a ~~4.2~~4.1 percent decrease in the market value of equity at December 31, 2004. Given the low level of interest rates, the down 200 basis point scenario was not computed for December 31, 2003. ALPC reviews other down rate scenarios to evaluate the impact of falling interest rates. The down 100 basis point scenario resulted in2005, compared with a ~~..7~~4.2 percent decrease at December 31, ~~2004, and a 1.3 percent increase at December 31, 2003.~~2004. At December 31, ~~2004~~2005 and ~~2003,~~2004, the Company was within its policy guidelines.
    The valuation analysis is dependent upon certain key assumptions about the nature of ~~indeterminate maturity of~~ assets and ~~liabilities.~~liabilities with non-contractual maturities. Management estimates the average life and rate characteristics of asset and liability accounts based upon historical analysis and management’s expectation of rate behavior. These assumptions are validated on a periodic basis. A sensitivity analysis of key variables of the valuation analysis is provided to ALPC monthly and is used to guide ~~hedging~~asset/liability management strategies. ~~The results of the valuation analysis as of December 31, 2004, were well within policy guidelines.~~ The Company also uses duration of equity as a measure of interest rate risk. The duration of equity is a measure of the net market value sensitivity of the assets, liabilities and derivative positions of the Company. The duration of assets was ~~1.68~~1.61 years at December 31, ~~2004,~~2005, compared with ~~1.91~~1.63 years at December 31, ~~2003.~~2004. The duration of liabilities was ~~2.02~~1.57 years at December 31, ~~2004,~~2005, compared with ~~2.18~~1.89 years at December 31, ~~2003. After giving effect to~~2004. At December 31, 2005, the ~~Company’s derivative positions, the estimated~~ duration of equity was ~~.12~~1.84 years, compared with ..12 years at December 31, ~~2004, compared with 1.35 years at December 31, 2003.~~2004. The increased duration of equity measure shows that sensitivity of the market value of equity of the Company was ~~relatively neutral~~liability sensitive to changes in interest rates.
Use of Derivatives to Manage Interest Rate RiskIn the ordinary course of business, the Company enters into derivative transactions to manage its interest rate, prepayment and foreign currency risks (“asset and liability management positions”) and to accommodate the business requirements of its customers (“customer-related positions”). To manage its interest rate risk, the Company may enter into interest rate swap agreements and interest rate options such as caps and floors. Interest rate swaps involve the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. Interest rate caps protect against rising interest rates while
46  ~~U.S. BANCORP~~
interest rate floors protect against declining interest rates. In connection with its mortgage banking operations, the Company enters into forward commitments to sell mortgage loans related to fixed-rate mortgage loans held for sale and fixed-rate mortgage loan commitments. The Company also acts as a seller and buyer of interest rate contracts and foreign exchange rate contracts on behalf of customers. The Company minimizes its market and liquidity risks by taking similar offsetting positions.
    All interest rate derivatives that qualify for hedge accounting are recorded at fair value as other assets or liabilities on the balance sheet and are designated as either “fair value” or “cash flow” hedges. The Company performs an assessment, both at inception and quarterly thereafter, when required, to determine whether these derivatives are highly effective in offsetting changes in the value of the hedged items. Hedge ineffectiveness for both cash flow and fair value hedges is recorded in noninterest income. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income until income from the cash flows of the hedged items is realized. Customer-related interest rate swaps, foreign exchange rate contracts, and all other derivative contracts that do not qualify for hedge accounting are recorded at fair value and resulting gains or
~~Table 17~~   ~~Derivative Positions~~
~~Asset and Liability Management Positions~~

Weighted-
Maturing Average
Remaining
December 31, 2004 Fair Maturity
(Dollars in Millions) 2005 2006 2007 2008 2009 Thereafter Total Value In Years
Interest rate contracts

Receive fixed/pay floating swaps
Notional amount $ 2,750 $ 2,750 $ 3,520 $ 5,000 $ 1,750 $ 4,300 $ 20,070 $ 379 5.25
Weighted-average
Receive rate 3.75 % 3.67 % 3.76 % 3.78 % 4.62 % 6.29 % 4.37 %
Pay rate 2.28 2.36 2.39 2.31 2.39 2.74 2.42
Pay fixed/receive floating swaps
Notional amount $ 5,425 $ 2,950 $ 2,400 $ — $ — $ — $ 10,775 $ 56 1.42
Weighted-average
Receive rate 2.38 % 2.24 % 2.47 % — % — % — % 2.36 %
Pay rate 2.21 2.64 3.36 — — — 2.58
Futures and forwards $ 2,262 $ — $ — $ — $ — $ — $ 2,262 $ (4 ) .12
Options
Written 1,039 20 — — — — 1,059 $ 1 .15
Foreign exchange forward contracts
$ 314 $ — $ — $ — $ — $ — $ 314 $ (12 ) .04
Equity contracts
$ — $ — $ — $ — $ 53 $ — $ 53 $ 4 4.29
~~Customer-related Positions~~

Weighted-
Maturing Average
Remaining
December 31, 2004 Fair Maturity
(Dollars in Millions) 2005 2006 2007 2008 2009 Thereafter Total Value In Years
Interest rate contracts

Receive fixed/pay floating swaps
Notional amount $ 671 $ 1,069 $ 1,018 $ 1,171 $ 613 $ 2,166 $ 6,708 $ 76 4.67
Pay fixed/receive floating swaps
Notional amount 671 1,067 1,006 1,159 613 2,166 6,682 (40 ) 4.67
Options
Purchased 91 242 362 157 72 175 1,099 7 3.00
Written 91 242 362 157 72 175 1,099 (7 ) 3.00
Risk participation agreements
Purchased 27 5 32 9 21 43 137 — 7.13
Written 16 22 — 25 17 4 84 — 2.93
Foreign exchange rate contracts

Swaps and forwards
Buy $ 1,957 $ 47 $ 34 $ 7 $ 2 $ — $ 2,047 $ 80 .31
Sell 1,917 54 35 8 1 — 2,015 (76 ) .33
Options
Purchased 77 — — — — — 77 1 .59
Written 77 — — — — — 77 (1 ) .59
~~U.S. BANCORP~~  47
losses are recorded in trading account gains or losses or mortgage banking revenue.
Sensitivity of Net Interest Income and Rate Sensitive Income:

December 31, 2005 December 31, 2004
Down 50 Up 50 Down 300 Up 300 Down 50 Up 50 Down 300 Up 300
Immediate Immediate Gradual Gradual Immediate Immediate Gradual Gradual
Net interest income .66 % (.73 )% (.30 )% (2.58 )% (.49 )% .04 % *% (.19 )%
Rate sensitive income .73 % (.89 )% (.21 )% (3.03 )% (.40 )% (.13 )% *% (.69 )%
* Due to the level of interest rates at December 31, 2004, a downward 300 basis point scenario could not be computed.
U.S. BANCORP  45
    By their nature, derivative instruments are subject to market risk. The Company does not utilize derivative instruments for speculative purposes. Of the Company’s ~~$34.5~~$30.2 billion of total notional amount of asset and liability management derivative positions at December 31, ~~2004, $32.1~~2005, $27.4 billion was designated as either fair value or cash flow ~~hedges.~~hedges, or net investment hedges of foreign operations. The cash flow hedge derivative positions are interest rate swaps that hedge the forecasted cash flows from the underlying variable-rate LIBOR loans and floating-rate debt. The fair value hedges are primarily interest rate ~~contracts~~swaps that hedge the change in fair value related to interest rate changes of underlying fixed-rate debt and subordinated obligations.
    In addition, the Company uses forward commitments to sell residential mortgage loans to hedge its interest rate risk related to residential mortgage loans held for sale. The Company commits to sell the loans at specified prices in a future period, typically within 90 days. The Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market. Related to its mortgage banking
Table 18   Derivative Positions
Asset and Liability Management Positions

Weighted-
Maturing Average
Remaining
December 31, 2005 Fair Maturity
(Dollars in Millions) 2006 2007 2008 2009 2010 Thereafter Total Value In Years

Interest rate contracts

Receive fixed/pay floating swaps
Notional amount $ 800 $ 3,970 $ 3,750 $ 1,750 $ 500 $ 5,600 $ 16,370 $ (82 ) 7.79
Weighted-average
Receive rate 3.82 % 4.22 % 3.98 % 4.62 % 4.56 % 6.15 % 4.86 %
Pay rate 4.36 4.34 4.32 4.41 4.46 4.77 4.49
Pay fixed/receive floating swaps
Notional amount $ 4,450 $ 3,600 $ 1,000 $ — $ — $ 113 $ 9,163 $ 139 1.33
Weighted-average
Receive rate 4.32 % 4.29 % 4.37 % — % — % 4.46 % 4.32 %
Pay rate 2.95 3.42 3.75 — — 4.91 3.24
Futures and forwards
Buy $ 104 $ — $ — $ — $ — $ — $ 104 $ — .07
Sell 2,669 — — — — — 2,669 (15 ) .09
Options
Written $ 1,086 $ — $ — $ — $ — $ — $ 1,086 $ 3 .08

Foreign exchange contracts

Cross-currency swaps
Notional amount $ — $ — $ — $ — $ — $ 387 $ 387 $ 11 9.61
Weighted average
Receive rate — % — % — % — % — % 3.80 % 3.80 %
Pay rate — — — — — 4.46 4.46
Forwards $ 404 $ — $ — $ — $ — $ — $ 404 $ 7 .05
Equity contracts
$ — $ — $ — $ 42 $ — $ — $ 42 $ 3 3.29
Customer-related Positions

Weighted-
Maturing Average
Remaining
December 31, 2005 Fair Maturity
(Dollars in Millions) 2006 2007 2008 2009 2010 Thereafter Total Value In Years
Interest rate contracts

Receive fixed/pay floating swaps
Notional amount $ 1,060 $ 1,184 $ 1,653 $ 959 $ 1,410 $ 3,487 $ 9,753 $ (69 ) 5.25
Pay fixed/receive floating swaps
Notional amount 1,055 1,163 1,633 960 1,403 3,493 9,707 121 5.25
Options
Purchased 239 642 191 165 179 37 1,453 6 2.26
Written 239 642 191 165 179 37 1,453 (5 ) 2.26
Risk participation agreements
Purchased 5 35 3 21 6 73 143 — 8.02
Written 22 3 25 17 43 59 169 — 4.64

Foreign exchange rate contracts

Forwards, spots and swaps
Buy $ 1,810 $ 111 $ 45 $ 39 $ 37 $ — $ 2,042 $ 77 .43
Sell 1,778 118 46 39 37 — 2,018 (73 ) .46
Options
Purchased 56 — — — — — 56 1 .24
Written 56 — — — — — 56 (1 ) .24
46  U.S. BANCORP
operations, the Company held $1.1 billion of forward commitments to sell mortgage loans and ~~$1.0~~$1.1 billion of unfunded mortgage loan commitments that were derivatives in accordance with the provisions of the Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedge Activities.” The unfunded mortgage loan commitments are reported at fair value as options in Table ~~17.~~18.
    Derivative instruments are also subject to credit risk associated with counterparties to the derivative contracts. Credit risk associated with derivatives is measured based on the replacement cost should the counterparties with contracts in a gain position to the Company fail to perform under the terms of the contract. The Company manages this risk through diversification of its derivative positions among various counterparties, requiring collateral agreements with credit-rating thresholds, entering into master netting agreements in certain cases and entering into interest rate swap risk participation agreements. These agreements are credit derivatives that transfer the credit risk related to interest rate swaps from the Company to an unaffiliated third-party. The Company also provides credit protection to third-parties with risk participation agreements, for a fee, as part of a loan syndication transaction.
    At December 31, ~~2004,~~2005, the Company had ~~$113.4~~$10 million in accumulated other comprehensive income related to realized and unrealized ~~gains~~losses on derivatives classified as cash flow hedges. The unrealized ~~gains~~losses will be reflected in earnings when the related cash flows or hedged transactions occur and will offset the related performance of the hedged items. The estimated amount of gain to be reclassified from accumulated other comprehensive income into earnings during the next 12 months is ~~$65.8~~$26 million.
    Gains or losses on customer-related derivative positions were not material in ~~2004.~~2005. The change in fair value of forward commitments attributed to hedge ineffectiveness recorded in noninterest income was a decrease of $4 million in 2005, compared with an increase of ~~$.7~~$1 million in 2004. The change in the fair value of all other asset and liability management derivative positions attributed to hedge ineffectiveness was ~~not material~~a decrease of $2 million in ~~2004.~~2005.
    ~~Beginning in the second quarter of 2004, the~~The Company ~~entered~~may enter into derivatives to protect its net investment in certain foreign operations. The Company uses forward commitments to sell specified amounts of certain foreign currencies to hedge its capital volatility risk associated with fluctuations in foreign currency exchange rates. The net amount of gains or losses included in the cumulative translation adjustment for ~~2004~~2005 was not material.
    Table 1718 summarizes information on the Company’s derivative positions at December 31, ~~2004.~~2005. Refer to Notes 1 and 2221 of the Notes to Consolidated Financial Statements for significant accounting policies and additional information regarding the Company’s use of derivatives.
Market Risk ManagementIn addition to interest rate risk, the Company is exposed to other forms of market risk as a consequence of conducting normal trading activities. Business activities that contribute to market risk include, among other things, proprietary trading and foreign exchange positions. Value at Risk (“VaR”) is a key measure of market risk for the Company. Theoretically, VaR represents the maximum amount that the Company has placed at risk of loss, with a ninety-ninth percentile degree of confidence, to adverse market movements in the course of its risk taking activities.
    VaR modeling of trading activities is subject to certain limitations. Additionally, it should be recognized that there are assumptions and estimates associated with VaR modeling, and actual results could differ from those assumptions and estimates. The Company mitigates these uncertainties through regular monitoring of trading activities by management and other risk management practices, including stop-loss and position limits related to its trading activities. Stress-test models are used to provide management with perspectives on market events that VaR models do not capture.
    The Company establishes market risk limits, subject to approval by the Company’s Board of Directors. The Company’s VaR limit was $20 million at December 31, ~~2004~~2005 and ~~$40 million at December 31, 2003.~~2004. The market valuation risk inherent in its customer-based derivative trading, mortgage banking pipeline and foreign exchange, as estimated by the VaR analysis, was ~~$1.8 million at~~
48  ~~U.S. BANCORP~~
~~Table 18~~   ~~Debt Ratings~~
~~Standard &~~
~~Moody’s~~ ~~Poor’s~~ ~~Fitch~~
~~U.S. Bancorp~~
~~Short-term borrowings~~ ~~F1+~~
~~Senior debt and medium-term notes~~ ~~Aa2~~ A+ ~~AA-~~
~~Subordinated debt~~ ~~Aa3~~ A A+
~~Preferred stock~~ A1 A- A+
~~Commercial paper~~ ~~P-1~~ ~~A-1~~ ~~F1+~~
~~U.S. Bank National Association~~
~~Short-term time deposits~~ ~~P-1~~ ~~A-1+~~ ~~F1+~~
~~Long-term time deposits~~ ~~Aa1~~ ~~AA-~~ AA
~~Bank notes~~ ~~Aa1/P-1~~ ~~AA-/A-1+~~ ~~AA-/F1+~~
~~Subordinated debt~~ ~~Aa2~~ A+ A+
~~Commercial paper~~ ~~P-1~~ ~~A-1+~~ ~~F1+~~
~~December 31, 2004, and $1.5~~$1 million at December 31, ~~2003.~~2005, and $2 million at December 31, 2004.
Liquidity Risk ManagementALPC establishes policies, as well as analyzes and manages liquidity, to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. The Company’s performance in these areas has enabled it to develop a large and reliable base of core funding within its market areas and in domestic and global capital markets. Liquidity management is viewed from long-term and short-term perspectives, as well as from an asset and liability perspective. Management monitors liquidity through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk.
    The Company maintains strategic liquidity and contingency plans that are subject to the availability of asset liquidity in the balance sheet. Monthly, ALPC reviews the
U.S. BANCORP  47
Company’s ability to meet funding requirements due to adverse business events. These funding needs are then matched with specific asset-based sources to ensure sufficient funds are available. Also, strategic liquidity policies require diversification of wholesale funding sources to avoid concentrations in any one market source. Subsidiary banks are members of various Federal Home Loan Banks (“FHLB”) that provide a source of funding through FHLB advances. The Company maintains a Grand Cayman branch for issuing eurodollar time deposits. The Company also issues commercial paper through its Canadian branch. In addition, the Company establishes relationships with dealers to issue national market retail and institutional savings certificates and short- and medium-term bank notes. The Company’s subsidiary banks also have significant correspondent banking networks and corporate accounts. Accordingly, the Company has access to national fed funds, funding through repurchase agreements and sources of more stable, regionally-based certificates of deposit and commercial paper.
    The Company’s ability to raise negotiated funding at competitive prices is influenced by rating agencies’ views of the Company’s credit quality, liquidity, capital and earnings. On ~~September~~January 27, ~~2004, Fitch Ratings~~2006, Standard & Poor’s Rating Services upgraded the Company’s ~~senior long-term debt rating~~credit ratings to ~~“AA-” and raised the Company’s short-term debt rating to “F1+”~~AA-/A-1+. ~~The long-term ratings of U.S. Bank National Association were upgraded to “AA” from “AA-”. On January 18, 2005, Moody’s Investors Service~~Standard & Poor’s also upgraded the Company’s ~~senior~~primary banking subsidiaries to an AA long-term debt ~~rating to “Aa2” and U.S. Bank National Association’s long-term debt and deposit ratings to “Aa1”.~~rating. At January ~~18, 2005,~~27, 2006, the credit ratings outlook for the Company was considered “Stable” by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. The debt ratings noted in Table ~~18, updated~~19, upgraded for the ~~Moody’s~~Standard & Poor’s January of ~~2005~~2006 upgrade, reflect the rating agencies’ recognition of the ~~strong, consistent financial~~Company’s sector-leading core earnings performance ~~of the Company~~ and ~~the quality of its balance sheet.~~lower credit risk profile.
    The parent company’s routine funding requirements consist primarily of operating expenses, dividends to shareholders, debt service, repurchases of common stock and funds used for acquisitions. The parent company obtains funding to meet its obligations from dividends collected from its subsidiaries and the issuance of debt securities. ~~On April 1, 2003, USB Capital II, a subsidiary of U.S. Bancorp, redeemed 100 percent, or $350 million, of its 7.20 percent Trust Preferred Securities.~~
    At December 31, ~~2004,~~2005, parent company long-term debt outstanding was ~~$6.9~~$10.9 billion, compared with ~~$7.9~~$6.9 billion at December 31, ~~2003.~~2004. The ~~change in~~$4.0 billion increase was primarily due to issuances of convertible senior debentures of $4.5 billion, medium-term notes of $.5 billion and junior subordinated debentures of $1.0 billion, offset by long-term debt maturities and repayments during ~~2004 was driven by medium-term note maturities of $.8 billion and fixed-rate subordinated note prepayments of $.1 billion.~~2005. Total parent company debt scheduled to mature
~~U.S. BANCORP~~  49
in ~~2005~~2006 is ~~$1.3 billion.~~$626 million. These debt obligations may be met through medium-term note and capital security issuances and dividends from subsidiaries, as well as from parent company cash and cash equivalents.
    Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. The amount of dividends available to the parent company from its banking subsidiaries after meeting the regulatory capital requirements for well-capitalized banks was approximately ~~$1.2~~$1.0 billion at December 31, ~~2004.~~2005. For further information, see Note 2524 of the Notes to Consolidated Financial Statements.
    Refer to Table 1920 for further information on significant contractual obligations at December 31, ~~2004.~~2005.
Off-Balance Sheet ArrangementsOff-balance sheet arrangements include any contractual arrangement to which an unconsolidated entity is a party, under which the Company has an obligation to provide credit or liquidity enhancements or market risk support. Off-balance sheet arrangements include certain defined guarantees, asset securitization trusts and conduits. Off-balance sheet arrangements also include any obligation under a variable interest held by an unconsolidated entity that provides financing, liquidity, credit enhancement or market risk support.
    In the ordinary course of business, the Company enters into an array of commitments to extend credit, letters of credit ~~lease commitments~~ and various forms of guarantees that may be considered off-balance sheet arrangements. The nature and
Table 19   DEBT RATINGS
Standard &
Moody’s Poor’s Fitch
U.S. Bancorp
Short-term borrowings F1+
Senior debt and medium-term notes Aa2 AA- AA-
Subordinated debt Aa3 A+ A+
Preferred stock A1 A A+
Commercial paper P-1 A-1+ F1+
U.S. Bank National Association
Short-term time deposits P-1 A-1+ F1+
Long-term time deposits Aa1 AA AA
Bank notes Aa1/P-1 AA/A-1+ AA-/F1+
Subordinated debt Aa2 AA- A+
Commercial paper P-1 A-1+ F1+
48  U.S. BANCORP
extent of these arrangements are provided in Note 2423 of the Notes to Consolidated Financial Statements.
    Asset ~~securitization~~securitizations and conduits represent a source of funding for the Company through off-balance sheet structures. Credit, liquidity, operational and legal structural risks exist due to the nature and complexity of asset securitizations and other off-balance sheet structures. ALPC regularly monitors the performance of each off-balance sheet structure in an effort to minimize these risks and ensure compliance with the requirements of the structures. The Company utilizes its credit risk management systems to evaluate the credit quality of underlying assets and regularly forecasts cash flows to evaluate any potential impairment of retained interests. Also, regulatory guidelines require consideration of asset securitizations in the determination of risk-based capital ratios. The Company does not rely significantly on off-balance sheet arrangements for liquidity or capital resources.
    The Company sponsors an off-balance sheet conduit, a qualified special purpose entity (“QSPE”), to which it transferred high-grade investment securities, funded by the issuance of commercial paper. Because QSPE’s are exempt from consolidation under the provisions of Financial Accounting Standards Board Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”), the Company does not consolidate the conduit structure in its financial statements. The conduit held assets of $3.8 billion at December 31, 2005, and $5.7 billion at December 31, ~~2004, and $7.3 billion at December 31, 2003.~~2004. These investment securities include primarily (i) private label asset-backed securities, which are insurance “wrapped” by AAA/Aaa-rated ~~monoline~~mono-line insurance companies and (ii) government agency mortgage-backed securities and collateralized mortgage obligations. The conduit had commercial paper liabilities of $3.8 billion at December 31, 2005, and $5.7 billion at December 31, ~~2004, and $7.3 billion at December 31, 2003.~~2004. The Company provides a liquidity facility to the conduit. Utilization of the liquidity facility would be triggered if the conduit is unable to, or does not, issue commercial paper to fund its assets. A liability for the estimate of the potential risk of loss the Company has as the liquidity facility provider is recorded on the balance sheet in other liabilities. The liability is adjusted downward over time as the underlying assets pay down with the offset recognized as other noninterest income. The liability for the liquidity facility was ~~$32.4~~$20 million and ~~$47.3~~$32 million at December 31, ~~2004~~2005 and ~~2003,~~2004, respectively. In addition, the Company recorded at fair value its retained residual interest in the investment securities conduit of ~~$56.8~~$28 million and ~~$89.5~~$57 million at December 31, ~~2004~~2005 and ~~2003, respectively.~~
    The Company also has an asset-backed securitization to fund an unsecured small business credit product. The unsecured small business credit securitization trust held assets of $375.3 million at December 31, 2004, of which the Company retained $85.0 million of subordinated securities and a residual interest-only strip of $36.1 million. This compared with $497.5 million in assets at December 31, 2003, of which the Company retained $112.4 million of subordinated securities and a residual
~~Table 19~~   ~~Contractual Obligations~~

Payments Due By Period
Over One Over Three
One Year Through Through Over Five
(Dollars in Millions) or Less Three Years Five Years Years Total
Contractual Obligations

Long-term debt (a) $ 11,932 $ 12,128 $ 3,239 $ 7,440 $ 34,739
Capital leases 8 14 12 33 67
Operating leases 198 351 273 596 1,418
Purchase obligations 146 125 28 — 299
Benefit obligations (b) 43 85 89 223 440
~~(a)~~ In the banking industry, interest-bearing obligations are principally utilized to fund interest-bearing assets. As such, interest charges on related contractual obligations were excluded from reported amounts as the potential cash outflows would have corresponding cash inflows from interest-bearing assets.
~~(b)~~ ~~Amounts only include obligations related to the unfunded non-qualified pension plan and post-retirement medical plans.~~
50  ~~U.S. BANCORP~~
interest-only strip of $34.4 million. The securitization trust issued asset-backed variable funding notes in various tranches. The Company provides credit enhancement in the form of subordinated securities and reserve accounts. The Company’s risk, primarily from losses in the underlying assets, was considered in determining the fair value of the Company’s retained interests in this securitization. The Company recognized income from subordinated securities, an interest-only strip and servicing fees from this securitization of $33.2 million during 2004 and $29.8 million during 2003. The unsecured small business credit securitization held average assets of $438.9 million and $571.4 million in 2004 and 2003, respectively.
Capital ManagementThe Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. The Company has targeted returning 80 percent of earnings to our shareholders through a combination of dividends and share repurchases. In keeping with this target, the Company returned ~~109~~90 percent of earnings in ~~2004.~~2005. The Company continually assesses its business risks and capital position. The Company also manages its capital to exceed regulatory capital requirements for well-capitalized bank holding companies. To achieve these capital goals, the Company employs a variety of capital management tools, including dividends, common share repurchases, and the issuance of subordinated debt and other capital instruments. Total shareholders’ equity was $20.1 billion at December 31, 2005, compared with $19.5 billion at December 31, ~~2004, compared with $19.2 billion at December 31, 2003.~~2004. The increase was the result of corporate earnings, offset by share repurchases and ~~option exercises, offset primarily~~dividends.

    On December 20, 2005, the Company increased its dividend rate per common share by ~~the payment of dividends and the repurchase of common stock.~~
10 percent, from $.30 per quarter to $.33 per quarter. On December 21, 2004, the Company increased its dividend rate per common share by 25.0 percent, from $.24 per quarter to $.30 per quarter. On December 16, 2003, the Company increased its dividend rate per common share by 17.1 percent, from $.205 per quarter to $.24 per quarter. On March 12, 2003, the Company increased its dividend rate per common share by 5.1 percent, from $.195 per quarter to $.205 per quarter.
    On December 18, 2001, the Board of Directors approved an authorization to repurchase 100 million shares of common stock through 2003. In 2003, the Company repurchased 7.0 million shares of common stock under the plan, which expired in 2003.    On December 16, 2003, the Board of Directors approved an authorization to repurchase 150 million shares of common stock over the following 24 months. ~~During 2003, the Company purchased 8.0 million shares under the December 2003 plan. The average price paid for the 15.0 million shares repurchased during 2003 was $27.84 per share.~~ In 2004, the Company repurchased ~~88.8~~89 million shares of common stock under the December 2003 plan. On December 21, 2004, the Board of Directors approved an authorization to repurchase 150 million shares of common stock during the
Table 20   CONTRACTUAL OBLIGATIONS

Payments Due By Period
Over One Over Three
One Year Through Through Over Five
(Dollars in Millions) or Less Three Years Five Years Years Total
Contractual Obligations

Long-term debt (a) $ 7,690 $ 12,874 $ 3,499 $ 13,006 $ 37,069
Capital leases 5 7 6 12 30
Operating leases 171 299 227 461 1,158
Purchase obligations 135 136 19 — 290
Benefit obligations (b) 37 78 78 193 386

Total $ 8,038 $ 13,394 $ 3,829 $ 13,672 $ 38,933
(a) In the banking industry, interest-bearing obligations are principally utilized to fund interest-bearing assets. As such, interest charges on related contractual obligations were excluded from reported amounts as the potential cash outflows would have corresponding cash inflows from interest-bearing assets.
(b) Amounts only include obligations related to the unfunded non-qualified pension plan and post-retirement medical plans.
U.S. BANCORP  49
next 24 months. This new authorization ~~replaces~~replaced the December 16, 2003, authorization. InDuring 2004, the Company purchased ~~5.0~~5 million shares of common stock under the plan. The average price paid for the ~~93.8~~94 million shares repurchased during 2004 was $28.34 per share. In 2005, the Company purchased 62 million shares under the 2004 plan. The average price paid for the shares repurchased in 2005 was $29.37 per share. For a complete analysis of activities impacting shareholders’
~~Table 20~~   ~~Regulatory Capital Ratios~~

At December 31 (Dollars in Millions) 2004 2003
U.S. Bancorp

Tangible common equity $ 11,950 $ 11,858
As a percent of tangible assets 6.4 % 6.5 %
Tier 1 capital $ 14,720 $ 14,623
As a percent of risk-weighted assets 8.6 % 9.1 %
As a percent of adjusted quarterly average assets (leverage ratio) 7.9 % 8.0 %
Total risk-based capital $ 22,352 $ 21,710
As a percent of risk-weighted assets 13.1 % 13.6 %
Bank Subsidiaries

U.S. Bank National Association

Tier 1 capital 6.5 % 6.6 %
Total risk-based capital 10.9 10.8
Leverage 5.9 6.3

U.S. Bank National Association ND

Tier 1 capital 12.7 % 13.1 %
Total risk-based capital 17.2 18.0
Leverage 10.8 11.0
Bank Regulatory Capital Requirements Minimum
Well-
Capitalized

Tier 1 capital 4.0 % 6.0 %
Total risk-based capital 8.0 10.0
Leverage 4.0 5.0
~~U.S. BANCORP~~  51
equity and capital management programs, refer to Note 1716 of the Notes to Consolidated Financial Statements.
    The following table provides a detailed analysis of all shares repurchased under this authorization during the fourth quarter of ~~2004:~~2005:

Number of Average Remaining Shares
Shares Price Paid Available to be
Time Period Purchased per Share Purchased
October (a) 4,316,098 $ 28.74 63,615,584
November (a) 6,044,285 29.74 57,571,299
December (b) 9,345,786 30.53 144,959,788

Total 19,706,169 $ 29.90 144,959,788

Number of Average Remaining Shares
Shares Price Paid Available to be
Time Period Purchased (a) Per Share Purchased
October 2,188,324 $ 28.16 89,927,218
November 1,581,814 29.93 88,345,404
December 4,860,184 30.65 83,485,220

Total 8,630,322 $ 29.89 83,485,220
(a) All shares purchased during ~~October and November~~the fourth quarter of ~~2004 were purchased under the publicly announced December 16, 2003 repurchase authorization.~~
~~(b)~~ ~~For the month of December 5.0 million shares~~2005 were purchased under the publicly announced December 21, 2004, ~~authorization and 4.3 million shares were purchased under the publicly announced December 16, 2003~~repurchase authorization.
Banking regulators define minimum capital requirements for banks and financial services holding companies. These requirements are expressed in the form of a minimum Tier 1 capital ratio, total risk-based capital ratio, and Tier 1 leverage ratio. The minimum required level for these ratios is 4.0 percent, 8.0 percent, and 4.0 percent, respectively. The Company targets its regulatory capital levels, at both the bank and bank holding company level, to exceed the “well-capitalized” threshold for these ratios of 6.0 percent, 10.0 percent, and 5.0 percent, respectively. As of December 31, 2004, the Company’s Tier 1 capital, total risk-based capital, and Tier 1 leverage ratio were 8.6 percent, 13.1 percent, and 7.9 percent, respectively. These ratios compare to 9.1 percent, 13.6 percent, and 8.0 percent, respectively, as of December 31, 2003. All regulatory ratios, at both the bank and bank holding company level, continue to be in excess of stated “well-capitalized” requirements.
    The Company uses tangible common equity expressed as a percent of tangible common assets as an additional measure of its capital. At December 31, 2004, the Company’s tangible common equity ratio was 6.4 percent, compared with 6.5 percent at year-end 2003. Table 2021 provides a summary of capital ratios as of December 31, ~~2004~~2005 and ~~2003,~~2004, including Tier 1 and total risk-based capital ratios, as defined by the regulatory agencies. During 2006, the Company expects to target capital level ratios of 8.5 percent Tier 1 capital and 12.0 percent total risk-based capital on a consolidated basis.
FOURTH QUARTER SUMMARY
The Company reported net income of ~~$1,056.0~~$1,143 million for the fourth quarter of ~~2004,~~2005, or ~~$.56~~$.62 per diluted share, compared with ~~$977.0~~$1,056 million, or ~~$.50~~$.56 per diluted share, for the fourth quarter of ~~2003.~~2004. Return on average assets and return on average equity were 2.18 percent and 22.6 percent, respectively, for the fourth quarter of 2005, compared with returns of 2.16 percent and 21.2 percent, respectively, for the fourth quarter of ~~2004, compared with returns of 2.05 percent and 19.4 percent, respectively, for the fourth quarter of 2003.~~2004. The Company’s results for the fourth quarter of ~~2004~~2005 improved over the ~~fourth quarter~~same period of ~~2003,~~2004, as net income rose by $87 million (8.2 percent), primarily due to ~~lower credit costs and~~ growth in fee-based products and ~~services. Net income from continuing operations was $1,056.0 million, or $.56 per diluted share, compared with $970.3 million, or $.50 per diluted share for~~services and a debt restructuring charge taken in the fourth quarter of ~~2003, representing an 8.8 percent annual growth rate. Net income for~~2004, partially offset by a release of the loan loss allowance in the fourth quarter of ~~2003 also included after-tax merger~~2004. In addition, income tax expense was lower in the fourth quarter of 2005, driven by the timing of investments that generate incremental tax credits. In addition, the Company’s
Table 21   REGULATORY CAPITAL RATIOS

At December 31 (Dollars in Millions) 2005 2004
U.S. Bancorp

Tangible common equity $ 11,873 $ 11,950
As a percent of tangible assets 5.9 % 6.4 %
Tier 1 capital $ 15,145 $ 14,720
As a percent of risk-weighted assets 8.2 % 8.6 %
As a percent of adjusted quarterly average assets (leverage ratio) 7.6 % 7.9 %
Total risk-based capital $ 23,056 $ 22,352
As a percent of risk-weighted assets 12.5 % 13.1 %
Bank Subsidiaries

U.S. Bank National Association

Tier 1 capital 6.5 % 6.5 %
Total risk-based capital 10.7 10.9
Leverage 5.9 5.9

U.S. Bank National Association ND

Tier 1 capital 12.9 % 12.7 %
Total risk-based capital 17.0 17.2
Leverage 11.2 10.8

Bank Regulatory Capital Requirements

Minimum

Well-
Capitalized

Tier 1 capital 4.0 % 6.0 %
Total risk-based capital 8.0 10.0
Leverage 4.0 5.0
50  U.S. BANCORP
results reflect an $81 million favorable change in the valuation of MSRs, due to changing longer-term interest rates. These favorable changes were partially offset by higher securities losses of $28 million compared with the fourth quarter of 2004 and ~~restructuring-related items~~additional bankruptcy-related credit losses of ~~$5.0~~approximately $56 million ~~($7.6 million on a pre-tax basis).~~in the fourth quarter of 2005.
    Total net revenue, on a taxable-equivalent basis ~~was $3,235.0 million~~ for the fourth quarter of ~~2004, compared with $3,113.3~~2005, was $96 million ~~for~~(3.0 percent) higher than the fourth quarter of ~~2003, an~~2004, primarily reflecting a 7.7 percent increase ~~of $121.7 million (3.9 percent) from a year ago. The increase reflected~~in noninterest income due to 9.5 percent growth in fee-based revenue across the majority of ~~fee-based revenue~~fee categories ~~particularly~~and expansion in payment processing revenue. The expansion of the Company’s merchant acquiring business in Europe, including the purchase of the remaining 50 percent shareholder interest in EuroConex and the acquisition of several European merchant acquiring businesses, accounted for approximately $24.2 million of the favorable variance in total net revenue year-over-year. Fee-based revenue growthbusinesses. This was partially offset ~~somewhat~~ by the ~~unfavorable variance~~increase in securities ~~gains (losses)~~losses compared with the fourth quarter of ~~$20.4 million~~2004 driven by asset/liability risk management decisions given the flatter yield curve and ~~net interest income.~~continued growth in fixed-rate loan products.
    Fourth quarter net interest income, on a taxable-equivalent basis was ~~$1,799.8~~$1,785 million, compared with ~~$1,816.7~~$1,800 million in the fourth quarter of ~~2003. The $16.9 million (.9 percent) decrease in net interest income was driven by lower net interest margins, partially offset by growth in average earning assets.~~2004. Average earning assets increased by ~~$7.2~~$12.2 billion ~~(4.4~~(7.1 percent), primarily driven by ~~continued strong growth in retail loans, as well as increases~~a $5.3 billion (35.1 percent) increase in residential mortgages, ~~investment securities,~~a $3.6 billion (8.9 percent) increase in total commercial loans and ~~commercial real estate~~a $2.7 billion (6.3 percent) increase in total retail loans. The positive impact to net interest income from the growth in earning assets ~~contributed approximately $83.8 million of~~was offset by a lower net interest income relative to a year ago. The positive impact of earning asset growth was more than offset by an unfavorable rate variance, which reduced net interest income by $89.0 million, primarily driven by the higher cost of wholesale funding relative to the fourth quarter of 2003. Also contributing to the year-over-year decline was an $11.6 million reduction in loan fees, the result of fewer loan prepayments.margin. The net interest margin for the fourth quarter of ~~2004~~2005 was ~~4.20~~3.88 percent, compared with ~~4.42~~4.20 percent in the fourth quarter of ~~2003.~~2004. The ~~year-over-year~~ decline in net interest margin ~~primarily~~ reflected ~~competitive credit pricing, a preference to acquire lower yielding, adjustable rate securities, lower prepayment fees~~the current lending environment, asset/liability management decisions and the ~~higher cost~~impact of ~~wholesale funding relative to~~changes in the yield curve from a year ago. Since the fourth quarter of ~~2003~~2004, credit spreads have tightened by approximately 25 basis points across most lending products due to ~~rising~~competitive pricing, growth in noninterest-bearing corporate payment card balances and a change in mix due to growth in lower-spread, fixed-rate credit products. The net interest ~~rates.~~margin also declined due to funding incremental asset growth with higher cost wholesale funding, share repurchases and asset/liability decisions designed to minimize the Company’s rate sensitivity position, including an 18.3 percent reduction in the net receive fixed swap position since December 31, 2004. An increase in the margin benefit of net free funds and loan fees partially offset these factors.
    ~~Fourth~~Noninterest income in the fourth quarter ~~2004 noninterest income increased 10.7 percent from~~of 2005 was $1,546 million, compared with $1,435 million in the same period of ~~a year ago.~~2004. The $111 million (7.7 percent) increase was driven by favorable variances in the majority of fee income categories, ~~slightly~~partially offset by ~~an increase~~a $28 million reduction in
52  ~~U.S. BANCORP~~
~~losses on the sales of~~ net securities ~~of $20.4 million.~~gains (losses). Credit and debit card revenue and corporate payment products revenue were both higher in the fourth quarter of ~~2004~~2005 than the fourth quarter of ~~2003~~2004 by ~~$31.0~~$13 million ~~(20.2 percent)~~ and ~~$12.1~~$25 million, ~~(13.6 percent),~~or 7.1 percent and 24.8 percent, respectively. The growth in credit and debit card revenue ~~reflected increases in transaction volumes and other rate adjustments, partially offset~~was primarily driven by higher ~~customer loyalty reward expenses.~~transaction volumes. The corporate payment products revenue growth reflected growth in sales, card usage, ~~and~~ rate changes. ATM processing services revenue was higher by $2.7 million (6.7 percent), compared with 2003, due to increases in transaction volumes and sales. Merchant processing services revenue was higher in the fourth quarter of 2004 than the same quarter of 2003 by $34.9 million (23.9 percent), reflecting an increase in same store sales volume, new businesschanges and the recent expansion of the Company’s merchant acquiring business in Europe. The recent European acquisitions accounted for approximately $25.5 million of the total increase. Deposit service charges were higher year-over-year by $25.1 million (13.5 percent) due to account growth, revenue enhancement initiatives and transaction-related fees. Commercial products revenue increased by $9.2 million (9.3 percent) over the fourth quarter of 2003, primarily due to syndication fees and commercial leasing revenue. The favorable variance year-over-year in mortgage banking revenue of $4.1 million (4.5 percent) was primarily due to higher loan servicing revenue. The $1.2 million (3.3 percent) increase in investment product fees and commissions reflected higher sales activity in the Consumer Banking business line. Other income was higher year-over-year by $51.1 million (55.4 percent), primarily due to a favorable change in end-of-term lease residual gains (losses) and revenue from equity investments relative to the same quarter of 2003. Partially offsetting these positive variances were trust and investment management fees, which declined by $5.9 million (2.4 percent) in the fourth quarter of 2004 from the same period of 2003, and treasury management fees, which declined by $6.5 million (5.6 percent) year-over-year. Trust and investment management fees declined as gains from equity market valuations were more than offset by lower fees, partially due to a change in the mix of fund balances and customers’ migration from paying for services with fees to paying with compensating balances. The decrease in treasury management fees was primarily due to higher earnings credit on customers’ compensating balances and the impact of an industry-wide shift of payments from paper-based to electronic and card-based transactions.
    Total noninterest expense was $1,578.0 million in the fourth quarter of 2004, compared with $1,342.4 million in the fourth quarter of 2003. The increase in noninterest expense of $235.6 million (17.6 percent) was primarily driven by a $112.5 million charge related to the prepayment of the Company’s long-term debt and a $31.9 million unfavorable change in the valuation of mortgage servicing

Table 2122   ~~Fourth Quarter Summary~~FOURTH QUARTER SUMMARY

Three Months Ended Three Months Ended
December 31, December 31,
(In Millions, Except Per Share Data) (In Millions, Except Per Share Data) 2004 2003 (In Millions, Except Per Share Data) 2005 2004
Condensed Income Statement
Condensed Income Statement

Condensed Income Statement

Net interest income (taxable-equivalent basis) (a) Net interest income (taxable-equivalent basis) (a) $ 1,799.8 $ 1,816.7 Net interest income (taxable-equivalent basis) (a) $ 1,785 $ 1,800
Noninterest income Noninterest income 1,455.7 1,296.7 Noninterest income 1,595 1,456
Securities gains (losses), net Securities gains (losses), net (20.5 ) (.1 ) Securities gains (losses), net (49 ) (21 )

Total net revenue 3,235.0 3,113.3 Total net revenue 3,331 3,235
Noninterest expense Noninterest expense 1,578.0 1,342.4 Noninterest expense 1,464 1,579
Provision for credit losses Provision for credit losses 65.0 286.0 Provision for credit losses 205 64

Income from continuing operations before taxes 1,592.0 1,484.9 Income before taxes 1,662 1,592
Taxable-equivalent adjustment Taxable-equivalent adjustment 7.3 7.2 Taxable-equivalent adjustment 10 8
Applicable income taxes Applicable income taxes 528.7 507.4 Applicable income taxes 509 528

Income from continuing operations 1,056.0 970.3 Net income $ 1,143 $ 1,056
Discontinued operations (after-tax) — 6.7

Net income $ 1,056.0 $ 977.0

Per Common Share
Per Common Share

Per Common Share

Earnings per share Earnings per share $ .57 $ .51 Earnings per share $ .63 $ .57
Diluted earnings per share Diluted earnings per share .56 .50 Diluted earnings per share .62 .56
Dividends declared per share Dividends declared per share .30 .24 Dividends declared per share .33 .30
Average common shares outstanding Average common shares outstanding 1,865.0 1,927.3 Average common shares outstanding 1,816 1,865
Average diluted common shares outstanding Average diluted common shares outstanding 1,893.8 1,950.8 Average diluted common shares outstanding 1,841 1,894

Financial Ratios
Financial Ratios

Financial Ratios

Return on average assets Return on average assets 2.16 % 2.05 % Return on average assets 2.18 % 2.16 %
Return on average equity Return on average equity 21.2 19.4 Return on average equity 22.6 21.2
Net interest margin (taxable-equivalent basis) Net interest margin (taxable-equivalent basis) 4.20 4.42 Net interest margin (taxable-equivalent basis) 3.88 4.20
Efficiency ratio (b) Efficiency ratio (b) 48.5 43.1 Efficiency ratio (b) 43.3 48.5
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.

U.S. BANCORP  5351
~~rights, as well as operating expenses related~~acquisition of a small aviation card business. ATM processing services revenue was higher by $18 million (41.9 percent) in the fourth quarter of 2005 than the same quarter of the prior year, primarily due to the expansion of the ~~Company’s merchant acquiring~~ATM business in ~~Europe~~May of ~~$24.2 million.~~2005. Merchant processing services revenue was higher in the fourth quarter of 2005 than the same quarter of 2004 by $13 million (7.2 percent), reflecting an increase in sales volume and new business. Trust and investment management fees increased $17 million (7.1 percent) year-over-year, primarily due to improved equity market conditions and account growth. Deposit service charges increased year-over-year by $26 million (12.3 percent) due to account growth and transaction-related activities. Mortgage banking revenue was higher in the fourth quarter of 2005 than the same quarter of 2004 by $13 million (13.5 percent), due to higher production volumes and increased servicing income. Other income was higher by $27 million (18.9 percent), primarily due to higher income from equity and other investments relative to the same quarter of 2004. Partially offsetting these positive variances, year-over-year, were reductions in commercial products revenue and treasury management fees, which declined by $7 million (6.5 percent) and $6 million (5.5 percent), respectively. The decrease in commercial products revenue was due to reductions in loan-related fees and international product revenue. Treasury management fees declined due to higher earnings credits on customers’ compensating balances relative to a year ago, reflecting rising interest rates, partially offset by growth in treasury management-related activities.
    Noninterest expense was $1,464 million in the fourth quarter of 2005, a decrease of $115 million (7.3 percent) from the fourth quarter of 2004. The decrease in expense year-over-year included the $113 million charge related to the prepayment of the Company’s long-term debt in the prior year and the $81 million favorable change in the MSR impairment results from a flattening yield curve despite recent increases in short-term interest rates. The expense growth also reflected increases in compensation, employee benefits, technology and communications and postage, printing and supplies.valuation. Compensation expense was higher year-over-year by ~~$39.8~~$22 million ~~(7.4~~(3.8 percent), principally due to ~~increases in salaries and stock-based compensation. The increase in salaries reflected~~ business expansion, ofincluding in-store branches, the ~~expansion of the~~ Company’s ~~merchant acquiring business in Europe~~payment processing businesses and other growth initiatives. ~~Stock-based compensation was higher due to lower forfeitures relative to prior years.~~ Employee benefits increased year-over-year by ~~$16.7~~$3 million ~~(20.5~~(3.1 percent), primarily as a result of ~~a $13.5 million increase in pension expense and~~ higher payroll ~~taxes.~~taxes, 401(k) costs and other benefits. Marketing and business development expense increased $15 million (30.6 percent) due to the timing of payment processing business program initiatives in 2005. Technology and communications expense rose by ~~$9.4~~$13 million ~~(8.8~~(11.2 percent), reflecting depreciation of technology investments, ~~that~~network costs associated with expansion of the payment processing businesses and higher outside data processing expense principally associated with expanding a prepaid gift program. Other expense increased ~~software expense amortization and~~in the ~~write-off~~fourth quarter of ~~capitalized software being replaced. Postage, printing and supplies expense was higher~~2005 from the same quarter of 2004 by ~~$3.1~~$20 million ~~(5.0~~(10.5 percent), primarily due to ~~new consumer credit card accounts. The fourth quarter~~the $35 million incremental impact from amortization of ~~2004 included $112.5 million of charges related to the prepayment of a portion of the Company’s long-term debt. Other expense was higher~~investments in the fourth quarter than the same quarter of 2003 by $25.1 million (15.2 percent). The year-over-year increase reflected increases in loan-related expense, affordable housing operating costs and processing costs for payment services products, the result of increases in transaction volume year-over-year. Slightly offsetting these unfavorable variances was marketing and business development expense, which was lower by $1.9 million (3.7 percent), reflecting the timing of marketing campaigns.tax-advantaged projects.
    The provision for credit losses ~~was $65.0 million~~ for the fourth quarter of ~~2004 and $286.0~~2005 was $205 million, ~~for~~an increase of $141 million from the fourth quarter of ~~2003,~~2004. The increase in the provision for credit losses year-over-year reflected a ~~decrease~~$56 million provision in the fourth quarter of ~~$221.0~~2005 related to charge-offs related to new bankruptcy legislation and a reduction in the allowance for credit losses of $99 million ~~(77.3 percent).~~in the fourth quarter of 2004. Net charge-offs in the fourth quarter of ~~2004~~2005 were ~~$163.6~~$213 million, compared with net charge-offs of ~~$285.1~~$163 million during the fourth quarter of ~~2003.~~2004.
    The ~~decline~~provision for income taxes for the fourth quarter of 2005 declined to an effective tax rate of 30.8 percent from ~~a year ago~~an effective tax rate of 33.3 percent in the fourth quarter of 2004. The decline primarily reflected the ~~release~~Company’s decision to increase tax-advantaged investments and the timing of ~~the allowance for credit losses of $98.5 million, improving credit quality and changing economic conditions.~~making these investments. The Company expects its effective tax rate to approximate 33 percent in future periods.
LINE OF BUSINESS FINANCIAL REVIEW
Within the Company, financial performance is measured by major lines of business, which include Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance.
Basis ~~for Financial~~of PresentationBusiness line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. ~~Funds~~Goodwill and other intangible assets are assigned to the lines of business based on the mix of business of the acquired entity. Within the Company, capital levels are evaluated and managed centrally; however, capital is allocated to the operating segments to support evaluation of business performance. Capital allocations to the business lines are based on the amount of goodwill and other intangibles, the extent of off-balance sheet managed assets and lending commitments and the ratio of on-balance sheet assets relative to the total Company. Certain lines of business, such as Private Client, Trust and Asset Management, have no significant balance sheet components. For these business units, capital is allocated taking into consideration fiduciary and operational risk, capital levels of independent organizations operating similar businesses, and regulatory requirements. Interest income and expense is determined based on the assets and liabilities managed by
52  U.S. BANCORP

the business line. Because funding and asset liability management is a central function, funds transfer-pricing methodologies are utilized to allocate a cost of funds used or credit for funds provided to all business line assets and liabilities, respectively, using a matched funding concept. Also, the business unit is allocated the taxable-equivalent benefit of tax-exempt products. Noninterest income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct costs are accounted for within each segment’s financial results in a manner similar to the consolidated financial statements. Occupancy costs are allocated based on utilization of facilities by the lines of business. Operating losses are charged to the line of business when the loss event is realized in a manner similar to a loan charge-off. Noninterest expenses incurred by centrally managed operations or business lines that directly support another business line’s operations are charged to the applicable business line based on its utilization of those services primarily measured by the volume of customer ~~activities.~~activities, number of employees or other relevant factors. These allocated expenses are reported as net shared services expense within noninterest expense. Certain ~~corporate~~ activities that do not directly support the operations of the lines of business or for which the line of business is not considered accountable are not charged to the lines of business. ~~Goodwill~~The income or expenses associated with these corporate activities is reported within the Treasury and ~~other intangible assets are assigned to the lines~~Corporate Support line of ~~business based on the mix of business of the acquired entity.~~business. The provision for credit losses within the Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management and Payment Services lines of business is based on net charge-offs, while Treasury and Corporate Support reflects the residual component of the Company’s total consolidated provision for credit losses determined in accordance with accounting principles generally accepted in the United States. Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support. Merger and restructuring-related charges, discontinued operations and cumulative effects of changes in accounting principles are not identified by or allocated to lines of business. Within the Company, capital levels are evaluated and managed centrally; however, capital is allocated to the operating segments to support evaluation of business performance. Capital allocations to the business lines are based on the amount of goodwill and other intangibles, the extent of off-balance sheet managed assets and lending commitments and the ratio of on-balance sheet assets relative to the total Company. Certain lines of business, such as Trust and Asset Management, have no significant balance sheet components. For these business
54  ~~U.S. BANCORP~~
~~units, capital is allocated taking into consideration fiduciary and operational risk, capital levels of independent organizations operating similar businesses, and regulatory requirements.~~
    Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to our diverse customer base. During ~~2004,~~2005, certain organization and methodology changes were made and, accordingly, ~~2003~~2004 results were restated and presented on a comparable basis. Due to organizational and methodology changes, the Company’s basis of financial presentation differed in ~~2002.~~2003. The presentation of comparative business line results for ~~2002~~2003 is not practical and has not been provided.
Wholesale Bankingoffers lending, depository, treasury management and other financial services to middle market, large corporate and public sector clients. Wholesale Banking contributed ~~$1,079.6~~$1,063 million of the Company’s ~~operating earnings~~net income in ~~2004 and $850.3~~2005, an increase of $79 million ~~in 2003.~~(8.0 percent), compared with 2004. The increase ~~in operating earnings in 2004~~ was primarily driven by growth in total net revenue and reductions in total noninterest expense and the provision for credit ~~losses and total noninterest expense, partially offset by a decline in total net revenue, compared with 2003.~~losses.
    Total net revenue ~~decreased $65.2~~increased $71 million ~~(2.7~~(3.0 percent) in ~~2004,~~2005, compared with ~~2003.~~2004. Net interest income, on a taxable-equivalent basis, ~~decreased $55.9~~increased $63 million ~~(3.4~~(4.0 percent), in 2005, compared with ~~2003, as average loans decreased $2.0 billion (4.6 percent) in~~ 2004, ~~average non-interest bearing deposits decreased $2.1 billion (13.9 percent) and average savings products declined $1.2 billion, compared with 2003. The decline~~driven by growth in average ~~loans in 2004 was driven in part by soft commercial~~ loan ~~demand through mid 2004, in addition to the Company’s decisions to tighten credit availability to certain types~~balances of ~~lending products, industries~~approximately $2.6 billion and customers and reductions due to asset workout strategies. This decline was partially offset by the consolidation of the commercial loan conduit onto the Company’s balance sheet during the third quarter of 2003. Loanwider spreads declined from a year ago due in part to competitive pricing and the consolidation of the high credit quality, low margin loans from the commercial loan conduit during 2003, partially offset by higher interest recoveries in 2004 on ~~previously charged-off loans. While average noninterest-bearing~~ deposits ~~decreased 13.9 percent in 2004, compared with 2003, due to reductions in government and mortgage-related deposits, the net interest spread on total deposits increased~~ due to the funding benefit associated with the impact of rising interest rates, ~~over the second half of~~partially offset by reduced loan spreads due to competitive pricing. The increase in average loans was driven by stronger commercial loan demand beginning in late 2004 and continuing throughout 2005. Total deposits increased year-over-year, driven by growth in time deposits, partially offset by decreases in noninterest-bearing and interest checking deposits. Average savings products balances in 2005 were also lower than 2004. The ~~decline~~shift in ~~mortgage-related~~mix of deposits ~~reflected lower production of mortgage banking businesses while the decline in government deposits was primarily~~is partially due to ~~a decision~~the result of deposit pricing by the ~~Federal government~~Company for money market products in relation to ~~pay fees for treasury management services rather than maintain compensating balances. Noninterest income decreased $10.8~~other fixed-rate deposits offered. The $8 million ~~(1.4~~(1.0 percent) ~~in 2004 to $750.1 million, compared to 2003 noninterest income of $760.9 million. The decrease~~increase in noninterest income in 2005, compared with 2004, was ~~principally~~ due to ~~lower commercial products~~higher revenue ~~resulting~~ from ~~the consolidation of the~~equity investments, partially offset by reductions in treasury management fees and other commercial loan ~~conduit in 2003. This revenue reduction was~~fees. Treasury management fees declined due to higher earnings credits on customers’ compensating balances, partially offset by growth in treasury management-related ~~fees, international banking, syndication and customer derivative fees, equipment leasing and foreign exchange revenue. Treasury management-related fees were higher primarily~~activities.
    Noninterest expense decreased $7 million (.8 percent) in 2005 compared to 2004, due to ~~a change~~reductions in ~~the Federal government’s payment methodology for treasury management~~net shared services, ~~to fees for services rather than maintaining compensating balances in the third quarter of 2003,~~fraud losses and other loan expenses, partially offset by ~~higher interest earnings credit on customers’ compensating balances and the impact of~~ an ~~industry-wide shift of payments from paper-based to electronic and card-based transactions.~~
    ~~Noninterest expense was $643.5 million~~increase in 2004, compared with $686.1 million in 2003. The $42.6 million decrease (6.2 percent) was primarily driven by lower personnel-related costs, software expenses, loan workout expenses and net shared services expense. Loan workout expenses declined in 2004 as the credit quality of the loan portfolio has improved. Net shared services expenses were lower due to changes in transaction volumes related to customer accounts.personnel expenses.
    The provision for credit losses ~~was $22.6 million and $405.5~~decreased $46 million in ~~2004 and 2003, respectively, a decline of $382.9 million (94.4 percent).~~2005, compared with 2004. The favorable change in the provision for credit losses ~~for Wholesale Banking business is~~during 2005, was due to improving credit quality in the commercial loan portfolio resulting in net recoveries of $24 million in 2005, compared with net charge-offs ~~which declined to .05 percent~~ of ~~average loans~~$22 million in 2004 from .91 percent of average loans in 2003. The reduction in net charge-offs was attributable, in part, to increased levels of commercial loan recoveries, in addition to improvements in credit quality driven by initiatives taken by the Company during the past three years, including asset workout strategies and reductions in commitments to certain industries and customers. Commercial loan recoveries are anticipated to return to more normalized levels during future periods.2004. Nonperforming assets within Wholesale Banking were ~~$391.1~~$242 million at December 31, ~~2004,~~2005, compared with ~~$743.6~~$387 million at December 31, ~~2003.~~2004. Nonperforming assets as a percentage of end-of-period loans were ~~..90~~..54 percent at December 31, ~~2004 and 1.76~~2005, compared with ..91 percent at December 31, ~~2003.~~2004. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.

U.S. BANCORP  5553
Consumer Bankingdelivers products and services ~~to the broad consumer market and small businesses~~ through banking offices, ~~telemarketing,~~telephone servicing and sales, on-line services, direct mail and ~~automated teller machines (“ATMs”).~~ATMs. It encompasses community banking, metropolitan banking, in-store banking, small business banking, including lending guaranteed by the Small Business Administration, small-ticket leasing, consumer lending, mortgage banking, consumer finance, workplace banking, student banking, 24-hour banking and investment product and insurance sales. Consumer Banking contributed ~~$1,465.0~~$1,788 million of the Company’s ~~operating earnings for 2004 and $1,333.7~~net income in 2005, an increase of $315 million for 2003, a 9.8 percent increase over 2003. The increase in operating earnings in 2004 was driven by strong fee-based revenues, lower noninterest expense and reductions in the provision for credit losses,(21.4 percent), compared with ~~2003. Within Consumer Banking,~~2004. While the retail banking business grew ~~operating earnings by 23.1~~net income 23.6 percent ~~offset somewhat by a lower~~in 2005, the contribution ~~from~~of the mortgage banking business declined 1.6 percent, compared with ~~the same periods of 2003.~~2004.
    Total net revenue increased ~~$24.4~~$495 million ~~(.5~~(8.9 percent) in ~~2004,~~2005, compared with ~~2003, as growth in net interest income and noninterest income was partially offset by a reduction in securities gains (losses) associated with the mortgage banking business.~~2004. Net interest income, on a taxable-equivalent basis, increased ~~$57.8~~$332 million ~~(1.6 percent). Fee-based revenue increased $243.8 million (15.7 percent) and securities gains (losses) decreased $277.2 million.~~in 2005, compared with 2004. The year-over-year increase in net interest income was due to strong growth in average ~~loan balances, improved spreads on commercial and commercial real estate~~ loans ~~growth in noninterest-bearing and savings product deposit balances~~ and the funding benefit of ~~total~~ deposits due to rising interest rates. Partially offsetting these increases ~~was the decline in average mortgage loans held for sale,~~were reduced spreads on commercial and retail loans due to ~~the~~ competitive
~~Table 22~~   ~~Line of Business Financial Performance~~

Wholesale Consumer
Banking Banking
Percent Percent
Year Ended December 31 (Dollars in Millions) 2004 2003 Change 2004 2003 Change
Condensed Income Statement

Net interest income (taxable-equivalent basis) $ 1,611.6 $ 1,667.5 (3.4 )% $ 3,636.5 $ 3,578.7 1.6 %
Noninterest income 750.1 760.9 (1.4 ) 1,794.2 1,550.4 15.7
Securities gains (losses), net 1.5 — * (83.8 ) 193.4 *

Total net revenue 2,363.2 2,428.4 (2.7 ) 5,346.9 5,322.5 .5
Noninterest expense 625.2 666.6 (6.2 ) 2,364.4 2,361.9 .1
Other intangibles 18.3 19.5 (6.2 ) 304.4 432.7 (29.7 )

Total noninterest expense 643.5 686.1 (6.2 ) 2,668.8 2,794.6 (4.5 )

Operating earnings before provision and income taxes 1,719.7 1,742.3 (1.3 ) 2,678.1 2,527.9 5.9
Provision for credit losses 22.6 405.5 (94.4 ) 375.1 431.1 (13.0 )

Operating earnings before income taxes 1,697.1 1,336.8 27.0 2,303.0 2,096.8 9.8
Income taxes and taxable-equivalent adjustment 617.5 486.5 26.9 838.0 763.1 9.8

Operating earnings $ 1,079.6 $ 850.3 27.0 $ 1,465.0 $ 1,333.7 9.8

Merger and restructuring-related items (after-tax)
Discontinued operations (after-tax)
Net income

Average Balance Sheet Data

Commercial $ 26,674 $ 28,195 (5.4) % $ 7,774 $ 8,220 (5.4 )%
Commercial real estate 15,918 16,393 (2.9 ) 10,603 9,974 6.3
Residential mortgages 72 116 (37.9 ) 13,918 11,315 23.0
Retail 52 52 — 31,327 29,005 8.0

Total loans 42,716 44,756 (4.6 ) 63,622 58,514 8.7
Goodwill 1,225 1,227 (.2 ) 2,242 2,242 —
Other intangible assets 88 107 (17.8 ) 1,073 936 14.6
Assets 49,045 51,696 (5.1 ) 71,581 68,373 4.7
Noninterest-bearing deposits 12,722 14,775 (13.9 ) 13,977 13,756 1.6
Savings products 9,830 11,057 (11.1 ) 41,929 40,107 4.5
Time deposits 7,518 3,976 89.1 16,010 18,512 (13.5 )

Total deposits 30,070 29,808 .9 71,916 72,375 (.6 )
Shareholders’ equity 5,081 5,046 .7 6,225 5,878 5.9
* Not meaningful
56  ~~U.S. BANCORP~~
~~pricing for consumer loans and lower loan fees.~~ pricing. The increase in average loan balances ~~of 8.7 percent~~ reflected ~~retail loan growth of 8.0 percent and~~ growth in retail loans, residential mortgages, ~~of 23.0 percent in 2004, compared with 2003.~~commercial loans and commercial real estate loans. Included within the retail loan category are second-lien home equity loans, ~~that had a growth rate of 5.3 percent. The category of residential mortgages includes first-lien home equity~~installment loans and retail leases which had a growth rate of ~~19.1~~6.6 percent, 10.1 percent and 10.4 percent, respectively, in ~~2004,~~2005, compared with ~~2003. On a combined basis, first and second-lien home equity products increased $1.5 billion, or 9.2 percent, compared with a year ago. The year-over-year growth of~~the prior year. Residential mortgages, including traditional residential mortgages ~~was $1.7 billion, or 25.8~~and first-lien home equity loans, grew 26.2 percent in 2005, compared with 2004, reflecting the Company’s ~~decisions~~decision to retain adjustable-rate residential mortgages. ~~Commercial real estate loan balances increased 6.3 percent while commercial loans decreased 5.4 percent in 2004, compared with 2003.~~ The year-over-year decrease in average deposits ~~(.6 percent) was due to~~of ..7 percent reflected a reduction in ~~time deposit balances (13.5 percent),~~noninterest-bearing deposits and savings products, offset by growth in ~~noninterest-bearing deposits (1.6 percent),~~ interest checking ~~(11.3 percent), savings (4.5 percent)~~ and ~~money market account (.3 percent) balances.~~time deposits. The decline in ~~lower margin~~noninterest-bearing deposits in 2005, compared with the prior year, was primarily due to the Company’s decision to migrate $1.3 billion of certain high-value customer accounts to interest checking as an
Table 23   LINE OF BUSINESS FINANCIAL PERFORMANCE

Wholesale Consumer
Banking Banking
Percent Percent
Year Ended December 31 (Dollars in Millions) 2005 2004 Change 2005 2004 Change
Condensed Income Statement

Net interest income (taxable-equivalent basis) $ 1,645 $ 1,582 4.0 % $ 4,005 $ 3,673 9.0 %
Noninterest income 825 811 1.7 2,056 1,893 8.6
Securities gains (losses), net (4 ) 2 * — — —

Total net revenue 2,466 2,395 3.0 6,061 5,566 8.9
Noninterest expense 803 808 (.6 ) 2,687 2,626 2.3
Other intangibles 16 18 (11.1 ) 253 248 2.0

Total noninterest expense 819 826 (.8 ) 2,940 2,874 2.3

Income before provision and income taxes 1,647 1,569 5.0 3,121 2,692 15.9
Provision for credit losses (24 ) 22 * 311 376 (17.3 )

Income before income taxes 1,671 1,547 8.0 2,810 2,316 21.3
Income taxes and taxable-equivalent adjustment 608 563 8.0 1,022 843 21.2

Net income $ 1,063 $ 984 8.0 $ 1,788 $ 1,473 21.4

Average Balance Sheet Data

Commercial $ 28,711 $ 26,271 9.3 % $ 8,652 $ 8,171 5.9 %
Commercial real estate 15,697 15,538 1.0 11,549 10,973 5.2
Residential mortgages 63 67 (6.0 ) 17,569 13,921 26.2
Retail 34 49 (30.6 ) 34,106 31,325 8.9

Total loans 44,505 41,925 6.2 71,876 64,390 11.6
Goodwill 1,225 1,225 — 2,243 2,243 —
Other intangible assets 70 88 (20.5 ) 1,189 1,073 10.8
Assets 50,391 48,192 4.6 80,404 72,408 11.0
Noninterest-bearing deposits 12,189 12,473 (2.3 ) 13,232 14,213 (6.9 )
Interest checking 3,085 3,380 (8.7 ) 17,301 15,087 14.7
Savings products 5,290 6,078 (13.0 ) 24,255 27,162 (10.7 )
Time deposits 12,681 7,429 70.7 17,259 16,099 7.2

Total deposits 33,245 29,360 13.2 72,047 72,561 (.7 )
Shareholders’ equity 5,085 5,034 1.0 6,531 6,272 4.1
* Not meaningful
54  U.S. BANCORP
enhancement to its Silver Elite Checking product in late 2004. The year-over-year increase in interest checking balances reflected this migration of the Silver Elite product and strong branch-based new account deposit growth. On a combined basis, the Consumer Banking line of business generated growth of $1.2 billion (4.2 percent) in average checking account balances in 2005, compared with 2004, driven by 6.1 percent growth in net new checking accounts. Offsetting this growth was a reduction in average savings balances of $2.9 billion (10.7 percent) from 2004, principally related to money market accounts. The decline reflected deposit pricing by the Company for money market products in relation to other fixed-rate deposits offered. Average time ~~deposits primarily reflected~~deposit balances grew $1.2 billion (7.2 percent) in 2005, compared with the prior year, as a ~~shift in product mix towards savings~~portion of money market balances migrated to time deposit products.
    Fee-based noninterest income ~~was $1,794.2~~increased $163 million in ~~2004, $243.8 million (15.7 percent) higher~~2005, compared with ~~2003. The year-over-year growth in fee-based revenue was~~2004, driven by strong deposit service charges and mortgage banking revenue ~~commercial products revenue, investment products fees and commissions, lower end-of-term lease residual losses and a residual value insurance recovery,~~growth, partially offset by lower treasury management ~~revenue. Securities~~fees. Deposit service charges were higher due to new account growth and higher transaction-related service activities. The growth in mortgage banking revenue was due to strong loan production generating origination fees and gains ~~(losses) were $(83.8) million in 2004, a net decrease of $277.2 million~~ from ~~a year ago. The Company utilizes its investment portfolio as a balance sheet economic hedge against the valuation risk of the portfolio of mortgage~~production volumes and increased servicing ~~rights.~~income.

Private Client, Trust Payment Treasury and Consolidated
and Asset Management Services Corporate Support Company
Percent Percent Percent Percent
2004 2003 Change 2004 2003 Change 2004 2003 Change 2004 2003 Change
$ 361.0 $ 311.9 15.7 % $ 573.1 $ 605.1 (5.3) % $ 957.7 $ 1,054.3 (9.2) % $ 7,139.9 $ 7,217.5 (1.1) %
987.1 957.0 3.1 1,873.2 1,606.9 16.6 219.5 193.0 13.7 5,624.1 5,068.2 11.0
— — — — — — (22.6 ) 51.4 * (104.9 ) 244.8 *

1,348.1 1,268.9 6.2 2,446.3 2,212.0 10.6 1,154.6 1,298.7 (11.1 ) 12,659.1 12,530.5 1.0
585.0 585.3 (.1 ) 797.3 704.1 13.2 862.5 550.4 56.7 5,234.4 4,868.3 7.5
62.0 66.2 (6.3 ) 159.9 158.2 1.1 5.5 5.8 (5.2 ) 550.1 682.4 (19.4 )

647.0 651.5 (.7 ) 957.2 862.3 11.0 868.0 556.2 56.1 5,784.5 5,550.7 4.2

701.1 617.4 13.6 1,489.1 1,349.7 10.3 286.6 742.5 (61.4 ) 6,874.6 6,979.8 (1.5 )
10.2 6.5 56.9 362.6 412.7 (12.1 ) (100.9 ) (1.8 ) * 669.6 1,254.0 (46.6 )

690.9 610.9 13.1 1,126.5 937.0 20.2 387.5 744.3 (47.9 ) 6,205.0 5,725.8 8.4
251.4 222.3 13.1 410.0 341.0 20.2 (78.7 ) 172.4 * 2,038.2 1,985.3 2.7

$ 439.5 $ 388.6 13.1 $ 716.5 $ 596.0 20.2 $ 466.2 $ 571.9 (18.5 ) 4,166.8 3,740.5 11.4

— (30.4 )
— 22.5

$ 4,166.8 $ 3,732.6

$ 1,641 $ 1,804 (9.0 )% $ 3,068 $ 2,898 5.9 % $ 191 $ 209 (8.6 )% $ 39,348 $ 41,326 (4.8 )%
611 576 6.1 — — — 135 199 (32.2 ) 27,267 27,142 .5
322 252 27.8 — — — 10 13 (23.1 ) 14,322 11,696 22.5
2,224 1,990 11.8 7,548 7,103 6.3 53 48 10.4 41,204 38,198 7.9

4,798 4,622 3.8 10,616 10,001 6.1 389 469 (17.1 ) 122,141 118,362 3.2
818 740 10.5 1,868 1,814 3.0 — 305 * 6,153 6,328 (2.8 )
352 399 (11.8 ) 776 675 15.0 7 12 (41.7 ) 2,296 2,129 7.8
6,563 6,407 2.4 13,764 13,397 2.7 50,640 47,757 6.0 191,593 187,630 2.1
3,251 3,006 8.2 108 276 (60.9 ) (242 ) (98 ) * 29,816 31,715 (6.0 )
7,861 5,852 34.3 11 10 10.0 22 — * 59,653 57,026 4.6
591 474 24.7 — — — 2,634 4,850 (45.7 ) 26,753 27,812 (3.8 )

11,703 9,332 25.4 119 286 (58.4 ) 2,414 4,752 (49.2 ) 116,222 116,553 (.3 )
2,077 1,991 4.3 3,198 3,008 6.3 2,878 3,470 (17.1 ) 19,459 19,393 .3
~~U.S. BANCORP~~  57
    Noninterest expense ~~was $2,668.8~~increased $66 million (2.3 percent) in ~~2004,~~2005, compared with ~~$2,794.6 million for 2003, a decrease of $125.8 million (4.5 percent).~~the prior year. The ~~year-over-year decrease in noninterest expense~~increase was primarily attributable to ~~lower levels of MSR impairment, reductions in intangible amortization, depreciation and software expense and net shared services expense, partially offset by increases in~~ compensation and ~~occupancy costs related to new~~employee benefits expense, reflecting the impact of adding thirty-six in-store branch expansion along with higher amortization costs from growth in the mortgage servicing portfolio. MSR impairment was $56.8 million in 2004, compared with $208.7 million in 2003, a decrease of $151.9 million year-over-year. The change in MSR valuations was driven by declining interest rates and ~~refinancing activities in early 2004, partially offset by rising interest rates~~thirteen traditional branches during 2005 and ~~slower prepayment speeds in late 2004, compared with the declining interest rates and refinancing activities of 2003.~~production-based incentives.
    The provision for credit losses decreased ~~$56.0~~$65 million ~~(13.0 percent)~~ in ~~2004,~~2005, compared with ~~2003.~~2004. The improvement ~~in the provision for credit losses in 2004~~ was primarily attributable to ~~lower net charge-offs.~~strong credit quality during the year. As a percentage of average loans outstanding, net charge-offs declined to ~~..59~~.43 percent in ~~2004,~~2005, compared with ~~.74~~..58 percent in ~~2003.~~2004. The decline in net charge-offs included both the commercial ~~commercial real estate~~ and retail loan portfolios. The $44 million improvement in commercial ~~and commercial real estate~~ loan net charge-offs ~~within Consumer Banking of $19.7 million~~in 2005, compared with 2004, was broad-based across most industry and geographical regions. Retail loan net

Private Client, Trust Payment Treasury and Consolidated
and Asset Management Services Corporate Support Company
Percent Percent Percent Percent
2005 2004 Change 2005 2004 Change 2005 2004 Change 2005 2004 Change
$ 454 $ 363 25.1 % $ 575 $ 563 2.1 % $ 409 $ 959 (57.4 )% $ 7,088 $ 7,140 (.7 )%
1,040 1,001 3.9 2,185 1,885 15.9 45 34 32.4 6,151 5,624 9.4
— — — — — — (102 ) (107 ) 4.7 (106 ) (105 ) (1.0 )

1,494 1,364 9.5 2,760 2,448 12.7 352 886 (60.3 ) 13,133 12,659 3.7
668 673 (.7 ) 1,074 893 20.3 173 235 (26.4 ) 5,405 5,235 3.2
60 62 (3.2 ) 176 161 9.3 (47 ) 61 * 458 550 (16.7 )

728 735 (1.0 ) 1,250 1,054 18.6 126 296 (57.4 ) 5,863 5,785 1.3

766 629 21.8 1,510 1,394 8.3 226 590 (61.7 ) 7,270 6,874 5.8
5 10 (50.0 ) 386 364 6.0 (12 ) (103 ) (88.3 ) 666 669 (.4 )

761 619 22.9 1,124 1,030 9.1 238 693 (65.7 ) 6,604 6,205 6.4
277 225 23.1 409 374 9.4 (201 ) 33 * 2,115 2,038 3.8

$ 484 $ 394 22.8 $ 715 $ 656 9.0 $ 439 $ 660 (33.5 ) $ 4,489 $ 4,167 7.7

$ 1,594 $ 1,647 (3.2 )% $ 3,526 $ 3,068 14.9 % $ 158 $ 191 (17.3 )% $ 42,641 $ 39,348 8.4 %
632 619 2.1 — — — 86 137 (37.2 ) 27,964 27,267 2.6
398 324 22.8 — — — 6 10 (40.0 ) 18,036 14,322 25.9
2,334 2,229 4.7 7,941 7,549 5.2 49 52 (5.8 ) 44,464 41,204 7.9

4,958 4,819 2.9 11,467 10,617 8.0 299 390 (23.3 ) 133,105 122,141 9.0
846 818 3.4 2,030 1,867 8.7 — — — 6,344 6,153 3.1
310 352 (11.9 ) 960 776 23.7 4 7 (42.9 ) 2,533 2,296 10.3
6,719 6,587 2.0 15,278 13,765 11.0 50,406 50,641 (.5 ) 203,198 191,593 6.1
3,600 3,264 10.3 171 108 58.3 37 (242 ) * 29,229 29,816 (2.0 )
2,394 2,459 (2.6 ) — — — 5 7 (28.6 ) 22,785 20,933 8.8
5,554 5,454 1.8 16 11 45.5 18 15 20.0 35,133 38,720 (9.3 )
1,482 590 * 3 — * 2,429 2,635 (7.8 ) 33,854 26,753 26.5

13,030 11,767 10.7 190 119 59.7 2,489 2,415 3.1 121,001 116,222 4.1
2,120 2,077 2.1 3,587 3,198 12.2 2,630 2,878 (8.6 ) 19,953 19,459 2.5
U.S. BANCORP  55
charge-offs declined by ~~$40.3~~$12 million in 2005, compared to 2004, primarily resulting from ongoing collection efforts and risk management activities. Nonperforming assets within Consumer Banking were ~~$348.9~~$341 million at December 31, ~~2004, compared with $393.4~~2005, and $353 million at December 31, ~~2003.~~2004. Nonperforming assets as a percentage of end-of-period loans were ~~..56~~.47 percent at December 31, ~~2004~~2005, and ~~.69~~.56 percent at December 31, ~~2003.~~2004. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.
Private Client, Trust and Asset Managementprovides trust, private banking, financial advisory, investment management and mutual fund servicing through five businesses: Private Client Group, Corporate Trust, Asset Management, Institutional Trust and Custody and Fund ~~Services, LLC.~~Services. Private Client, Trust and Asset Management contributed ~~$439.5~~$484 million of the Company’s ~~operating earnings~~net income in ~~2004 and $388.6 million in 2003,~~2005, or an increase of ~~$50.9~~$90 million ~~(13.1~~(22.8 percent), compared with ~~2003.~~2004. The growth was primarily attributable to ~~higher total net~~strong revenue ~~and lower noninterest expense, partially offset by an increase~~growth in ~~the provision for credit losses.~~this business line.
    Total net revenue ~~was $1,348.1~~increased $130 million (9.5 percent) in ~~2004, an increase of 6.2 percent,~~2005, compared with ~~2003.~~2004. Net interest income, on a taxable-equivalent basis, increased ~~$49.1~~$91 million ~~(15.7~~(25.1 percent) in ~~2004,~~2005, compared with ~~2003. The increase in net interest income in 2004 was~~the prior year, due to 10.7 percent growth in ~~total~~ average deposits ~~of 25.4 percent attributable to growth in noninterest-bearing deposits, savings products~~ and ~~time deposits primarily within corporate trust and private banking,~~ the favorable impact of rising interest rates on the funding benefit of customer deposits. The increase in total deposits was attributable to growth in noninterest-bearing deposits and ~~higher average loans (3.8 percent), partially offset by a decline~~time deposits, principally in ~~loan spreads.~~Corporate Trust. Noninterest income increased ~~$30.1~~$39 million ~~(3.1~~(3.9 percent) in ~~2004,~~2005, compared with ~~2003. The increase in noninterest income was primarily attributable to improvement in~~2004, driven by improved equity ~~capital~~ market conditions and ~~related fees, partially offset by a change in customer payment methodology for certain corporate trust services clients from fees to compensating balances.~~account growth.
    Noninterest expense decreased ~~$4.5~~$7 million ~~(.7~~(1.0 percent) in ~~2004,~~2005, compared with ~~2003,~~2004, primarily ~~attributable~~due to reductions in ~~personnel-related costs, lower intangible amortization~~operating losses and net shared services, ~~expense~~ partially offset by higher ~~losses and outside data processing~~personnel-related costs.
    The provision for credit losses ~~increased $3.7~~decreased $5 million ~~(56.9 percent)~~ in ~~2004,~~2005, compared with ~~2003.~~2004. The ~~year-over-year increase in the provision for credit losses~~decrease was ~~primarily~~ due to ~~higher commercial loan net charge-offs~~a reduction in ~~2004 partially offset by lower retail loan~~ net charge-offs. Net charge-offs as a percentage of average loans outstanding were .10 percent in 2005, compared with .21 percent in ~~2004, compared with .14 percent in 2003.~~2004.
Payment Servicesincludes consumer and business credit cards, stored-value cards, debit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. Payment Services contributed ~~$716.5~~$715 million of the Company’s ~~operating earnings~~net income in ~~2004 and $596.0~~2005, or an increase of $59 million ~~in 2003, a 20.2 percent~~(9.0 percent), compared with 2004. The increase ~~over 2003. The increases were~~was due to growth in total net revenue, ~~driven by higher transaction volumes and reductions in the provision for credit losses,~~ partially offset by increases in total noninterest ~~expense.~~expense and the provision for loan losses.
    Total net revenue ~~was $2,446.3~~increased $312 million (12.7 percent) in ~~2004, a 10.6 percent~~2005, compared 2004. The 2005 increase in net interest income of $12 million, compared with ~~2003. Net interest income decreased 5.3 percent~~the prior year, was attributable to increases in ~~2004, compared with 2003, primarily due to higher corporate payment~~retail and commercial credit card balances ~~higher~~and customer late fees, partially offset by corporate card rebates ~~a reduction in customer late fees~~ and ~~a lower percentage of revolving credit card balances relative to a year ago. The~~the margin impact of ~~these factors was partially offset by total average consumer loan growth of 6.3 percent in 2004, compared with 2003.~~higher non-earning assets. Noninterest income increased ~~16.6 percent~~$300 million (15.9 percent) in ~~2004,~~2005, compared with ~~2003.~~2004. The increase in fee-based revenue ~~in 2004~~ was driven by strong growth in credit ~~card~~ and debit card revenue, ~~(16.0 percent),~~ corporate payment ~~product revenues (12.6 percent),~~products revenue, ATM processing services revenue
58  ~~U.S. BANCORP~~
~~(8.7 percent)~~ and merchant processing ~~revenue (20.1 percent). The $89.0 million growth in credit~~revenue. Credit and debit card revenue was muted somewhat by the impact of the settlement of the debit card antitrust litigation brought against VISA USA and MasterCard by Wal-Mart stores, Sears Roebuck and Co. and other retailers, which lowered interchange rates on signature debit transactions beginning in August 2003. The change in interchange rate, in additionincreased primarily due to higher customer ~~loyalty rewards expense, was more than offset by higher~~ transaction volumes and rate ~~changes.~~changes from a year ago. Corporate payment products revenue increased ~~$45.5 million~~primarily due to ~~increases~~growth in sales volume, card usage, rate changes and ~~pricing enhancements.~~the recent acquisition of a small aviation card business. ATM processing services revenue increased ~~$9.5 million~~primarily due to ~~transaction growth and new product sales.~~the expansion of the business through the acquisition of a small ATM processing company in the second quarter of 2005. Merchant processing revenue increased ~~$113.1 million~~ due to increases in merchant sales volume and ~~transaction processing volumes and the~~business expansion ~~of the merchant acquiring business~~ in Europe, which accounted for approximately $58.6 million of the revenue growth. Other revenue increased $8.1 million in 2004, compared with 2003, due to increases in insurance product revenue and EuroConex.European markets.
    Noninterest expense ~~was $957.2~~increased $196 million (18.6 percent) in ~~2004, an increase of $94.9 million (11.0 percent),~~2005, compared with ~~2003. The increase in noninterest expense was~~2004, primarily ~~attributable~~due to higher compensation and employee benefit costs for processing associated with increased credit and debit card transaction volumes, higher corporate payment products and merchant processing sales volumes, ~~in addition~~higher ATM processing services volumes due to the ATM business acquisition and higher merchant acquiring costs resulting from the expansion of the merchant acquiring business and increases in ~~Europe, which accounted for approximately $56.8 million of the increase in 2004.~~transaction volume year-over-year.
    The provision for credit losses ~~was $362.6~~increased $22 million in ~~2004, a decrease of $50.1 million (12.1 percent),~~2005, compared with ~~2003,~~2004, due to ~~lower~~higher net charge-offs. The unfavorable change in credit losses was primarily driven by additional charge-offs ~~of the business line.~~related to new bankruptcy legislation. As a percentage of average loans outstanding, net charge-offs were 3.37 percent in 2005, compared with 3.42 percent in 2004, compared with 4.13 percent of average loans in 2003. The favorable change in credit losses was due to improvements in ongoing collection efforts and risk management activities, as well as improvements in economic conditions from a year ago.2004.
Treasury and Corporate Supportincludes the Company’s investment portfolios, funding, capital management and asset securitization activities, interest rate risk management, the net effect of transfer pricing related to average balances and the residual aggregate of those expenses associated with ~~business~~corporate activities that are managed on a corporate basis, including enterprise-wide operations and administrative support functions. Operational expenses incurred by Treasury and Corporate Support on behalf of the other business lines are allocated back primarily based on customer transaction volume and account activities to the appropriate business unit and are identified as net shared services expense.consolidated basis. Treasury and Corporate Support recorded ~~operating earnings~~net income of ~~$466.2~~$439 million in ~~2004,~~2005, or a decrease of ~~18.5 percent,~~$221 million, compared with ~~2003.~~2004.
    Total net revenue ~~was $1,154.6~~decreased $534 million (60.3 percent) in ~~2004,~~2005, compared with ~~total net revenue of $1,298.7 million in 2003. The year-over-year decline of $144.1 million (11.1 percent) in total net revenue in~~ 2004, ~~was attributable~~primarily due to reductions in net interest income of $96.6 million (9.2 percent) and securities gains (losses) of $74.0 million, partially offset by increases in fee-based noninterest income of $26.5 million (13.7 percent). Thea decrease in net interest income. Net interest income was ~~primarily attributable to the Company’s~~$409 million, or 5.8 percent of consolidated net interest income, in 2005 compared with $959 million, or
56  U.S. BANCORP
13.4 percent of consolidated net interest income, in 2004. The decline of $550 million reflected asset/liability management decisions to ~~invest~~borrow more in ~~adjustable-rate securities and utilize higher-cost fixed-rate funding given~~ the ~~current rising~~capital markets, a higher interest rate ~~environment. It also reflects the residual effect of transfer pricing caused by changes in the mix of earning assets~~environment and the ~~yield curve from a year ago. The increase in fee-based noninterest income was primarily attributable to higher equity investment revenue. Net securities losses~~reduction of ~~$22.6 million in 2004 were principally related to asset/liability decisions, compared with~~ net ~~securities gains of $51.4 million in 2003.~~receive fixed swap positions as short-term rates have risen over the past eighteen months.
    Noninterest expense ~~was $868.0~~decreased $170 million (57.4 percent) in 2005, compared with 2004. The year-over-year decrease reflected a favorable change in the MSR valuation and lower debt prepayment charges, partially offset by higher personnel expenses. Noninterest expense in 2005 included MSR reparation of $53 million, compared with MSR impairment of $57 million in ~~2004,~~2004. The change in MSR valuations was driven by higher interest rates and declining prepayment speeds in 2005, compared with ~~$556.2~~2004. Debt prepayment charges were $54 million in ~~2003, a $311.8~~2005, compared with $155 million ~~increase (56.1 percent). The increase~~ in noninterest expense was principally driven by several factors. Stock-based compensation was higher by $33.8 million primarily due to lower employee stock-award forfeitures relative to a year ago. Pension expenses increased $35.5 million reflecting recognition of deferred actuarial (gains) losses resulting from lower asset returns in prior years. Debt prepayment costs of $154.8 million were incurred as a result of prepaying borrowings in connection with asset/liability management activities during 2004. Corporate insurance costs increased by $17.0 million from a year ago primarily due to premium increases by insurance carriers. Additionally, operating costs associated with incremental investments in affordable housing increased $20.4 million from a year ago. Finally, the residual in costs associated with centralized support functions that were not allocated to other business lines increased by $27.7 million.
    The provision for credit losses for this business unit represents the residual aggregate of the net credit losses allocated to the reportable business units and the Company’s recorded provision determined in accordance with accounting principles generally accepted in the United States. The provision for credit losses was a net recovery of ~~$100.9~~$12 million in ~~2004,~~2005, compared with ~~a net recovery of $1.8~~$103 million in 2003. The favorable variance is primarily due to the Company’s decision to reduce the allowance for credit losses by approximately $98.5 million in 2004, reflecting the continued improvement in credit quality and
~~U.S. BANCORP~~  59
~~economic conditions.~~2004. Refer to the “Corporate Risk Profile” section for further information on the provision for credit losses, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
    Income taxes are assessed to each line of business at a ~~standard~~managerial tax rate of 36.4 percent with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support. The $234 million favorable change in income tax expense reflected a consolidated effective tax rate of 31.7 percent in 2005, compared with 32.5 percent in 2004. The decrease in the effective tax rate from 2004 primarily reflected higher tax exempt income from investment securities and insurance products and incremental tax credits generated from investments in affordable housing and similar tax-advantaged projects.
ACCOUNTING CHANGES
Note 2 of the Notes to Consolidated Financial Statements discusses accounting standards recently issued but not yet required to be adopted and the expected impact of the changes in accounting standards. To the extent the adoption of new accounting standards affects the Company’s financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of the Management’s Discussion and Analysis and the Notes to Consolidated Financial Statements.
    On January 8, 2004, the Company elected to adopt the “fair value” method of accounting for stock-based compensation. The Company implemented this accounting change utilizing the “retroactive restatement method,” requiring all prior periods to be restated to recognize compensation expense for the estimated fair value of all employee stock awards including stock options granted, modified or settled in fiscal years beginning after December 15, 1994.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company’s financial statements. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third-parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under generally accepted accounting principles. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee.
    Significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements. Those policies considered to be critical accounting policies are described below.
Allowance for Credit LossesThe allowance for credit losses is established to provide for probable losses inherent in the Company’s credit portfolio. The methods utilized to estimate the allowance for credit losses, key assumptions and quantitative and qualitative information considered by management in determining the adequacy of the allowance for credit losses are discussed in the “Credit Risk Management” section.
    Management’s evaluation of the adequacy of the allowance for credit losses is often the most critical of accounting estimates for a banking institution. It is an inherently subjective process impacted by many factors as discussed throughout the Management’s Discussion and Analysis section of the Annual Report. Although risk management practices, methodologies and other tools are utilized to determine each element of the allowance, degrees of imprecision exist in these measurement tools due in part to subjective judgments involved and an inherent lagging of credit quality measurements relative to the stage of the business cycle. Even determining the stage of the business
U.S. BANCORP  57
cycle is highly subjective. As discussed in the “Analysis and Determination of Allowance for Credit Losses” section, management considers the effect of imprecision and many other factors in determining the allowance for credit losses by establishing an “allowance for other factors” that is not specifically allocated to a category of loans. If not considered, inherent losses in the portfolio related to imprecision and other subjective factors could have a dramatic adverse impact on the liquidity and financial viability of a bank.
    Given the many subjective factors affecting the credit portfolio, changes in the allowance for credit losses may not directly coincide with changes in the risk ratings of the credit portfolio reflected in the risk rating process. This is in part due to the timing of the risk rating process in relation to changes in the business cycle, the exposure and mix of loans within risk rating categories, levels of nonperforming loans and the timing of charge-offs and recoveries. For example, the amount of loans within specific risk ratings may change, providing a leading indicator of improving credit quality, while nonperforming loans and net charge-offs continue at elevated levels. Also, inherent loss ratios,
60  ~~U.S. BANCORP~~
determined through migration analysis and historical loss performance over the estimated business cycle of a loan, may not change to the same degree as net charge-offs. Because risk ratings and inherent loss ratios primarily drive the allowance specifically allocated to commercial loans, the amount of the allowance for commercial and commercial real estate loans might decline; however, the degree of change differs somewhat from the level of changes in nonperforming loans and net charge-offs. Also, management would maintain an adequate allowance for credit losses by increasing the allowance for other factors during ~~period~~periods of economic uncertainty or changes in the business cycle.
    Some factors considered in determining the adequacy of the allowance for credit losses are quantifiable while other factors require qualitative judgment. Management conducts analysis with respect to the accuracy of risk ratings and the volatility of inherent losses, and utilizes this analysis along with qualitative factors including uncertainty in the economy from changes in unemployment rates, the level of bankruptcies, concentration risks, including risks associated with the ~~transportation~~airline industry sector and highly leveraged enterprise-value credits, in determining the overall level of the allowance for credit losses. The Company’s determination of the allowance for commercial and commercial real estate loans is sensitive to the assigned credit risk ratings and inherent loss rates at December 31, ~~2004.~~2005. In the event that 10 percent of loans within these portfolios experienced downgrades of two risk categories, the allowance for commercial and commercial real estate would increase by approximately ~~$250~~$264 million at December 31, ~~2004.~~2005. In the event that inherent loss or estimated loss rates for these portfolios increased by 10 percent, the allowance determined for commercial and commercial real estate would increase by approximately ~~$95~~$92 million at December 31, ~~2004.~~2005. The Company’s determination of the allowance for residential and retail loans is sensitive to changes in estimated loss rates. In the event that estimated loss rates increased by 10%, the allowance for residential mortgages and retail loans would increase by approximately ~~$65~~$60 million at December 31, ~~2004.~~2005. Because several quantitative and qualitative factors are considered in determining the allowance for credit losses, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the allowance for credit losses. They are intended to provide insights into the impact of adverse changes in risk rating and inherent losses and do not imply any expectation of future deterioration in the risk rating or loss rates. Given current processes employed by the Company, management believes the risk ratings and inherent loss rates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be significant to the Company’s financial statements. Refer to the “Analysis and Determination of the Allowance for Credit Losses” section for further information.
Mortgage Servicing RightsMSRs are capitalized as separate assets when loans are sold and servicing is retained. The total cost of loans sold is allocated between the loans sold and the servicing assets retained based on their relative fair values. MSRs that are purchased from others are initially recorded at cost. The carrying value of the MSRs is amortized in proportion to and over the period of estimated net servicing revenue and recorded in noninterest expense as amortization of intangible assets. The carrying value of these assets is periodically reviewed for impairment using a lower of carrying value or fair value methodology. For purposes of measuring impairment, the servicing rights are stratified based on the underlying loan type and note rate and the carrying value for each stratum is compared to fair value based on a discounted cash flow analysis, utilizing current prepayment speeds and discount rates. Events that may significantly affect the estimates used are changes in interest rates and the related impact on mortgage loan prepayment speeds and the payment performance of the underlying loans. If the carrying value is greater than fair value, impairment is recognized through a valuation allowance for each impaired stratum and recorded as amortization of intangible assets. The reduction in the fair value of MSRs at December 31, ~~2004,~~2005, to immediate 25 and 50 basis point adverse changes in interest rates would be approximately ~~$133~~$47 million and ~~$258~~$109 million, respectively. An upward movement in interest rates at December 31, ~~2004,~~2005, of 25 and 50 basis points would increase the value of the MSRs by approximately ~~$109~~$32 million and ~~$177~~$58 million, respectively. Refer to Note 1211 of the Notes
58  U.S. BANCORP
to Consolidated Financial Statements for additional information regarding MSRs.
Goodwill and Other IntangiblesThe Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by Statement of Financial Accounting Standards No. 141, “Goodwill and Other Intangible Assets.” Goodwill and indefinite-lived assets are no longer amortized but are subject, at a minimum, to annual tests for impairment. Under certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting segment below its carrying amount. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.
    The initial recognition of goodwill and other intangible assets and subsequent impairment analysis require
~~U.S. BANCORP~~  61
management to make subjective judgments concerning estimates of how the acquired assets will perform in the future using valuation methods including discounted cash flow analysis. Additionally, estimated cash flows may extend beyond ten years and, by their nature, are difficult to determine over an extended timeframe. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. In determining the reasonableness of cash flow estimates, the Company reviews historical performance of the underlying assets or similar assets in an effort to assess and validate assumptions utilized in its estimates.
    In assessing the fair value of reporting units, the Company may consider the stage of the current business cycle and potential changes in market conditions in estimating the timing and extent of future cash flows. Also, management often utilizes other information to validate the reasonableness of its valuations including public market comparables, and multiples of recent mergers and acquisitions of similar businesses. Valuation multiples may be based on revenue, price-to-earnings and tangible capital ratios of comparable public companies and business segments. These multiples may be adjusted to consider competitive differences including size, operating leverage and other factors. The carrying amount of a reporting unit is determined based on the capital required to support the reporting unit’s activities including its tangible and intangible assets. The determination of a reporting unit’s capital allocation requires management judgment and considers many factors including the regulatory capital regulations and capital characteristics of comparable public companies in relevant industry sectors. In certain circumstances, management will engage a third-party to independently validate its assessment of the fair value of its business segments.
    The Company’s annual assessment of potential goodwill impairment was completed during the second quarter of ~~2004.~~2005. Based on the results of this assessment, no goodwill impairment was recognized.
Income TaxesThe Company estimates income tax expense based on amounts expected to be owed to various tax jurisdictions. Currently, the Company files tax returns in approximately 140 federal, state and local domestic jurisdictions and 610 foreign jurisdictions. The estimated income tax expense is reported in the Consolidated Statement of Income. Accrued taxes represent the net estimated amount due or to be received from taxing jurisdictions either currently or in the future and are reported in other assets or other liabilities on the Consolidated Balance Sheet. In estimating accrued taxes, the Company assesses the relative merits and risks of the appropriate tax treatment considering statutory, judicial and regulatory guidance in the context of the tax position. Because of the complexity of tax laws and regulations, interpretation can be difficult and subject to legal judgment given specific facts and circumstances. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions regarding the estimated amounts of accrued taxes.
    Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by various taxing authorities, and newly enacted statutory, judicial and regulatory guidance that impact the relative merits and risks of tax positions. These changes, when they occur, affect accrued taxes and can be significant to the operating results of the Company. Refer to Note 2120 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.effective.
U.S. BANCORP  59
    During the most recently completed fiscal quarter, there was no change made in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
    The annual report of the Company’s management on internal control over financial reporting is provided on page ~~106.~~101. The attestation report of Ernst & Young LLP, the Company’s independent accountants, regarding the Company’s internal control over financial reporting is provided on page ~~107.~~103.

62  60  U.S. BANCORP

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U.S. BANCORP  61
U.S. BANCORP
CONSOLIDATED BALANCE SHEET

At December 31 (Dollars in Millions) 2005 2004
Assets

Cash and due from banks $ 8,004 $ 6,336
Investment securities
Held-to-maturity (fair value $113 and $132, respectively) 109 127
Available-for-sale 39,659 41,354
Loans held for sale 1,686 1,439
Loans
Commercial 42,942 40,173
Commercial real estate 28,463 27,585
Residential mortgages 20,730 15,367
Retail 45,671 43,190

Total loans 137,806 126,315
Less allowance for loan losses (2,041 ) (2,080 )

Net loans 135,765 124,235
Premises and equipment 1,841 1,890
Customers’ liability on acceptances 61 95
Goodwill 7,005 6,241
Other intangible assets 2,874 2,387
Other assets 12,461 11,000

Total assets $ 209,465 $ 195,104

Liabilities and Shareholders’ Equity

Deposits
Noninterest-bearing $ 32,214 $ 30,756
Interest-bearing 70,024 71,936
Time deposits greater than $100,000 22,471 18,049

Total deposits 124,709 120,741
Short-term borrowings 20,200 13,084
Long-term debt 37,069 34,739
Acceptances outstanding 61 95
Other liabilities 7,340 6,906

Total liabilities 189,379 175,565
Shareholders’ equity
Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares issued: 2005 and 2004 — 1,972,643,007 shares 20 20
Capital surplus 5,907 5,902
Retained earnings 19,001 16,758
Less cost of common stock in treasury: 2005 — 157,689,004 shares; 2004 — 115,020,064 shares (4,413 ) (3,125 )
Other comprehensive income (429 ) (16 )

Total shareholders’ equity 20,086 19,539

Total liabilities and shareholders’ equity $ 209,465 $ 195,104
See Notes to Consolidated Financial Statements.

62  U.S. BANCORP
U.S. BANCORP
CONSOLIDATED STATEMENT OF INCOME

Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data) 2005 2004 2003
Interest Income

Loans $ 8,381 $ 7,168 $ 7,272
Loans held for sale 106 91 202
Investment securities 1,954 1,827 1,684
Other interest income 110 100 100

Total interest income 10,551 9,186 9,258

Interest Expense

Deposits 1,559 904 1,097
Short-term borrowings 690 263 167
Long-term debt 1,247 908 805

Total interest expense 3,496 2,075 2,069

Net interest income 7,055 7,111 7,189
Provision for credit losses 666 669 1,254

Net interest income after provision for credit losses 6,389 6,442 5,935
Noninterest Income

Credit and debit card revenue 713 649 561
Corporate payment products revenue 488 407 361
ATM processing services 229 175 166
Merchant processing services 770 675 561
Trust and investment management fees 1,009 981 954
Deposit service charges 928 807 716
Treasury management fees 437 467 466
Commercial products revenue 400 432 401
Mortgage banking revenue 432 397 367
Investment products fees and commissions 152 156 145
Securities gains (losses), net (106 ) (105 ) 245
Other 593 478 370

Total noninterest income 6,045 5,519 5,313
Noninterest Expense

Compensation 2,383 2,252 2,177
Employee benefits 431 389 328
Net occupancy and equipment 641 631 644
Professional services 166 149 143
Marketing and business development 235 194 180
Technology and communications 466 430 418
Postage, printing and supplies 255 248 246
Other intangibles 458 550 682
Debt prepayment 54 155 —
Other 774 787 779

Total noninterest expense 5,863 5,785 5,597

Income from continuing operations before income taxes 6,571 6,176 5,651
Applicable income taxes 2,082 2,009 1,941

Income from continuing operations 4,489 4,167 3,710
Income from discontinued operations (after-tax) — — 23

Net income $ 4,489 $ 4,167 $ 3,733

Earnings Per Share

Income from continuing operations $ 2.45 $ 2.21 $ 1.93
Discontinued operations — — .01

Net income $ 2.45 $ 2.21 $ 1.94

Diluted Earnings Per Share

Income from continuing operations $ 2.42 $ 2.18 $ 1.92
Discontinued operations — — .01

Net income $ 2.42 $ 2.18 $ 1.93

Dividends declared per share 1.230 1.020 .855

Average common shares outstanding 1,831 1,887 1,924
Average diluted common shares outstanding 1,857 1,913 1,936
See Notes to Consolidated Financial Statements.
U.S. BANCORP  63
U.S. BANCORP
CONSOLIDATED ~~BALANCE SHEET~~STATEMENT OF SHAREHOLDERS’ EQUITY

At December 31 (Dollars in Millions) 2004 2003
Assets

Cash and due from banks $ 6,336 $ 8,630
Investment securities
Held-to-maturity (fair value $132 and $161, respectively) 127 152
Available-for-sale 41,354 43,182
Loans held for sale 1,439 1,433
Loans
Commercial 40,173 38,526
Commercial real estate 27,585 27,242
Residential mortgages 15,367 13,457
Retail 43,190 39,010

Total loans 126,315 118,235
Less allowance for loan losses (2,080 ) (2,184 )

Net loans 124,235 116,051
Premises and equipment 1,890 1,957
Customers’ liability on acceptances 95 121
Goodwill 6,241 6,025
Other intangible assets 2,387 2,124
Other assets 11,000 9,796

Total assets $ 195,104 $ 189,471

Liabilities and Shareholders’ Equity

Deposits
Noninterest-bearing $ 30,756 $ 32,470
Interest-bearing 71,936 74,749
Time deposits greater than $100,000 18,049 11,833

Total deposits 120,741 119,052
Short-term borrowings 13,084 10,850
Long-term debt 34,739 33,816
Acceptances outstanding 95 121
Other liabilities 6,906 6,390

Total liabilities 175,565 170,229
Shareholders’ equity
Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares issued: 2004 and 2003 — 1,972,643,007 shares 20 20
Capital surplus 5,902 5,851
Retained earnings 16,758 14,508
Less cost of common stock in treasury: 2004 — 115,020,064 shares; 2003 — 49,722,856 shares (3,125 ) (1,205 )
Other comprehensive income (16 ) 68

Total shareholders’ equity 19,539 19,242

Total liabilities and shareholders’ equity $ 195,104 $ 189,471

Common Other Total
Shares Common Capital Retained Treasury Comprehensive Shareholders’
(Dollars and Shares in Millions) Outstanding Stock Surplus Earnings Stock Income Equity
Balance December 31, 2002
1,917 $20 $ 5,799 $ 13,105 $ (1,272 ) $ 784 $ 18,436
Net income 3,733 3,733
Unrealized loss on securities available for sale (716 ) (716 )
Unrealized loss on derivatives (373 ) (373 )
Foreign currency translation adjustment 23 23
Realized gain on derivatives 199 199
Reclassification adjustment for gains realized in net income (288 ) (288 )
Income taxes 439 439

Total comprehensive income 3,017
Cash dividends declared on common stock (1,645 ) (1,645 )
Special dividends declared on common stock (685 ) (685 )
Issuance of common and treasury stock 22 (51 ) 502 451
Purchase of treasury stock (15 ) (417 ) (417 )
Stock option and restricted stock grants 111 111
Shares reserved to meet deferred compensation obligations (1 ) (8 ) (18 ) (26 )

Balance December 31, 2003
1,923 $20 $ 5,851 $ 14,508 $ (1,205 ) $ 68 $ 19,242
Net income 4,167 4,167
Unrealized loss on securities available for sale (123 ) (123 )
Unrealized loss on derivatives (43 ) (43 )
Foreign currency translation adjustment (17 ) (17 )
Realized gain on derivatives 16 16
Reclassification adjustment for losses realized in net income 32 32
Income taxes 51 51

Total comprehensive income 4,083
Cash dividends declared on common stock (1,917 ) (1,917 )
Issuance of common and treasury stock 30 (96 ) 772 676
Purchase of treasury stock (94 ) (2,656 ) (2,656 )
Stock option and restricted stock grants 116 116
Shares reserved to meet deferred compensation obligations (1 ) 31 (36 ) (5 )

Balance December 31, 2004
1,858 $20 $ 5,902 $ 16,758 $ (3,125 ) $ (16 ) $ 19,539
Net income 4,489 4,489
Unrealized loss on securities available for sale (539 ) (539 )
Unrealized loss on derivatives (58 ) (58 )
Foreign currency translation adjustment 3 3
Realized loss on derivatives (74 ) (74 )
Reclassification adjustment for losses realized in net income 39 39
Minimum pension liability adjustment (38 ) (38 )
Income taxes 254 254

Total comprehensive income 4,076
Cash dividends declared on common stock (2,246 ) (2,246 )
Issuance of common and treasury stock 19 (81 ) 525 444
Purchase of treasury stock (62 ) (1,807 ) (1,807 )
Stock option and restricted stock grants 84 84
Shares reserved to meet deferred compensation obligations 2 (6 ) (4 )

Balance December 31, 2005
1,815 $20 $ 5,907 $ 19,001 $ (4,413 ) $ (429 ) $ 20,086
See Notes to Consolidated Financial Statements.

64  U.S. BANCORP
U.S. BANCORP
CONSOLIDATED STATEMENT OF ~~INCOME~~CASH FLOWS

Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data) 2004 2003 2002
Interest Income

Loans $ 7,168.1 $ 7,272.0 $ 7,743.0
Loans held for sale 91.5 202.2 170.6
Investment securities 1,827.1 1,684.0 1,484.3
Other interest income 99.8 99.8 96.0

Total interest income 9,186.5 9,258.0 9,493.9

Interest Expense

Deposits 904.3 1,096.6 1,485.3
Short-term borrowings 262.7 166.8 222.9
Long-term debt 908.2 805.3 971.4

Total interest expense 2,075.2 2,068.7 2,679.6

Net interest income 7,111.3 7,189.3 6,814.3
Provision for credit losses 669.6 1,254.0 1,349.0

Net interest income after provision for credit losses 6,441.7 5,935.3 5,465.3
Noninterest Income

Credit and debit card revenue 649.3 560.7 517.0
Corporate payment products revenue 406.8 361.3 325.7
ATM processing services 175.3 165.9 160.6
Merchant processing services 674.6 561.4 567.3
Trust and investment management fees 981.2 953.9 892.1
Deposit service charges 806.4 715.8 690.3
Treasury management fees 466.7 466.3 416.9
Commercial products revenue 432.2 400.5 479.2
Mortgage banking revenue 397.3 367.1 330.2
Investment products fees and commissions 156.0 144.9 132.7
Securities gains (losses), net (104.9 ) 244.8 299.9
Other 478.3 370.4 398.8

Total noninterest income 5,519.2 5,313.0 5,210.7
Noninterest Expense

Compensation 2,252.2 2,176.8 2,167.5
Employee benefits 389.4 328.4 317.5
Net occupancy and equipment 630.8 643.7 658.7
Professional services 148.9 143.4 129.7
Marketing and business development 193.5 180.3 171.4
Technology and communications 429.6 417.4 392.1
Postage, printing and supplies 248.4 245.6 243.2
Other intangibles 550.1 682.4 553.0
Merger and restructuring-related charges — 46.2 321.2
Debt prepayment 154.8 — (.2 )
Other 786.8 732.7 786.4

Total noninterest expense 5,784.5 5,596.9 5,740.5

Income from continuing operations before income taxes 6,176.4 5,651.4 4,935.5
Applicable income taxes 2,009.6 1,941.3 1,707.5

Income from continuing operations 4,166.8 3,710.1 3,228.0
Income (loss) from discontinued operations (after-tax) — 22.5 (22.7 )
Cumulative effect of accounting change (after-tax) — — (37.2 )

Net income $ 4,166.8 $ 3,732.6 $ 3,168.1

Earnings Per Share

Income from continuing operations $ 2.21 $ 1.93 $ 1.68
Discontinued operations — .01 (.01 )
Cumulative effect of accounting change — — (.02 )

Net income $ 2.21 $ 1.94 $ 1.65

Diluted Earnings Per Share

Income from continuing operations $ 2.18 $ 1.92 $ 1.68
Discontinued operations — .01 (.01 )
Cumulative effect of accounting change — — (.02 )

Net income $ 2.18 $ 1.93 $ 1.65

Dividends declared per share $ 1.020 $ .855 $ .780

Average common shares outstanding 1,887.1 1,923.7 1,916.0
Average diluted common shares outstanding 1,912.9 1,936.2 1,924.8

Year Ended December 31 (Dollars in Millions) 2005 2004 2003
Operating Activities

Net income $ 4,489 $ 4,167 $ 3,733
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses 666 669 1,254
Depreciation and amortization of premises and equipment 231 244 275
Amortization of intangibles 458 550 682
Provision for deferred income taxes (301 ) 281 273
(Gain) loss on sales of securities and other assets, net (316 ) (104 ) (300 )
Mortgage loans originated for sale in the secondary market, net of repayments (19,245 ) (16,007 ) (27,666 )
Proceeds from sales of mortgage loans 18,616 15,778 30,228
Stock-based compensation 83 139 123
Other, net (1,269 ) (492 ) 80

Net cash provided by operating activities 3,412 5,225 8,682
Investing Activities

Proceeds from sales of available-for-sale investment securities 5,039 8,216 17,383
Proceeds from maturities of investment securities 10,264 12,261 18,140
Purchases of investment securities (13,148 ) (19,624 ) (51,127 )
Net (increase) decrease in loans outstanding (9,904 ) (7,680 ) (4,193 )
Proceeds from sales of loans 1,711 1,804 2,204
Purchases of loans (3,568 ) (2,719 ) (944 )
Acquisitions, net of cash acquired (1,008 ) (322 ) —
Divestitures — — (382 )
Other, net (1,159 ) (451 ) (506 )

Net cash used in investing activities (11,773 ) (8,515 ) (19,425 )
Financing Activities

Net increase (decrease) in deposits 3,968 1,689 3,449
Net increase (decrease) in short-term borrowings 7,116 2,234 3,869
Principal payments or redemption of long-term debt (12,848 ) (12,683 ) (8,968 )
Proceeds from issuance of long-term debt 15,519 13,704 11,468
Proceeds from issuance of common stock 371 581 398
Repurchase of common stock (1,855 ) (2,660 ) (326 )
Cash dividends paid (2,245 ) (1,820 ) (1,557 )

Net cash provided by financing activities 10,026 1,045 8,333

Change in cash and cash equivalents 1,665 (2,245 ) (2,410 )
Cash and cash equivalents at beginning of year 6,537 8,782 11,192

Cash and cash equivalents at end of year $ 8,202 $ 6,537 $ 8,782
Supplemental Cash Flow Disclosures

Cash paid for income taxes $ 2,131 $ 1,768 $ 1,258
Cash paid for interest 3,365 2,030 2,077
Net noncash transfers to foreclosed property 98 104 110
Acquisitions
Assets acquired $ 1,545 $ 437 $ —
Liabilities assumed (393 ) (114 ) —

Net $ 1,152 $ 323 $ —
See Notes to Consolidated Financial Statements.

U.S. BANCORP  65
~~U.S. BANCORP~~
~~CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY~~

Common Other Total
(Dollars in Millions) Shares Common Capital Retained Treasury Comprehensive Shareholders’
(Unaudited) Outstanding Stock Surplus Earnings Stock Income Equity
Balance December 31, 2001
1,951,709,512 $20 $ 5,683 $ 11,425 $ (478 ) $ 95 $ 16,745
Net income 3,168 3,168
Unrealized gain on securities available-for-sale 1,048 1,048
Unrealized gain on derivatives 324 324
Foreign currency translation adjustment �� 7 7
Realized gain on derivatives 64 64
Reclassification adjustment for gains realized in net income (332 ) (332 )
Income taxes (422 ) (422 )

Total comprehensive income 3,857
Cash dividends declared on common stock (1,488 ) (1,488 )
Issuance of common and treasury stock 10,589,034 (75 ) 249 174
Purchase of treasury stock (45,256,736 ) (1,040 ) (1,040 )
Stock option and restricted stock grants 188 188
Shares reserved to meet deferred compensation obligations (85,250 ) 3 (3 ) —

Balance December 31, 2002
1,916,956,560 $20 $ 5,799 $ 13,105 $ (1,272 ) $ 784 $ 18,436
Net income 3,733 3,733
Unrealized loss on securities available-for-sale (716 ) (716 )
Unrealized loss on derivatives (373 ) (373 )
Foreign currency translation adjustment 23 23
Realized gain on derivatives 199 199
Reclassification adjustment for gains realized in net income (288 ) (288 )
Income taxes 439 439

Total comprehensive income 3,017
Cash dividends declared on common stock (1,645 ) (1,645 )
Special dividends declared on common stock (685 ) (685 )
Issuance of common and treasury stock 21,709,297 (51 ) 502 451
Purchase of treasury stock (14,971,000 ) (417 ) (417 )
Stock option and restricted stock grants 111 111
Shares reserved to meet deferred compensation obligations (774,706 ) (8 ) (18 ) (26 )

Balance December 31, 2003
1,922,920,151 $20 $ 5,851 $ 14,508 $ (1,205 ) $ 68 $ 19,242
Net income 4,167 4,167
Unrealized loss on securities available-for-sale (123 ) (123 )
Unrealized loss on derivatives (43 ) (43 )
Foreign currency translation adjustment (17 ) (17 )
Realized gain on derivatives 16 16
Reclassification adjustment for losses realized in net income 32 32
Income taxes 51 51

Total comprehensive income 4,083
Cash dividends declared on common stock (1,917 ) (1,917 )
Issuance of common and treasury stock 29,758,496 (96 ) 772 676
Purchase of treasury stock (93,773,487 ) (2,656 ) (2,656 )
Stock option and restricted stock grants 116 116
Shares reserved to meet deferred compensation obligations (1,282,217 ) 31 (36 ) (5 )

Balance December 31, 2004
1,857,622,943 $20 $ 5,902 $ 16,758 $ (3,125 ) $ (16 ) $ 19,539
~~See~~ Notes to Consolidated Financial ~~Statements.~~Statements
66  ~~U.S. BANCORP~~
~~U.S. BANCORP~~ Note 1  SIGNIFICANT ACCOUNTING POLICIES
~~CONSOLIDATED STATEMENT OF CASH FLOWS~~

Year Ended December 31 (Dollars in Millions) 2004 2003 2002
Operating Activities

Net income $ 4,166.8 $ 3,732.6 $ 3,168.1
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses 669.6 1,254.0 1,349.0
Depreciation and amortization of premises and equipment 244.4 275.2 285.3
Amortization of intangibles 550.1 682.4 553.0
Provision for deferred income taxes 281.3 272.7 291.7
(Gain) loss on sales of securities and other assets, net (104.0 ) (300.4 ) (411.1 )
Mortgage loans originated for sale in the secondary market, net of repayments (16,007.2 ) (27,665.8 ) (22,567.9 )
Proceeds from sales of mortgage loans 15,777.8 30,228.4 20,756.6
Stock-based compensation 138.5 123.4 113.3
Other, net (492.5 ) 79.7 248.3

Net cash provided by (used in) operating activities 5,224.8 8,682.2 3,786.3
Investing Activities

Proceeds from sales of available-for-sale investment securities 8,216.2 17,383.3 14,386.9
Proceeds from maturities of investment securities 12,260.8 18,139.9 11,246.5
Purchases of investment securities (19,623.9 ) (51,127.3 ) (26,469.8 )
Net (increase) decrease in loans outstanding (7,680.1 ) (4,193.3 ) (4,111.3 )
Proceeds from sales of loans 1,803.5 2,203.7 2,219.1
Purchases of loans (2,718.8 ) (944.3 ) (240.2 )
Proceeds from sales of premises and equipment 50.6 39.7 211.8
Purchases of premises and equipment (192.0 ) (670.1 ) (429.8 )
Acquisitions, net of cash acquired (322.1 ) — 1,368.8
Divestitures — (381.8 ) —
Other, net (309.8 ) 124.7 (126.1 )

Net cash provided by (used in) investing activities (8,515.6 ) (19,425.5 ) (1,944.1 )

Financing Activities

Net increase (decrease) in deposits 1,688.8 3,449.0 7,002.3
Net increase (decrease) in short-term borrowings 2,234.3 3,869.5 (7,307.0 )
Principal payments or redemption of long-term debt (12,682.8 ) (8,967.9 ) (8,367.5 )
Proceeds from issuance of long-term debt 13,704.3 11,467.5 10,650.9
Proceeds from issuance of common stock 580.6 398.4 147.0
Repurchase of common stock (2,659.6 ) (326.3 ) (1,040.4 )
Cash dividends paid (1,820.5 ) (1,556.8 ) (1,480.7 )

Net cash provided by (used in) financing activities 1,045.1 8,333.4 (395.4 )

Change in cash and cash equivalents (2,245.7 ) (2,409.9 ) 1,446.8
Cash and cash equivalents at beginning of year 8,782.2 11,192.1 9,745.3

Cash and cash equivalents at end of year $ 6,536.5 $ 8,782.2 $ 11,192.1
Supplemental Cash Flow Disclosures

Cash paid for income taxes $ 1,767.7 $ 1,257.8 $ 1,129.5
Cash paid for interest 2,029.8 2,077.0 2,890.1
Net noncash transfers to foreclosed property 104.5 110.0 89.5
Acquisitions
Assets acquired $ 436.9 $ — $ 2,068.9
Liabilities assumed (113.9 ) — (3,821.9 )

Net $ 323.0 $ — $ (1,753.0 )
~~See Notes to Consolidated Financial Statements.~~
~~U.S. BANCORP~~  67
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~Note 1~~   ~~Significant Accounting Policies~~
U.S. Bancorp and its subsidiaries (the “Company”) is a multi-state financial services holding company headquartered in Minneapolis, Minnesota. The Company provides a full range of financial services including lending and depository services through banking offices principally in 24 states. The Company also engages in credit card, merchant, and ATM processing, mortgage banking, insurance, trust and investment management, brokerage, and leasing activities principally in domestic markets.
Basis of PresentationThe consolidated financial statements include the accounts of the Company and its subsidiaries. The consolidation eliminates all significant intercompany accounts and transactions. Certain items in prior periods have been reclassified to conform to the current presentation.
Uses of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual experience could differ from those estimates.
BUSINESS SEGMENTS
Within the Company, financial performance is measured by major lines of business based on the products and services provided to customers through its distribution channels. The Company has five reportable operating segments:
Wholesale Bankingoffers lending, depository, treasury management and other financial services to middle market, large corporate and public sector clients.
Consumer Bankingdelivers products and services ~~to the broad consumer market and small businesses~~ through banking offices, ~~telemarketing,~~telephone servicing and sales, on-line services, direct mail and automated teller machines (“ATMs”). It encompasses community banking, metropolitan banking, in-store banking, small business banking, including lending guaranteed by the Small Business Administration, small-ticket leasing, consumer lending, mortgage banking, consumer finance, workplace banking, student banking, 24-hour banking and investment product and insurance sales.
Private Client, Trust and Asset Managementprovides trust, private banking, financial advisory, investment management and mutual fund servicing to affluent individuals, businesses, institutions and mutual funds.
Payment Servicesincludes consumer and business credit cards, debit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. Customized products and services, coupled with cutting-edge technology are provided to consumer and business customers, government clients, correspondent financial institutions, merchants and co-brand partners.
Treasury and Corporate Supportincludes the Company’s investment portfolios, funding, capital management and asset securitization activities, interest rate risk management, the net effect of transfer pricing related to average balances and the residual aggregate of expenses associated with ~~business~~corporate activities managed on a ~~corporate~~consolidated basis, including enterprise-wide operations and administrative support functions.
Segment ResultsAccounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. For details of these methodologies and segment results, see “Basis ~~for Financial~~of Presentation” and Table 2223 “Line of Business Financial Performance” included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.
SECURITIES
Realized gains or losses on securities are determined on a trade date basis based on the specific carrying value of the investments being sold.
Trading SecuritiesDebt and equity securities held for resale are classified as trading securities and reported at fair value. Realized gains or losses are reported in noninterest income.
Available-for-sale SecuritiesThese securities are not trading securities but may be sold before maturity in response to changes in the Company’s interest rate risk profile, funding needs or demand for collateralized deposits by public entities. Available-for-sale securities are carried at fair value with unrealized net gains or losses reported within other comprehensive income in shareholders’ equity. When sold, the amortized cost of the specific securities is used to compute the gain or loss. Declines in fair value that are deemed other-than-temporary, if any, are reported in noninterest income.
66  U.S. BANCORP
Held-to-maturity SecuritiesDebt securities for which the Company has the positive intent and ability to hold to maturity are reported at historical cost adjusted for amortization of premiums and accretion of discounts.
68  ~~U.S. BANCORP~~
Declines in fair value that are deemed other than temporary, if any, are reported in noninterest income.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to RepurchaseSecurities purchased under agreements to resell and securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold, plus accrued interest. ~~Securities pledged as collateral under these financing arrangements cannot be sold or repledged by the secured party.~~ The fair value of collateral received is continually monitored and additional collateral obtained or requested to be returned to the Company as deemed appropriate.
EQUITY INVESTMENTS IN OPERATING ENTITIES
Equity investments in public entities in which ownership is less than 20 percent are accounted for as available-for-sale securities and carried at fair value. Similar investments in private entities are accounted for using the cost method. Investments in entities where ownership interest is between 20 percent and 50 percent are accounted for using the equity method with the exception of limited partnerships and limited liability companies where an ownership interest of greater than 5 percent requires the use of the equity method. If the Company has a voting interest greater than 50 percent, the consolidation method is used. All equity investments are evaluated for impairment at least annually and more frequently if certain criteria are met.
LOANS
Loans are reported net of unearned income. Interest income is accrued on the unpaid principal balances as earned. Loan and commitment fees and certain direct loan origination costs are deferred and recognized over the life of the loan and/or commitment period as yield adjustments.
Commitments to Extend CreditUnfunded residential mortgage loan commitments entered into in connection with mortgage banking activities are considered derivatives and recorded on the balance sheet at fair value with changes in fair value recorded in income. All other unfunded loan commitments are generally related to providing credit facilities to customers of the bank and are not actively traded financial instruments. These unfunded commitments are disclosed as off-balance sheet financial instruments in Note 2423 in the Notes to Consolidated Financial Statements.
Allowance for Credit LossesManagement determines the adequacy of the allowance based on evaluations of credit relationships, the loan portfolio, recent loss experience, and other pertinent factors, including economic conditions. This evaluation is inherently subjective as it requires estimates, including amounts of future cash collections expected on nonaccrual loans, which may be susceptible to significant change. The allowance for credit losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.
    The Company determines the amount of the allowance required for certain sectors based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on quarterly reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of product mix, risk characteristics of the portfolio, bankruptcy experiences, and historical losses, adjusted for current trends, for each homogenous category or group of loans. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.
    The Company also assesses the credit risk associated with off-balance sheet loan commitments, ~~and~~ letters of credit, and derivatives and determines the appropriate amount of credit loss liability that should be recorded. The liability for off-balance sheet credit exposure related to loan commitments and other financial instruments is included in ~~the allowance for credit losses.~~other liabilities.
Nonaccrual LoansGenerally commercial loans (including impaired loans) are placed on nonaccrual status when the collection of interest or principal has become 90 days past due or is otherwise considered doubtful. When a loan is placed on nonaccrual status, unpaid accrued interest is reversed. Future interest payments are generally applied against principal. Revolving consumer lines and credit cards are charged off by 180 days past due and closed-end consumer loans other than loans secured by 1-4 family properties are charged off at 120 days past due and are, therefore, generally not placed on nonaccrual status. Certain retail customers having financial difficulties may have the terms of their credit card and other loan agreements modified to require only principal payments and, as such, are reported as nonaccrual.
Impaired LoansA loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement.
Restructured LoansIn cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a restructured loan. Loans restructured at a rate
U.S. BANCORP  67

equal to or greater than that of a new loan with comparable risk at the time the contract is modified may be excluded from restructured loans in the calendar years subsequent to the restructuring if they are in compliance with the modified terms.
~~U.S. BANCORP~~  69
    Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains classified as a nonaccrual loan.
LeasesThe Company engages in both direct and leveraged lease financing. The net investment in direct financing leases is the sum of all minimum lease payments and estimated residual values, less unearned income. Unearned income is added to interest income over the terms of the leases to produce a level yield.
    The investment in leveraged leases is the sum of all lease payments (less nonrecourse debt payments) plus estimated residual values, less unearned income. Income from leveraged leases is recognized over the term of the leases based on the unrecovered equity investment.
    Residual values on leased assets are reviewed regularly for other-than-temporary impairment. Residual valuations for retail automobile leases are based on independent assessments of expected used car ~~sales~~sale prices at the end-of-term. Impairment tests are conducted based on these valuations considering the probability of the lessee returning the asset to the Company, re-marketing efforts, insurance coverage and ancillary fees and costs. Valuations for commercial leases are based upon external or internal management appraisals. When there is other than temporary impairment in the estimated fair value of the Company’s interest in the residual value of a leased asset, the carrying value is reduced to the estimated fair value with the writedown recognized in the current ~~period in commercial products revenue or other noninterest income.~~period.
Loans Held for SaleLoans held for sale (“LHFS”) represent mortgage loan originations intended to be sold in the secondary market and other loans that management has an active plan to sell. LHFS are carried at the lower of cost or market value as determined on an aggregate basis by type of loan. In the event management decides to sell loans receivable, the loans are transferred at the lower of cost or fair value. ~~The Interagency Guidance on Certain~~ Loans ~~Held for Sale, dated March 26, 2001, requires loans~~ transferred to LHFS ~~to be~~are marked-to-market (“MTM”) at the time of transfer. MTM losses related to the sale/transfer of non-homogeneous loans that are predominantly credit-related are reflected in charge-offs. With respect to homogeneous loans, the amount of “probable” credit loss determined in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” methodologies utilized to determine the specific allowance allocation for the portfolio is also included in charge-offs. Any incremental loss determined in accordance with MTM accounting, that includes consideration of other factors such as estimates of inherent losses, is reported separately from charge-offs as a reduction to the allowance for credit losses. Subsequent decreases in fair value are recognized in noninterest income.
Other Real EstateOther real estate (“ORE”), which is included in other assets, is property acquired through foreclosure or other proceedings. ORE is carried at fair value, less estimated selling costs. The property is evaluated regularly and any decreases in the carrying amount are included in noninterest expense.
DERIVATIVE FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into derivative transactions to manage its interest rate, foreign currency and prepayment risk and to accommodate the business requirements of its customers. All derivative instruments are recorded as either other assets, other liabilities or short-term borrowings at fair value. Subsequent changes in a derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met.
    All derivative instruments that qualify for hedge accounting are recorded at fair value and classified either as a hedge of the fair value of a recognized asset or liability (“fair value” hedge) or as a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability or a forecasted transaction (“cash flow” hedge). Changes in the fair value of a derivative that is highly effective and designated as a fair value hedge and the offsetting changes in the fair value of the hedged item are recorded in income. Changes in the fair value of a derivative that is highly effective and designated as a cash flow hedge are recognized in other comprehensive income until income from the cash flows of the hedged item is recognized. The Company performs an assessment, both at the inception of the hedge and on a quarterly basis thereafter, when required, to determine whether these derivatives are highly effective in offsetting changes in the value of the hedged items. Any change in fair value resulting from hedge ineffectiveness is immediately recorded in noninterest income.
    If a derivative designated as a hedge is terminated or ceases to be highly effective, the gain or loss is amortized to earnings over the remaining life of the hedged asset or liability (fair value hedge) or over the same period(s) that the forecasted hedged transactions impact earnings (cash
68  U.S. BANCORP
flow hedge). If the hedged item is disposed of, or the forecasted transaction is no longer probable, the derivative
70  ~~U.S. BANCORP~~
is recorded at fair value with any resulting gain or loss included in the gain or loss from the disposition of the hedged item or, in the case of a forecasted transaction that is no longer probable, included in earnings immediately.
OTHER SIGNIFICANT POLICIES
Intangible AssetsThe price paid over the net fair value of ~~the~~ acquired businesses (“goodwill”) is not amortized. Other intangible assets are amortized over their estimated useful lives, using straight-line and accelerated methods. The recoverability of goodwill and other intangible assets is evaluated annually, at a minimum, or on an interim basis if events or circumstances indicate a possible inability to realize the carrying amount. The evaluation includes assessing the estimated fair value of the intangible asset based on market prices for similar assets, where available, and the present value of the estimated future cash flows associated with the intangible asset.
Income TaxesDeferred taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and the financial reporting amounts at each year-end.
Mortgage Servicing RightsMortgage servicing rights (“MSRs”) are capitalized as separate assets when loans are sold and servicing is retained. The total cost of loans sold is allocated between the loans sold and the servicing assets retained based on their relative fair values. MSRs that are purchased from others are initially recorded at cost. The carrying value of the MSRs is amortized in proportion to, and over the period of, estimated net servicing revenue and recorded in noninterest expense as amortization of intangible assets. The carrying value of these assets is periodically reviewed for impairment using a lower of carrying value or fair value methodology. For purposes of measuring impairment, the servicing rights are stratified based on the underlying loan type and note rate and the carrying value of each stratum is compared to fair value based on a discounted cash flow analysis, utilizing current prepayment speeds and discount rates. Events that may significantly affect the estimates used are changes in interest rates and the related impact on mortgage loan prepayment ~~speed~~speeds and the payment performance of the underlying loans. If the carrying value is greater than fair value, impairment is recognized through a valuation allowance for each impaired stratum and recorded as amortization of intangible assets. The valuation allowance is adjusted each subsequent period to reflect any increase or decrease in the indicated impairment. The Company reviews mortgage servicing rights for other-than-temporary impairment each quarter and recognizes a direct write-down when the recoverability of a recorded valuation allowance is determined to be remote. In determining whether other-than-temporary impairment has taken place, the Company considers historical trends in pay off activity and the potential for impairment recovery. Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of the mortgage servicing rights, precluding subsequent reversals.
PensionsFor purposes of its retirement plans, the Company utilizes a measurement date of September 30. At the measurement date, plan assets are determined based on fair value, generally representing observable market prices. The actuarial cost method used to compute the pension liabilities and related expense is the projected unit credit method. The projected benefit obligation is principally determined based on the present value of projected benefit distributions at an assumed discount rate. The discount rate utilized is based on match-funding maturities and interest payments of high quality corporate bonds available in the market place to projected cash flows as of the measurement date for future benefit payments. Periodic pension expense (or credits) includes service costs, interest costs based on the assumed discount rate, the expected return on plan assets based on an actuarially derived market-related value and amortization of actuarial gains and losses. Pension accounting reflects the long-term nature of benefit obligations and the investment horizon of plan assets and can have the effect of reducing earnings volatility related to short-term changes in interest rates and market valuations. Actuarial gains and losses include the impact of plan amendments and various unrecognized gains and losses which are deferred and amortized over the future service periods of active employees. The market-related value utilized to determine the expected return on plan assets is based on fair value adjusted for the difference between expected returns and actual performance of plan assets. The unrealized difference between actual experience and expected returns is included in the market-related value ratably over a five-year period.
Premises and EquipmentPremises and equipment are stated at cost less accumulated depreciation and depreciated primarily on a straight-line basis over the estimated life of the assets. Estimated useful lives range up to 40 years for newly constructed buildings and from 3 to 20 years for furniture and equipment.
    Capitalized leases, less accumulated amortization, are included in premises and equipment. The lease obligations are included in long-term debt. Capitalized leases are amortized on a straight-line basis over the lease term and the amortization is included in depreciation expense.
Statement of Cash FlowsFor purposes of reporting cash flows, cash and cash equivalents include cash and money
U.S. BANCORP  69

market investments, defined as interest-bearing amounts due
~~U.S. BANCORP~~  71
from banks, federal funds sold and securities purchased under agreements to resell.
Stock-Based CompensationThe Company grants ~~stock~~stock-based awards including restricted stock and options to purchase common stock of the Company. Stock option grants are for a fixed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant. The Company recognizes stock-based compensation in its results of operations utilizing the fair value method under Statement of Financial Accounting Standard No. 123, “Accounting for Stock-based Compensation” (“SFAS 123”). Stock-based compensation is recognized using an accelerated method of amortization for awards with graded vesting features and on a straight-line basis for awards with cliff vesting. The Company recognizes compensation cost over the normal vesting period for awards subject to continued vesting upon the employee’s retirement. The amortization of stock-based compensation reflects estimated forfeitures adjusted for actual forfeiture experience. As compensation expense is recognized, a deferred tax asset is recorded that represents an estimate of the future tax deduction from exercise or release of restrictions. At the time ~~stock options~~stock-based awards are exercised, cancelled, expire, or ~~expire,~~restrictions are released, the Company may be required to recognize an adjustment to tax expense.
Per Share CalculationsEarnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by adjusting income and outstanding shares, assuming conversion of all potentially dilutive securities, using the treasury stock method. All per share amounts have been restated for stock splits.
Note 2  ACCOUNTING CHANGES
~~Accounting Changes~~
Stock-Based CompensationIn December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure,” an amendment of SFAS 123. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In previous years, the Company accounted for stock-based employee compensation under the intrinsic based method and provided disclosure of the impact of the fair value based method on reported income. For its 2003 financial statements, the Company elected to adopt the fair value method using the retroactive restatement approach. All prior periods presented have been restated to reflect the compensation cost that would have been recognized had the recognition provisions of SFAS 123 been applied to all awards granted to employees after January 1, 1995, that remained unvested at the beginning of the first period presented.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment”, a revision of Statement of Financial Accounting Standards No. 123 (“SFAS ~~123.~~123”), “Accounting for Stock-Based Compensation.” SFAS 123R requires companies to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award. This statement eliminates the use of the alternative intrinsic value method of accounting that was allowed when SFAS 123 was originally issued. The provisions of this statement are effective infor the ~~first interim reporting period beginning after June 15, 2005.~~Company on January 1, 2006. Because the Company retroactively adopted the fair value method in 2003, the ~~revised statement will not have a significant~~ impact onof expensing stock-based awards is already recorded in the Company’s ~~financial statements.~~
Consolidated Statement of Income. In conjunction with the adoption of SFAS 123R, the Company plans to change from an accelerated to a straight-line method of expense attribution effective January 1, 2006, for new stock-based awards. The impact of changing from accelerated to straight-line amortization for new awards will reduce expenses by approximately $33 million ($20 million after tax) in 2006.
Loan CommitmentsOn March 9, 2004, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 105 (“SAB 105”), “Application of Accounting Principles to Loan Commitments,” which provides guidance regarding loan commitments accounted for as derivative instruments and is effective for commitments entered into after March 31, 2004. The guidance clarifies that expected future cash flows related to the servicing of the loan may be recognized only when the servicing asset has been contractually separated from the underlying loan by sale with servicing retained. The adoption of SAB 105 did not have a material impact on the Company’s financial statements.
~~Note 3~~   ~~Business Combinations~~
Note 3  BUSINESS COMBINATIONS
On ~~June 29, 2004,~~December 30, 2005, the Company ~~purchased~~acquired the ~~remaining 50 percent ownership interest~~corporate trust and institutional custody businesses of ~~EuroConex Technologies Ltd (“EuroConex”) from the Bank~~Wachovia Corporation in a cash transaction valued at $720 million initially with an additional $80 million payable in one year based on business retention levels. As a result of ~~Ireland. In addition, during the second and fourth quarter of 2004,~~this transaction, the Company ~~completed three separate transactions to acquire merchant processing businesses~~acquired approximately 14,100 new Corporate Trust client issuances with $410 billion in ~~Poland, the United Kingdom~~assets under administration and ~~Norway. In connection~~approximately 1,700 new Institutional Trust and Custody clients with ~~these transactions, EuroConex and its affiliates provide debit and credit card processing services to merchants, directly and through alliances with banking partners~~$570 billion in ~~these European markets. These transactions~~assets under administration. The transaction represented total assets acquired of ~~$377~~$730 million and ~~total~~ liabilities assumed of ~~$115~~$10 million at the closing date. Included in total assets were contract and other intangibles with aan estimated fair value of ~~$163~~$227 million and goodwill of $105 million. The goodwill reflected the strategic value of these businesses to the Company’s European merchant processing business and anticipated economies of scale that will result from these transactions.
    On December 31, 2002, the Company acquired the corporate trust business of State Street Bank and Trust Company (“State Street Corporate Trust”) in a cash transaction valued at $720 million. State Street Corporate Trust was a leading provider, particularly in the Northeast,
72  ~~U.S. BANCORP~~
of corporate trust and agency services to a variety of municipalities, corporations, government agencies and other financial institutions serving approximately 20,000 client issuances representing over $689 billion of assets under administration. With this acquisition, the Company is among the nation’s leading providers of a full range of corporate trust products and services. The transaction represented total assets acquired of $677 million and total liabilities assumed of $39 million at the closing date. Included in total assets were contract and other intangibles with a fair value of $218 million and goodwill of $520$500 million. The goodwill reflected the strategic value of the combined organization’s leadership position in the corporate trust ~~business~~ and ~~processing~~institutional custody businesses and economies of scale resulting from the transaction.

         In addition to ~~these business acquisitions,~~this acquisition the Company completed other ~~strategic~~smaller acquisitions to enhance its presence in certain markets and businesses.
70  U.S. BANCORP
~~The following table summarizes significant acquisitions by the Company completed since January 1, 2002:~~

Goodwill
and Other Cash Paid / Accounting
(Dollars in Millions) Date Assets (a) Deposits Intangibles (Received) Method
Nova European acquisitions April 2004-
November 2004 $ 109 $ — $ 268 $ 259 Purchase
Corporate trust business of State Street Bank and Trust Company December 2002 13 — 738 638 Purchase
Bay View Bank branches November 2002 362 3,305 483 (2,494 ) Purchase
The Leader Mortgage Company, LLC April 2002 517 — 191 85 Purchase
~~(a)~~ ~~Assets acquired do not include purchase accounting adjustments.~~

Note 4   ~~Discontinued Operations~~DISCONTINUED OPERATIONS
On December 31, 2003, the Company completed the distribution of all the outstanding shares of common stock of Piper Jaffray Companies to its shareholders. This non-cash distribution was tax-free to the Company, its shareholders and Piper Jaffray Companies. In connection with the December 31, 2003, distribution, the results of Piper Jaffray Companies are reported in the Company’s Consolidated Statement of Income separately as discontinued operations.
The following table represents the condensed results of operations for discontinued operations:

Year Ended December 31 (Dollars in Millions) Year Ended December 31 (Dollars in Millions) 2003 2002 Year Ended December 31 (Dollars in Millions) 2003
Revenue Revenue $ 783.4 $ 729.0 Revenue $ 783
Noninterest expense Noninterest expense 716.5 760.3 Noninterest expense 716

Income (loss) from discontinued operations 66.9 (31.3 )
Income from discontinued operations Income from discontinued operations 67
Costs of disposal (a) Costs of disposal (a) 27.6 — Costs of disposal (a) 27
Income taxes (benefit) 16.8 (8.6 )
Income taxes Income taxes 17

Discontinued operations, net of tax $ 22.5 $ (22.7 ) Discontinued operations, net of tax $ 23
(a) The ~~$27.6~~$27 million of disposal costs related to discontinued operations primarily represents legal, investment banking and other costs directly related to the distribution.
~~U.S. BANCORP~~  73
The distribution was treated as a dividend to shareholders for accounting purposes and, as such, reduced the Company’s retained earnings by $685 million. ~~At December 31, 2003, the Consolidated Balance Sheet reflects~~
~~the non-cash dividend and corresponding reduction in assets and liabilities at that date. A summary of the assets and liabilities of the discontinued operations is as follows:~~

December 31 (Dollars in Millions) 2003
Assets

Cash and cash equivalents $ 382
Trading securities 656
Goodwill 306
Other assets (a) 1,025

Total assets $ 2,369

Liabilities

Deposits $ 6
Short-term borrowings 905
Long-term debt 180
Other liabilities (b) 593

Total liabilities $ 1,684
~~(a)~~ ~~Includes customer margin account receivables, due from brokers/dealers and other assets.~~
~~(b)~~ ~~Includes accrued expenses, due to brokers/dealers and other liabilities.~~
Following the distribution, the Company’s wholly-owned subsidiary, USB Holdings, Inc. holds a $180 million subordinated debt facility with Piper Jaffray & Co., a broker-dealer subsidiary of Piper Jaffray Companies. In addition, the Company provides an indemnification in an amount up to ~~$17.5~~$18 million with respect to certain specified liabilities resulting from third-party claims relating to research analyst independence and from certain regulatory investigations, as defined in the separation and distribution agreement entered into with Piper Jaffray Companies at the time of the distribution. Through December 31, ~~2004,~~2005, the Company has paid approximately ~~$3.3~~$4 million to Piper Jaffray Companies under this indemnification agreement.

Note 5   ~~Merger and Restructuring-Related Items~~RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company recorded pre-tax merger and restructuring-related charges of $46.2 million and $321.2 million in 2003 and 2002, respectively. In 2003, merger-related items were incurred in connection with the NOVA Corporation acquisition and the Company’s various other acquisitions, primarily Bay View and State Street Corporate Trust. In 2002, merger-related items included costs associated with the Firstar/ former U.S. Bancorp of Minneapolis (“USBM”) merger, NOVA and other smaller acquisitions.
74  ~~U.S. BANCORP~~
~~The components of the merger and restructuring-related items are shown below:~~

(Dollars in Millions) USBM NOVA Other (a) Total
2003

Severance and employee-related $ — $ .8 $ — $ .8
Systems conversions and integration — 25.9 6.9 32.8
Asset write-downs and lease terminations — 6.8 3.0 9.8
Other merger-related items — — 1.4 1.4

Total 2003 $ — $ 33.5 $ 11.3 $ 44.8

Noninterest expense $ — $ 33.5 $ 12.7 $ 46.2
Balance sheet recognition — — (1.4 ) (1.4 )

Merger-related items — 2003 $ — $ 33.5 $ 11.3 $ 44.8

2002

Severance and employee-related $ 4.1 $ (3.8 ) $ 9.1 $ 9.4
Systems conversions and integration 194.9 29.4 17.3 241.6
Asset write-downs and lease terminations 104.0 14.2 6.0 124.2
Other merger-related items (34.0 ) (1.1 ) 3.5 (31.6 )

Total 2002 $ 269.0 $ 38.7 $ 35.9 $ 343.6

Noninterest expense $ 269.0 $ 34.9 $ 17.3 $ 321.2
Balance sheet recognition — 3.8 18.6 22.4

Merger-related items — 2002 $ 269.0 $ 38.7 $ 35.9 $ 343.6
~~(a)~~ ~~In 2003 and 2002, “Other” primarily included merger and restructuring-related items pertaining to the Bay View acquisition, State Street Corporate Trust and the Lyon Financial acquisition.~~
The Company determines merger and restructuring-related items and related accruals based on its integration strategy and formulated plans. These plans are established as of the acquisition date and are regularly evaluated during the integration process.
    Severance and employee-related charges include the cost of severance, other benefits and outplacement costs associated with the termination of employees primarily in branch offices and centralized corporate support and data processing functions. The severance amounts are determined based on the Company’s existing severance pay programs and are paid out over a benefit period of up to two years from the time of termination. In 2002, the Company recognized additional severance costs of $13.1 million in connection with the USBM merger offset by net curtailment and settlement gains of $9.0 million related to changes in certain non-qualified pension plans. Changes in severance costs for NOVA primarily reflected a change in estimate in the liability given the mix of employees terminated. Severance and employee-related costs for identified groups of acquired employees are included in the determination of goodwill at closing. Severance and employee-related costs are recorded as incurred for groups of employees not specifically identified at the time of closing or acquired in business combinations accounted for as “poolings.”
    Systems conversions and integration costs are recorded as incurred and are associated with the preparation and mailing of numerous customer communications for the acquisitions and conversion of customer accounts, printing and distribution of training materials and policy and procedure manuals, outside consulting fees, and other expenses related to systems conversions and the integration of acquired branches and operations.
    Asset write-downs and lease terminations represent lease termination costs and impairment of assets for redundant office space, branches that will be vacated and equipment disposed of as part of the integration plan. These costs are recognized in the accounting period that contract terminations occur or the asset becomes impaired and is abandoned. In 2002, this category included $38.2 million of signage write-offs, $26.9 million of software and equipment write-offs, $32.0 million of lease and contract cancellations and $6.9 million of leasehold and other related items associated with the Firstar/ USBM merger.
    Other merger-related items in 2002 of $(31.6) million primarily represented asset gains and changes to conform accounting policies implemented at the time of systems conversions related to the Firstar/ USBM merger and other acquired entities. During 2002, the Company recognized asset gains related to the sale of a non-strategic investment in a sub-prime lending business of $28.7 million and a mark-to-market recovery of $10.1 million associated with the liquidation of U.S. Bancorp Libra’s investment portfolio.
    The adequacy of the accrued liabilities is reviewed regularly taking into consideration actual and projected payments. Adjustments are made to increase or decrease these accruals as needed. Reversals of expenses can reflect a lower utilization of benefits by affected staff, changes in initial assumptions as a result of subsequent mergers and alterations of business plans.
~~U.S. BANCORP~~  75
~~The components of the merger and restructuring-related accruals for all acquisitions were as follows:~~

December 31,
(Dollars in Millions) 2003
Severance $ 3.4
Other employee-related costs 1.1
Lease termination and facility costs 14.4
Contracts and system write-offs 2.4
Other 3.3

Total $ 24.6
~~The merger and restructuring-related accruals by significant acquisition or business restructuring was as follows:~~

December 31,
(Dollars in Millions) 2003
NOVA $ 18.1
State Street Corporate Trust 4.1
USBM 2.4

Total $ 24.6
At December 31, 2002, the integration of Firstar and USBM was completed. The only activity in the USBM liability during 2004 was related to the payout of severance costs. In 2003, the integration of merchant processing platforms and business processes of U.S Bank National Association and NOVA, as well as systems conversions for the acquisitions of the State Street Corporate Trust business and Bay View were completed.
~~Note 6~~   ~~Restrictions on Cash and Due from Banks~~
Bank subsidiaries are required to maintain minimum average reserve balances with the Federal Reserve Bank. The amount of those reserve balances was approximately ~~$169~~$164 million at December 31, ~~2004.~~2005.

Note 76   ~~Investment Securities~~INVESTMENT SECURITIES
The detail of the amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale securities at December 31 was as follows:

2004 2003 2005 2004
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(Dollars in Millions) (Dollars in Millions) Cost Gains Losses Value Cost Gains Losses Value (Dollars in Millions) Cost Gains Losses Value Cost Gains Losses Value
Held-to-maturity (a)
Held-to-maturity (a)

Held-to-maturity (a)

Mortgage-backed securities $ 11 $ — $ — $ 11 $ 14 $ — $ — $ 14 Mortgage-backed securities $ 8 $ — $ — $ 8 $ 11 $ — $ — $ 11
Obligations of state and political subdivisions 98 7 (2 ) 103 138 11 (2 ) 147 Obligations of state and political subdivisions 84 5 (1 ) 88 98 7 (2 ) 103
Other debt securities 18 — — 18 — — — — Other debt securities 17 — — 17 18 — — 18

Total held-to-maturity securities $ 127 $ 7 $ (2 ) $ 132 $ 152 $ 11 $ (2 ) $ 161 Total held-to-maturity securities $ 109 $ 5 $ (1 ) $ 113 $ 127 $ 7 $ (2 ) $ 132
Available-for-sale (b)
Available-for-sale (b)

Available-for-sale (b)

U.S. Treasury and agencies $ 684 $ 3 $ (8 ) $ 679 $ 1,634 $ 10 $ (69 ) $ 1,575 U.S. Treasury and agencies $ 496 $ 2 $ (9 ) $ 489 $ 684 $ 3 $ (8 ) $ 679
Mortgage-backed securities 39,809 65 (337 ) 39,537 40,229 203 (407 ) 40,025 Mortgage-backed securities 38,161 86 (733 ) 37,514 39,809 65 (337 ) 39,537
Asset-backed securities 64 — — 64 250 5 (3 ) 252 Asset-backed securities 12 — — 12 64 — — 64
Obligations of state and political subdivisions 205 6 — 211 335 13 — 348 Obligations of state and political subdivisions 640 3 (6 ) 637 205 6 — 211
Other securities and investments 863 11 (11 ) 863 993 9 (20 ) 982 Other securities and investments 1,012 2 (7 ) 1,007 863 11 (11 ) 863

Total available-for-sale securities $ 41,625 $ 85 $ (356 ) $ 41,354 $ 43,441 $ 240 $ (499 ) $ 43,182 Total available-for-sale securities $ 40,321 $ 93 $ (755 ) $ 39,659 $ 41,625 $ 85 $ (356 ) $ 41,354
(a) Held-to-maturity securities are carried at historical cost adjusted for amortization of premiums and accretion of discounts.
(b) Available-for-sale securities are carried at fair value with unrealized net gains or losses reported within other comprehensive income in shareholders’ equity.
U.S. BANCORP  71
    The fair value of available-for-sale securities shown above includes securities totaling ~~$4.8~~$11.3 billion with unrealized losses of ~~$148.8~~$380 million which ~~have~~had been in an unrealized loss position for greater than 12 ~~months. All principal and interest payments on available-for-sale debt~~months at December 31, 2005, compared with securities totaling $4.8 billion with unrealized losses of $149 million which had been in ~~an unrealized~~a loss position ~~for~~of greater than 12 months ~~are expected to be collected given the high credit quality of the U.S. government agency debt securities and~~
76  ~~U.S. BANCORP~~
~~bank holding company issuers and the Company’s ability and intent to hold the securities until such time as the value recovers or maturity.~~at December 31, 2004. All other available-for-sale securities with unrealized losses have an aggregate fair value of ~~$26.1~~$21.7 billion and have been in an unrealized loss position for less than 12 months and represent both fixed-rate securities and adjustable-rate securities with temporary impairment resulting from increases in interest rates since the purchase of the securities. All principal and interest payments on available-for-sale debt securities are expected to be collected given the high credit quality of the U.S. government agency debt securities and bank holding company issuers.
    As of December 31, 2005, the Company has the ability and intent to hold investment securities until their anticipated recovery in value or maturity.
    The ~~weighted average~~weighted-average maturity of the available-for-sale investment securities was 6.10 years at December 31, 2005, compared with 4.45 years at December 31, ~~2004, compared with 5.12 years at December 31, 2003.~~2004. The corresponding ~~weighted average~~weighted-average yields were ~~4.43~~4.89 percent and ~~4.27~~4.43 percent, respectively. The ~~weighted average~~weighted-average maturity of the held-to-maturity investment securities was 7.21 years at December 31, 2005, compared with 6.19 years at December 31, ~~2004, compared with 6.16 years at December 31, 2003.~~2004. The corresponding weighted-average yields were 6.44 percent and 6.28 percent, respectively.
    Securities carried at $36.9 billion at December 31, 2005, and $28.0 billion at December 31, 2004, ~~and $31.0 billion at December 31, 2003,~~ were pledged to secure public, private and trust deposits, securities sold under agreements to repurchase and for other purposes required by law. Securities sold under agreements to repurchase where the buyer/ lender has the right to sell or pledge the securities, were ~~collateralized by securities with an amortized cost of~~$10.9 billion at December 31, 2005, and $4.8 billion at December 31, 2004, ~~and $3.6 billion at December 31, 2003.~~respectively.
The following table provides information as to the amount of interest income from taxable and non-taxable investment securities:

(Dollars in Millions) (Dollars in Millions) 2004 2003 2002 (Dollars in Millions) 2005 2004 2003
Taxable Taxable $ 1,808.6 $ 1,654.6 $ 1,438.2 Taxable $ 1,938 $ 1,809 $ 1,655
Non-taxable Non-taxable 18.5 29.4 46.1 Non-taxable 16 18 29

Total interest income from investment securities $ 1,827.1 $ 1,684.0 $ 1,484.3 Total interest income from investment securities $ 1,954 $ 1,827 $ 1,684
The following table provides information as to the amount of gross gains and losses realized through the sales of available-for-sale investment ~~securities.~~securities:

(Dollars in Millions) (Dollars in Millions) 2004 2003 2002 (Dollars in Millions) 2005 2004 2003
Realized gains Realized gains $ 104.5 $ 363.9 $ 316.5 Realized gains $ 13 $ 104 $ 364
Realized losses Realized losses (209.4 ) (119.1 ) (16.6 ) Realized losses (119 ) (209 ) (119 )

Net realized gains (losses) $ (104.9 ) $ 244.8 $ 299.9 Net realized gains (losses) $ (106 ) $ (105 ) $ 245

Income tax (benefit) on realized gains (losses) Income tax (benefit) on realized gains (losses) $ (39.9 ) $ 93.0 $ 114.0 Income tax (benefit) on realized gains (losses) $ (40 ) $ (40 ) $ 93
    For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale securities outstanding at December 31, ~~2004,~~2005, refer to Table 1011 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.

72  U.S. BANCORP  77

Note 87   ~~Loans and Allowance for Credit Losses~~LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition of the loan portfolio at December 31 was as follows:

(Dollars in Millions) 2004 2003
(Dollars in millions) (Dollars in millions) 2005 2004
Commercial
Commercial

Commercial

Commercial $ 35,210 $ 33,536
Lease financing 4,963 4,990 Commercial $ 37,844 $ 35,210

Lease financing 5,098 4,963
Total commercial 40,173 38,526
Total commercial 42,942 40,173
Commercial real estate
Commercial real estate

Commercial real estate

Commercial mortgages 20,315 20,624 Commercial mortgages 20,272 20,315
Construction and development 7,270 6,618 Construction and development 8,191 7,270

Total commercial real estate 27,585 27,242 Total commercial real estate 28,463 27,585
Residential mortgages
Residential mortgages
15,367 13,457
Residential mortgages
20,730 15,367
Retail
Retail

Retail

Credit card 6,603 5,933 Credit card 7,137 6,603
Retail leasing 7,166 6,029 Retail leasing 7,338 7,166
Home equity and second mortgages 14,851 13,210 Home equity and second mortgages 14,979 14,851
Other retail Other retail
Revolving credit 2,541 2,540 Revolving credit 2,504 2,541
Installment 2,767 2,380 Installment 3,582 2,767
Automobile 7,419 7,165 Automobile 8,112 7,419
Student 1,843 1,753 Student 2,019 1,843

Total other retail 14,570 13,838 Total other retail 16,217 14,570

Total retail 43,190 39,010 Total retail 45,671 43,190

Total loans $ 126,315 $ 118,235 Total loans $ 137,806 $ 126,315
    Loans are presented net of unearned interest and deferred fees and costs, which amounted to ~~$1.4~~$1.3 billion and ~~$1.5~~$1.4 billion at December 31, ~~2004~~2005 and ~~2003,~~2004, respectively. The Company had loans of $44.1 billion at December 31, 2005, and $38.3 billion at December 31, 2004, ~~and $28.7 billion at December 31, 2003,~~ pledged at the Federal Home Loan Bank. Loans of $18.1 billion at December 31, 2005, and $10.3 billion at December 31, 2004, ~~and $12.1 billion at December 31, 2003,~~ were pledged at the Federal Reserve Bank.
    The Company primarily lends to borrowers in the 24 states in which it has banking offices. Collateral for commercial loans may include marketable securities, accounts receivable, inventory and equipment. For details of the Company’s commercial portfolio by industry group and geography as of December 31, ~~2004~~2005 and ~~2003,~~2004, see Table 7 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.
    For detail of the Company’s commercial real estate portfolio by property type and geography as of December 31, ~~2004~~2005 and ~~2003,~~2004, see Table 98 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements. Such loans are collateralized by the related property.
    Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms, other real estate and other nonperforming assets owned by the Company. For details of the Company’s nonperforming assets as of December 31, ~~2004, 2003~~2005 and ~~2002,~~2004, see Table 1214 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.
The following table lists information related to nonperforming loans as of December 31:

(Dollars in Millions) 2004 2003 2005 2004
Loans on nonaccrual status $ 582.5 $ 979.5 $ 469 $ 582
Restructured loans 58.0 40.5 75 58

Total nonperforming loans $ 640.5 $ 1,020.0 $ 544 $ 640
Interest income that would have been recognized at original contractual terms $ 64.4 $ 94.1 $ 48 $ 64
Amount recognized as interest income 22.3 26.7 18 22

Forgone revenue $ 42.1 $ 67.4 $ 30 $ 42

78  U.S. BANCORP  73
Activity in the allowance for credit losses was as follows:

(Dollars in Millions) (Dollars in Millions) 2004 2003 2002 (Dollars in Millions) 2005 2004 2003
Balance at beginning of year Balance at beginning of year $ 2,368.6 $ 2,422.0 $ 2,457.3 Balance at beginning of year $ 2,269 $ 2,369 $ 2,422
Add Add Add
Provision charged to operating expense 669.6 1,254.0 1,349.0 Provision charged to operating expense 666 669 1,254
Deduct Deduct Deduct
Loans charged off 1,073.5 1,494.1 1,590.7 Loans charged off 949 1,074 1,494
Less recoveries of loans charged off 306.4 242.4 217.7 Less recoveries of loans charged off 264 307 242

Net loans charged off 767.1 1,251.7 1,373.0 Net loans charged off 685 767 1,252
Acquisitions and other changes Acquisitions and other changes (1.8 ) (55.7 ) (11.3 ) Acquisitions and other changes 1 (2 ) (55 )

Balance at end of year (a) Balance at end of year (a) $ 2,269.3 $ 2,368.6 $ 2,422.0 Balance at end of year (a) $ 2,251 $ 2,269 $ 2,369
Components Components Components
Allowance for loan losses $ 2,080.4 $ 2,183.6 Allowance for loan losses $ 2,041 $ 2,080 $ 2,184
Liability for unfunded credit commitments 188.9 185.0 Liability for unfunded credit commitments 210 189 185

Total allowance for credit losses $ 2,269.3 $ 2,368.6 Total allowance for credit losses $ 2,251 $ 2,269 $ 2,369
~~(a)~~ ~~Included in this analysis is activity related to the Company’s liability for unfunded commitments, which is separately recorded in other liabilities in the Consolidated Balance Sheet.~~
(a) Included in this analysis is activity related to the Company’s liability for unfunded commitments, which is separately recorded in other liabilities in the Consolidated Balance Sheet.
    A portion of the allowance for credit losses is allocated to commercial and commercial real estate loans deemed impaired. ~~All~~These impaired loans are included in nonperforming assets. A summary of ~~these~~impaired loans and their related allowance for credit losses is as follows:

2004 2003 2002 2005 2004 2003
Recorded Valuation Recorded Valuation Recorded Valuation Recorded Valuation Recorded Valuation Recorded Valuation
(Dollars in Millions) (Dollars in Millions) Investment Allowance Investment Allowance Investment Allowance (Dollars in Millions) Investment Allowance Investment Allowance Investment Allowance
Impaired loans Impaired loans Impaired loans
Valuation allowance required $ 489 $ 64 $ 841 $ 108 $ 992 $ 157 Valuation allowance required $ 388 $ 37 $ 489 $ 64 $ 841 $ 108
No valuation allowance required — — — — — — No valuation allowance required — — — — — —

Total impaired loans Total impaired loans $ 489 $ 64 $ 841 $ 108 $ 992 $ 157 Total impaired loans $ 388 $ 37 $ 489 $ 64 $ 841 $ 108

Average balance of impaired loans during the year Average balance of impaired loans during the year $ 600 $ 970 $ 839 Average balance of impaired loans during the year $ 412 $ 600 $ 970
Interest income recognized on impaired loans during the year Interest income recognized on impaired loans during the year 1 — — Interest income recognized on impaired loans during the year 2 1 —
    Commitments to lend additional funds to customers whose commercial or commercial real estate loans were classified as nonaccrual or restructured at December 31, ~~2004,~~2005, totaled ~~$61.2~~$35 million. ~~During 2004~~At December 31, 2005, there were ~~$10.2~~$1 million of these loans that were restructured at market interest rates and returned to an accruing status.
    In addition to impaired commercial and commercial real estate loans, the Company had smaller balance homogenous loans that are accruing interest at rates considered to be below market rate. At December 31, 2005 and 2004, the recorded investment in these other restructured loans was $315 million and $227 million, respectively, with average balances of $278 million during 2005 and $229 million during 2004. The Company recognized estimated interest income on these loans of $20 million $17 million during 2005 and 2004 respectively.
    Included in noninterest income, primarily in mortgage banking revenue, for the years ended December 31, 2005, 2004 ~~2003~~ and ~~2002,~~2003, the Company had net gains on the sale of loans of ~~$171.0~~$175 million, ~~$162.9~~$171 million and ~~$243.4~~$163 million, respectively.

Note 98   ~~Leases~~LEASES
The components of the net investment in sales-type and direct financing leases at December 31 were as follows:

(Dollars in Millions) (Dollars in Millions) 2004 2003 (Dollars in Millions) 2005 2004
Aggregate future minimum lease payments to be received Aggregate future minimum lease payments to be received $ 12,436 $ 11,293 Aggregate future minimum lease payments to be received $ 13,023 $ 12,436
Unguaranteed residual values accruing to the lessor’s benefit Unguaranteed residual values accruing to the lessor’s benefit 615 652 Unguaranteed residual values accruing to the lessor’s benefit 392 615
Unearned income Unearned income (1,560 ) (1,533 ) Unearned income (1,556 ) (1,560 )
Initial direct costs Initial direct costs 264 226 Initial direct costs 268 264

Total net investment in sales-type and direct financing leases $ 11,755 $ 10,638 Total net investment in sales-type and direct financing leases(a) $ 12,127 $ 11,755
(a) The ~~amount of future~~accumulated allowance for uncollectible minimum lease payments ~~included the following~~was $112 million and $141 million at December ~~31:~~31, 2005 and 2004, respectively.

(Dollars in Millions) 2004 2003
Accumulated allowance for uncollectible minimum lease payments $ 141 $ 131

74  U.S. BANCORP  79
The minimum future lease payments to be received from sales-type and direct financing leases were as follows at December 31, ~~2004:~~2005:

(Dollars in Millions)
2005 $ 2,272
2006 2,468 $ 2,489
2007 3,192 3,084
2008 2,893 3,844
2009 1,394 2,319
2010 1,067
Thereafter 217 220

Note 109   ~~Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities~~ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
~~FINANCIAL ASSET SALES~~Financial Asset Sales
When the Company sells financial assets, it may retain interest-only strips, servicing rights, residual rights to a cash reserve account, and/or other retained interests in the sold financial assets. The gain or loss on sale depends in part on the previous carrying amount of the financial assets involved in the transfer and is allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer. Quoted market prices are used to determine retained interest fair values when readily available. Since quotes are generally not available for retained interests, the Company estimates fair value based on the present value of future expected cash flows using management’s best estimates of the key assumptions including credit losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. Retained interests and liabilities are recorded at fair value using a discounted cash flow methodology at inception and are evaluated at least quarterly thereafter.
Conduits and SecuritizationThe Company sponsors an off-balance sheet conduit, a qualified special purpose entity (“QSPE”), to which it transferred high-grade investment securities, funded by the issuance of commercial paper. Because QSPE’s are exempt from consolidation under the provisions of Financial Interpretation No. 46, “Consolidation of Variable Interest Entities (“FIN 46”), the Company does not consolidate the conduit structure in its financial statements. The conduit ~~a qualifying special purpose entity,~~ held assets of $3.8 billion at December 31, 2005, and $5.7 billion at December 31, ~~2004 and $7.3 billion in assets at December 31, 2003.~~2004. These investment securities include primarily (i) private label asset-backed securities, which are insurance “wrapped” by AAA/Aaa-rated monoline insurance companies and (ii) government agency mortgage-backed securities and collateralized mortgage obligations. The conduit had commercial paper liabilities of $3.8 billion at December 31, 2005, and $5.7 billion at December 31, ~~2004 and $7.3 billion at December 31, 2003.~~2004. The Company benefits by transferring the investment securities into a conduit that provides diversification of funding sources in a capital-efficient manner and the generation of income.
    The Company provides a liquidity facility to the conduit. Utilization of the liquidity facility would be triggered if the conduit is unable to, or does not, issue commercial paper to fund its assets. A liability for the estimate of the potential risk of loss the Company has as the liquidity facility provider is recorded on the balance sheet in other liabilities. The liability is adjusted downward over time as the underlying assets pay down with the offset recognized as other noninterest income. The liability for the liquidity facility was ~~$32.4~~$20 million at December 31, ~~2004~~2005, and ~~$47.3~~$32 million at December 31, ~~2003.~~2004. In addition, the Company recorded at fair value its retained residual interest in the investment securities conduit of ~~$56.8~~$28 million at December 31, ~~2004~~2005, and ~~$89.5~~$57 million at December 31, ~~2003.~~2004. The Company recorded ~~$24.9~~$17 million from the conduit during ~~2004~~2005 and ~~$30.5~~$25 million during ~~2003,~~2004, for revenues related to the conduit including fees for servicing, management, administration and accretion income from retained interests.
    The Company also has an asset-backed securitization to fund an unsecured small business credit product. The unsecured small business credit securitization trust held assets of $375.3 million at December 31, 2004, of which the Company retained $85.0 million of subordinated securities and a residual interest-only strip of $36.1 million. This compared with $497.5 million in assets at December 31, 2003, of which the Company retained $112.4 million of subordinated securities and a residual interest-only strip of $34.4 million. The qualifying special purpose entity issued asset-backed variable funding notes in various tranches. The Company provides credit enhancement in the form of subordinated securities and reserve accounts. The Company’s risk, primarily from losses in the underlying assets, was considered in determining the fair value of the Company’s retained interests in this securitization. The Company recognized income from subordinated securities, an interest-only strip and servicing fees from this securitization of $33.2 million during 2004 and $29.8 million during 2003. The unsecured small business credit securitization held average assets of $438.9 million in 2004, and $571.4 million in 2003.
During 2003, the Company undertook several actions with respect to off-balance sheet structures. In January 2003, the Company exercised a cleanup call option on an indirect automobile loan securitization, with the remaining assets from the securitization recorded on the Company’s balance sheet at fair value. The indirect automobile securitization held $156.1 million in assets at December 31, 2002.

80  U.S. BANCORP  75
    During the third quarter of 2003, the Company did not reissue more than 90 percent of the commercial paper funding of Stellar Funding Group, Inc. (“Stellar”), a commercial loan conduit. This action caused the conduit to lose its status as a qualifying special purpose entity. As a result, the Company recorded all of Stellar’s assets and liabilities at fair value and the results of operations in the consolidated financial statements of the Company. Given the floating-rate nature and high credit quality of the assets within the conduit, the impact to the Company’s financial statements was not significant. In the third quarter of 2003, average commercial loan balances increased by approximately $2 billion and the resulting increase in net interest income was offset by a similar decline in conduit fee income within commercial products revenue. Prior to December 31, 2003, the remaining commercial paper borrowings held by third-party investors matured and the conduit was legally dissolved.
Sensitivity AnalysisAt December 31, ~~2004,~~2005, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions for the investment securities conduit were as follows:

Unsecured
Small
Business Investment
December 31, 2004 (Dollars in Millions) Receivables Securities
Current economic assumptions sensitivity analysis

Carrying value (fair value) of retained interests $ 121.0 $ 56.8
Weighted average life (in years) .9 2.1
Expected remaining life (a)
2.3 years 4.1 years
Impact of 10% adverse change $ (.7 ) $ (5.6 )
Impact of 20% adverse change (3.0 ) (10.3 )
Expected credit losses (annual) (b)
6.3%-9.5 % NA
Impact of 10% adverse change $ (1.4 ) $ —
Impact of 20% adverse change (3.9 ) —
Residual cash flow discount rate
11.0 % 7.5 %
Impact of 10% adverse change $ (.2 ) $ (.4 )
Impact of 20% adverse change (1.5 ) (.7 )
Interest rate on variable rate loans and bonds (c)(d)
Prime LIBOR
Impact of 10% adverse change $ — $ —
Impact of 20% adverse change (1.1 ) —

December 31, 2005 (Dollars in Millions)
Current economic assumptions sensitivity analysis

Carrying value (fair value) of residual interest $ 27.9
Weighted average life (in years) 1.6
Expected remaining life (in years)
2.7
Impact of 10% adverse change $ (2.8 )
Impact of 20% adverse change (5.1 )
Expected credit losses (annual) (a)
NA
Impact of 10% adverse change $ —
Impact of 20% adverse change —
Residual cash flow discount rate
6.2 %
Impact of 10% adverse change $ (.2 )
Impact of 20% adverse change (.4 )
Interest rate on variable rate bonds (b)
NA
Impact of 10% adverse change $ —
Impact of 20% adverse change —
(a) ~~For the small business receivables a monthly principal payment rate assumption is used to value the residual interests.~~
~~(b)~~ Credit losses are zero ~~for the investment securities conduit~~ as the investments are all AAA/ Aaa rated or insured investments.
~~(c)~~ ~~For the small business receivables interest income is base on Prime + contractual spread.~~
~~(d)~~(b) The investment securities conduit is mostly match funded. Therefore, interest rate movements create no material impact to the value of the residual interest.
    These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, in this table the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumptions; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.
Cash Flow InformationThe table below summarizes certain cash flows received from and paid to conduit or structured ~~entities for the asset sales described above:~~entities:

Unsecured
Indirect Small Unsecured
Commercial Automobile Business Investment Small Business Investment
Year Ended December 31 (Dollars in Millions) Year Ended December 31 (Dollars in Millions) Loans Loans Receivables (a) Securities Year Ended December 31 (Dollars in Millions) Receivables (a) Securities
2005
2005

Proceeds from
Collections used by trust to purchase new receivables in revolving securitizations $ 50 $ —
Servicing and other fees received and cash flows on retained interests 62 22
2004
2004

2004

Proceeds from Proceeds from
New sales and securitizations $ — $ — $ — $ — Collections used by trust to purchase new receivables in revolving securitizations $ 329 $ —
Collections used by trust to purchase new receivables in revolving securitizations — — 328.7 — Servicing and other fees received and cash flows on retained interests 74 35
Servicing and other fees received and cash flows on retained interests — — 73.7 35.5

2003

Proceeds from
New sales and securitizations $ — $ — $ — $ —
Collections used by trust to purchase new receivables in revolving securitizations — — 420.6 —
Servicing and other fees received and cash flows on retained interests 23.9 24.3 85.3 51.8
Net cash flow from loan conduit consolidation (1,884.0 ) — — —
(a) The small business credit securitization iswas a revolving transaction where proceeds ~~are~~were reinvested until their legal terminations.

76  U.S. BANCORP  81
Other InformationQuantitative information related to managed assets and loan sales was as follows:

At December 31 Year Ended December 31 At December 31 Year Ended December 31
Total Principal Principal Amount Total Principal Principal Amount
Balance 90 Days or More Past Due (a) Average Balance Net Credit Losses Balance 90 Days or More Past Due (a) Average Balance Net Credit Losses
Asset Type (Dollars in Millions) Asset Type (Dollars in Millions) 2004 2003 2004 2003 2004 2003 2004 2003 Asset Type (Dollars in Millions) 2005 2004 2005 2004 2005 2004 2005 2004
Commercial
Commercial

Commercial

Commercial $ 35,891 $ 34,427 $ 311 $ 651 $ 35,274 $ 39,079 $ 129 $ 535 Commercial $ 38,075 $ 35,891 $ 254 $ 311 $ 38,207 $ 35,274 $ 58 $ 129
Lease financing 4,963 4,990 92 115 4,866 5,088 69 84 Lease financing 5,098 4,963 42 92 4,923 4,866 42 69

Total commercial 40,854 39,417 403 766 40,140 44,167 198 619 Total commercial 43,173 40,854 296 403 43,130 40,140 100 198

Commercial real estate
Commercial real estate

Commercial real estate

Commercial mortgages 20,315 20,624 175 181 20,386 20,166 18 28 Commercial mortgages 20,272 20,315 134 175 20,268 20,386 6 18
Construction and development 7,270 6,618 26 42 6,881 6,976 9 11 Construction and development 8,191 7,270 23 26 7,696 6,881 (3 ) 9

Total commercial real estate 27,585 27,242 201 223 27,267 27,142 27 39 Total commercial real estate 28,463 27,585 157 201 27,964 27,267 3 27
Residential mortgages
Residential mortgages
15,367 13,457 114 123 14,322 11,696 29 27
Residential mortgages
20,730 15,367 115 114 18,036 14,322 36 29

Retail
Retail

Retail

Credit card 6,603 5,933 115 100 6,090 5,525 252 255 Credit card 7,137 6,603 139 115 6,615 6,090 278 252
Retail leasing 7,166 6,029 6 8 6,653 5,804 39 50 Retail leasing 7,338 7,166 3 6 7,346 6,653 26 39
Other retail 29,421 27,048 101 135 28,461 26,876 251 311 Other retail 31,196 29,421 87 101 30,503 28,461 255 251

Total retail 43,190 39,010 222 243 41,204 38,205 542 616 Total retail 45,671 43,190 229 222 44,464 41,204 559 542

Total managed loans 126,996 119,126 940 1,355 122,933 121,210 796 1,301 Total managed loans 138,037 126,996 797 940 133,594 122,933 698 796
Investment securities
Investment securities
47,191 50,679 — — 49,452 45,574 — —
Investment securities
43,517 47,191 — — 46,740 49,452 — —

Total managed assets $ 174,187 $ 169,805 $ 940 $ 1,355 $ 172,385 $ 166,784 $ 796 $ 1,301 Total managed assets $ 181,554 $ 174,187 $ 797 $ 940 $ 180,334 $ 172,385 $ 698 $ 796
Less Less Less
Assets sold or securitized 6,391 8,236 7,235 11,174 Assets sold or securitized 3,980 6,391 5,126 7,235

Total assets held $ 167,796 $ 161,569 $ 165,150 $ 155,610 Total assets held $ 177,574 $ 167,796 $ 175,208 $ 165,150

Sold or securitized assets
Sold or securitized assets

Sold or securitized assets

Commercial loans $ — $ — $ — $ — $ — $ 1,834 $ — $ — Guaranteed SBA loans (b) $ 231 $ 315 $ — $ — $ 274 $ 364 $ — $ —
Indirect automobile loans (b) — — — — — 7 — — Small business credit lines (b) — 366 — 4 215 428 13 29
Guaranteed SBA loans (c) 315 406 — — 364 450 — — Investment securities 3,749 5,710 — — 4,637 6,443 �� — —
Small business credit lines (c) 366 485 4 6 428 557 29 49
Investment securities 5,710 7,345 — — 6,443 8,326 — — Total securitized assets $ 3,980 $ 6,391 $ — $ 4 $ 5,126 $ 7,235 $ 13 $ 29

Total securitized assets $ 6,391 $ 8,236 $ 4 $ 6 $ 7,235 $ 11,174 $ 29 $ 49
(a) Includes nonaccrual
(b) ~~Reported in “other retail” loans.~~
~~(c)~~ Reported in “commercial” ~~loans.~~loans

Note 1110   ~~Premises and Equipment~~PREMISES AND EQUIPMENT
Premises and equipment at December 31 consisted of the following:

(Dollars in Millions) (Dollars in Millions) 2004 2003 (Dollars in Millions) 2005 2004
Land Land $ 311 $ 311 Land $ 315 $ 311
Buildings and improvements Buildings and improvements 2,288 2,226 Buildings and improvements 2,313 2,288
Furniture, fixtures and equipment Furniture, fixtures and equipment 2,105 2,092 Furniture, fixtures and equipment 2,239 2,105
Capitalized building and equipment leases Capitalized building and equipment leases 138 175 Capitalized building and equipment leases 136 138
Construction in progress Construction in progress 5 7 Construction in progress 4 5

4,847 4,811 5,007 4,847
Less accumulated depreciation and amortization Less accumulated depreciation and amortization (2,957 ) (2,854 ) Less accumulated depreciation and amortization (3,166 ) (2,957 )

Total $ 1,890 $ 1,957 Total $ 1,841 $ 1,890
U.S. BANCORP  77

Note 1211   ~~Mortgage Servicing Rights~~MORTGAGE SERVICING RIGHTS
The Company’s portfolio of residential mortgages serviced for others was $69.0 billion, $63.2 billion ~~$53.9 billion~~ and ~~$43.1~~$53.9 billion at December 31, 2005, 2004 and 2003 ~~and 2002~~ respectively.
82  ~~U.S. BANCORP~~
Changes in the valuation allowance for capitalized mortgage servicing rights are summarized as follows:

Year Ended December 31 (Dollars in Millions) Year Ended December 31 (Dollars in Millions) 2004 2003 2002 Year Ended December 31 (Dollars in Millions) 2005 2004 2003
Balance at beginning of year Balance at beginning of year $ 160 $ 207 $ 53 Balance at beginning of year $ 172 $ 160 $ 207
Additions charged to operations 57 209 186 Additions charged (reductions credited) to operations (53 ) 57 209
Direct write-downs charged against the allowance (45 ) (256 ) (32 ) Direct write-downs charged against the allowance (49 ) (45 ) (256 )

Balance at end of year Balance at end of year $ 172 $ 160 $ 207 Balance at end of year $ 70 $ 172 $ 160
Changes in net carrying value of capitalized mortgage servicing rights are summarized as follows:

Year Ended December 31 (Dollars in Millions) Year Ended December 31 (Dollars in Millions) 2004 2003 2002 Year Ended December 31 (Dollars in Millions) 2005 2004 2003
Balance at beginning of year Balance at beginning of year $ 670 $ 642 $ 360 Balance at beginning of year $ 866 $ 670 $ 642
Rights purchased 139 55 229 Rights purchased 27 139 55
Rights capitalized 300 338 357 Rights capitalized 369 300 338
Amortization (186 ) (156 ) (94 ) Amortization (197 ) (186 ) (156 )
Rights sold — — (24 ) Reparation (impairment) 53 (57 ) (209 )
Impairment (57 ) (209 ) (186 )

Balance at end of year Balance at end of year 866 670 642 Balance at end of year 1,118 866 670
Impairment valuation allowance 172 160 207 Impairment valuation allowance 70 172 160

Initial carrying value, net of amortization Initial carrying value, net of amortization $ 1,038 $ 830 $ 849 Initial carrying value, net of amortization $ 1,188 $ 1,038 $ 830
The key economic assumptions used to estimate the value of the mortgage servicing rights portfolio were as follows:

December 31 (Dollars in Millions) 2004 2003 2005 2004 2003
Fair value $ 872 $ 670 $ 1,123 $ 872 $ 670
Expected weighted-average life (in years) 5.5 5.2 6.8 5.5 5.2
Discount rate 9.9 % 9.9 % 10.2 % 9.9 % 9.9 %
The estimated sensitivity of the fair value of the mortgage servicing rights portfolio to changes in interest rates at December 31, ~~2004,~~2005, was as follows:

Down Scenario Up Scenario Down Scenario Up Scenario
(Dollars in Millions) 50 bps 25 bps 25 bps 50 bps 50 bps 25 bps 25 bps 50 bps
Fair value $ (258 ) $ (133 ) $ 109 $ 177 $ (109 ) $ (47 ) $ 32 $ 58
    The fair value of mortgage servicing rights and its sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. InThe Company’s servicing portfolio consists of the ~~current interest~~distinct portfolios of Mortgage Revenue Bond Programs (“MRBP”), government-insured mortgages and conventional mortgages. The MRBP division specializes in servicing loans made under state and local housing authority programs. These programs provide mortgages to low- and moderate-income borrowers and are generally government-insured programs with a favorable rate ~~environment, mortgage~~subsidy, down payment and/or closing cost assistance. Mortgage loans originated as part of government agency and state loan programs tend to experience slower prepayment speeds and better cash flows than conventional mortgage loans. The Company’s servicing portfolio consists of the distinct portfolios of Mortgage Revenue Bond Programs (“MRBP”), government-related mortgages and conventional mortgages. The MRBP division specializes in servicing loans made under state and local housing authority programs. These programs provide mortgages to low and moderate income borrowers and are generally under government insured programs with down payment or closing cost assistance. The conventional and government servicing portfolios are predominantly comprised of fixed-rate agency loans (FNMA, FHLMC, GNMA, FHLB and various housing agencies) with limited adjustable-rate or jumbo mortgage loans.
78  U.S. BANCORP
A summary of the Company’s mortgage servicing rights and related characteristics by portfolio as of December 31, ~~2004,~~2005, was as follows:

(Dollars in Millions) MRBP Government Conventional Total MRBP Government Conventional Total
Servicing portfolio $ 7,524 $ 9,204 $ 46,435 $ 63,163 $ 7,206 $ 9,063 $ 52,737 $ 69,006
Fair market value $ 126 $ 136 $ 610 $ 872 $ 118 $ 152 $ 853 $ 1,123
Value (bps) 167 148 131 138 164 168 162 163
Weighted-average servicing fees (bps) 43 46 34 37 42 45 35 37
Multiple (value/servicing fees) 3.88 3.22 3.85 3.73 3.90 3.73 4.63 4.41
Weighted-average note rate 6.24 % 6.04 % 5.71 % 5.82 % 6.03 % 6.03 % 5.70 % 5.78 %
Age (in years) 3.6 2.2 1.7 2.0 3.7 2.7 2.1 2.3
Expected life (in years) 6.3 5.1 5.4 5.5 6.1 6.3 7.0 6.8
Discount rate 10.1 % 11.0 % 9.6 % 9.9 % 10.5 % 10.7 % 10.1 % 10.2 %
~~U.S. BANCORP~~  83

Note 1312   ~~Intangible Assets~~INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” on January 1, 2002. The most significant changes made by SFAS 142 are that goodwill and other indefinite lived intangible assets are no longer amortized and will be tested for impairment at least annually. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the amortization provisions of SFAS 142 were effective upon adoption of SFAS 142.
    Prior to the adoption of SFAS 142, the Company evaluated goodwill for impairment under a projected undiscounted cash flow model. As a result of the initial impairment test from the adoption of SFAS 142, the Company recognized an impairment loss of $58.8 million resulting in an after-tax loss of $37.2 million in the first quarter of 2002. The impairment was primarily related to the purchase of a transportation leasing company in 1998 by the equipment leasing business. This charge was recognized as a “cumulative effect of accounting change” in the income statement. The fair value of that reporting unit was estimated using the present value of future expected cash flows.
~~Net income and earnings per share adjusted for the exclusion of asset impairments related to goodwill are as follows:~~

Year Ended December 31 (Dollars in Millions, Except Per Share Data) 2004 2003 2002
Reported net income $4,166.8 $3,732.6 $3,168.1
Asset impairments, net of tax — — 37.2

Adjusted net income $4,166.8 $3,732.6 $3,205.3

Earnings per share
Reported net income $    2.21 $    1.94 $    1.65
Asset impairments, net of tax — — .02

Adjusted net income $    2.21 $    1.94 $    1.67

Diluted earnings per share
Reported net income $    2.18 $    1.93 $    1.65
Asset impairments, net of tax — — .02

Adjusted net income $    2.18 $    1.93 $    1.67
~~The following table reflects the changes in the carrying value of goodwill for the years ended December 31, 2003 and 2004:~~

Private Client,
Wholesale Consumer Trust and Asset Payment Capital Consolidated
(Dollars in Millions) Banking Banking Management Services Markets Company
Balance at December 31, 2002 $1,230 $2,241 $736 $1,812 $  306 $6,325
Goodwill acquired — 1 6 4 — 11
Other (a) (5 ) — — — (306 ) (311 )
Balance at December 31, 2003 $1,225 $2,242 $742 $1,816 $    — $6,025
Goodwill acquired — — 101 105 — 206
Other (a) — — — 10 — 10
Balance at December 31, 2004 $1,225 $2,242 $843 $1,931 $    — $6,241
~~(a)~~ In 2003, the Company completed a tax-free distribution of Piper Jaffray Companies. Other changes in goodwill include goodwill associated with Piper Jaffray Companies and foreign exchange effects on non-dollar-denominated goodwill.
84  ~~U.S. BANCORP~~
Intangible assets consisted of the following:

Estimated Amortization Balance Estimated Amortization Balance
December 31 (Dollars in Millions) December 31 (Dollars in Millions) Life (a) Method (b) 2004 2003 December 31 (Dollars in Millions) Life (a) Method (b) 2005 2004
Goodwill Goodwill — — $ 6,241 $ 6,025 Goodwill — — $ 7,005 $ 6,241
Merchant processing contracts Merchant processing contracts 9 years/8 years SL/AC 714 552 Merchant processing contracts 9 years/8 years SL/AC 767 714
Core deposit benefits Core deposit benefits 10 years/6 years SL/AC 336 417 Core deposit benefits 10 years/6 years SL/AC 262 336
Mortgage servicing rights Mortgage servicing rights 6 years AC 866 670 Mortgage servicing rights 7 years AC 1,118 866
Trust relationships Trust relationships 15 years/8 years SL/AC 297 311 Trust relationships 15 years/7 years SL/AC 477 297
Other identified intangibles Other identified intangibles 8 years/4 years SL/AC 174 174 Other identified intangibles 8 years/4 years SL/AC 250 174

Total $ 8,628 $ 8,149 Total $ 9,879 $ 8,628
(a) Estimated life represents the amortization period for assets subject to the straight line method and the weighted average amortization period for intangibles subject to accelerated methods. If more than one amortization method is used for a category, the estimated life for each method is calculated and reported separately.
~~(b) Amortization methods: SL = straight line method~~
                                          ~~AC = accelerated methods generally based on cash flows~~
(b) Amortization methods: SL = straight line method
                                      AC = accelerated methods generally based on cash flows
Aggregate amortization expense consisted of the following:

Year Ended December 31 (Dollars in Millions) Year Ended December 31 (Dollars in Millions) 2004 2003 2002 Year Ended December 31 (Dollars in Millions) 2005 2004 2003
Merchant processing contracts Merchant processing contracts $ 131.6 $ 132.4 $ 135.1 Merchant processing contracts $ 138 $ 132 $ 132
Core deposit benefits Core deposit benefits 80.7 88.2 80.9 Core deposit benefits 74 81 88
Mortgage servicing rights (a) Mortgage servicing rights (a) 242.6 365.1 280.1 Mortgage servicing rights (a) 144 243 365
Trust relationships Trust relationships 49.4 53.3 19.3 Trust relationships 47 49 53
Other identified intangibles Other identified intangibles 45.8 43.4 37.6 Other identified intangibles 55 45 44

Total $ 550.1 $ 682.4 $ 553.0 Total $ 458 $ 550 $ 682
~~(a)~~ ~~Includes mortgage servicing rights impairment of $56.8 million, $208.7 million and $186.1 million for the years ended December 31, 2004, 2003 and 2002, respectively.~~
(a) Includes mortgage servicing rights reparation of $53 million and impairment of $57 million and $209 million for the years ended December 31, 2005, 2004 and 2003, respectively.
Below is the estimated amortization expense for the next five years:

(Dollars in Millions)
2005 $ 458.9
2006 389.4 $ 480
2007 334.0 425
2008 273.8 358
2009 225.2 302
2010 232
U.S. BANCORP  79
The following table reflects the changes in the carrying value of goodwill for the years ended December 31, 2004 and 2005:

Private Client,
Wholesale Consumer Trust and Asset Payment Consolidated
(Dollars in Millions) Banking Banking Management Services Company
Balance at December 31, 2003 $ 1,225 $ 2,242 $ 742 $ 1,816 $ 6,025
Goodwill acquired — — 101 105 206
Other (a) — — — 10 10
Balance at December 31, 2004 $ 1,225 $ 2,242 $ 843 $ 1,931 $ 6,241
Goodwill acquired — — 500 248 748
Other (a) — — — 16 16
Balance at December 31, 2005 $ 1,225 $ 2,242 $ 1,343 $ 2,195 $ 7,005
(a) Other changes in goodwill include foreign exchange effects on non-dollar-denominated goodwill.

Note 1413   ~~Short-Term Borrowings~~SHORT-TERM BORROWINGS
The following table is a summary of short-term borrowings for the last three years:

2004 2003 2002 2005 2004 2003
(Dollars in Millions) (Dollars in Millions) Amount Rate Amount Rate Amount Rate (Dollars in Millions) Amount Rate Amount Rate Amount Rate
At year-end At year-end At year-end
Federal funds purchased $ 3,379 1.25 % $ 5,098 .91 % $ 3,025 .98 % Federal funds purchased $ 3,133 3.93 % $ 3,379 1.25 % $ 5,098 .91 %
Securities sold under agreements to repurchase 4,848 1.95 3,586 .71 2,950 .97 Securities sold under agreements to repurchase 10,854 3.65 4,848 1.95 3,586 .71
Commercial paper 2,634 2.11 699 .88 380 1.20 Commercial paper 4,419 3.89 2,634 2.11 699 .88
Treasury, tax and loan notes 251 1.72 809 .69 102 .91 Treasury, tax and loan notes 430 3.84 251 1.72 809 .69
Other short-term borrowings 1,972 2.20 658 .65 1,349 1.26 Other short-term borrowings 1,364 3.90 1,972 2.20 658 .65

Total $ 13,084 1.84 % $ 10,850 .81 % $ 7,806 1.03 % Total $ 20,200 3.76 % $ 13,084 1.84 % $ 10,850 .81 %
Average for the year Average for the year Average for the year
Federal funds purchased $ 3,823 3.10 % $ 4,966 2.36 % $ 4,145 2.94 % Federal funds purchased $ 2,916 6.63 % $ 3,823 3.10 % $ 4,966 2.36 %
Securities sold under agreements to repurchase 6,144 1.19 3,374 .79 2,308 1.14 Securities sold under agreements to repurchase 11,849 2.93 6,144 1.19 3,374 .79
Commercial paper 1,144 .91 681 1.06 391 1.74 Commercial paper 3,326 3.11 1,144 .91 681 1.06
Treasury, tax and loan notes 804 1.01 634 .95 707 1.50 Treasury, tax and loan notes 142 3.17 804 1.01 634 .95
Other short-term borrowings 2,619 2.01 848 1.13 2,565 2.23 Other short-term borrowings 1,149 3.62 2,619 2.01 848 1.13

Total $ 14,534 1.81 % $ 10,503 1.59 % $ 10,116 2.20 % Total $ 19,382 3.56 % $ 14,534 1.81 % $ 10,503 1.59 %
Maximum month-end balance Maximum month-end balance Maximum month-end balance
Federal funds purchased $ 6,342 $ 6,658 $ 7,009 Federal funds purchased $ 4,559 $ 6,342 $ 6,658
Securities sold under agreements to repurchase 8,972 4,173 2,950 Securities sold under agreements to repurchase 14,931 8,972 4,173
Commercial paper 2,687 952 452 Commercial paper 4,419 2,687 952
Treasury, tax and loan notes 7,867 4,223 4,164 Treasury, tax and loan notes 430 7,867 4,223
Other short-term borrowings 3,856 2,676 6,172 Other short-term borrowings 1,563 3,856 2,676

80  U.S. BANCORP  85

Note 1514   ~~Long-Term Debt~~LONG-TERM DEBT
Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following:

(Dollars in Millions) (Dollars in Millions) 2004 2003 (Dollars in Millions) 2005 2004
U.S. Bancorp(Parent Company)
U.S. Bancorp(Parent Company)

U.S. Bancorp(Parent Company)

Fixed-rate subordinated notes Fixed-rate subordinated notes Fixed-rate subordinated notes
8.00% due 2004 $ — $ 73 7.625% due 2005 $ — $ 120
7.625% due 2005 120 120 6.75% due 2005 — 186
6.75% due 2005 186 191 6.875% due 2007 220 220
6.875% due 2007 220 220 7.30% due 2007 74 171
7.30% due 2007 171 200 7.50% due 2026 200 200
Floating-rate convertible senior debentures Floating-rate convertible senior debentures
2.69% due 2035 2,500 —
7.50% due 2026 200 200 3.00% due 2035 2,000 —
Medium-term notes Medium-term notes 3,225 4,025 Medium-term notes 2,725 3,225
Junior subordinated debentures Junior subordinated debentures 2,669 2,601 Junior subordinated debentures 3,152 2,629
Capitalized lease obligations, mortgage indebtedness and other 108 171
Capitalized lease obligations, mortgage indebtedness and other (a) Capitalized lease obligations, mortgage indebtedness and other (a) (17 ) 148

Subtotal 6,899 7,801 Subtotal 10,854 6,899
Subsidiaries
Subsidiaries

Subsidiaries

Fixed-rate subordinated notes Fixed-rate subordinated notes Fixed-rate subordinated notes
6.375% due 2004 — 75 7.30% due 2005 — 100
6.375% due 2004 — 150 6.875% due 2006 23 70
7.55% due 2004 — 100 6.625% due 2006 26 100
8.35% due 2004 — 100 6.50% due 2008 300 300
7.30% due 2005 100 100 6.30% due 2008 300 300
6.875% due 2006 70 70 5.70% due 2008 400 400
6.625% due 2006 100 100 7.125% due 2009 500 500
6.50% due 2008 300 300 7.80% due 2010 — 300
6.30% due 2008 300 300 6.375% due 2011 1,500 1,500
5.70% due 2008 400 400 6.30% due 2014 963 963
7.125% due 2009 500 500 4.95% due 2014 1,000 650
7.80% due 2010 300 300 4.80% due 2015 500 500
6.375% due 2011 1,500 1,500 3.80% due 2015 370 —
6.30% due 2014 963 1,000
4.95% due 2014 650 —
4.80% due 2015 500 500
Floating-rate subordinated notes Floating-rate subordinated notes Floating-rate subordinated notes
2.34% due 2014 350 — 4.42% due 2014 550 350
Federal Home Loan Bank advances Federal Home Loan Bank advances 3,629 8,595 Federal Home Loan Bank advances 4,041 3,629
Bank notes Bank notes 17,624 10,870 Bank notes 15,400 17,624
Euro medium-term notes due 2004 — 400
Capitalized lease obligations, mortgage indebtedness and other 554 655
Capitalized lease obligations, mortgage indebtedness and other (a) Capitalized lease obligations, mortgage indebtedness and other (a) 342 554

Subtotal 27,840 26,015 Subtotal 26,215 27,840

Total $ 34,739 $ 33,816 Total $ 37,069 $ 34,739
(a) Other includes debt issuance fees and unrealized gains and losses and deferred fees relating to derivative instruments.
In August 2005, the Company issued floating-rate convertible senior debentures of $2.5 billion, due August 21, 2035. These debentures bear interest at a floating-rate equal to three-month LIBOR, minus 1.68 percent, payable quarterly until August 21, 2026. After that date, the Company will not pay interest on the debentures prior to maturity. On the maturity date or certain earlier redemption dates, the holder will receive the original principal amount of $1,000 per debenture, plus accrued interest. At December 31, 2005, the interest rate was 2.69 percent. The debentures are callable anytime on or after August 21, 2006, at a price equal to 100 percent of the accreted principle amount plus accrued and unpaid interest and putable August 21, 2006, 2007, 2010, and every five years, thereafter, until maturity at a price equal to 100 percent of the accreted principle amount plus accrued and unpaid interest. The debentures are convertible at any time on or prior to the maturity date at an initial conversion rate of 27.7316 shares for each $1,000 debenture. This results in a conversion price of approximately $36.06 per share and represents a premium of 20 percent over the closing sale price of $30.05 per share on August 9, 2005. If converted, holders of the convertible debentures will generally receive cash up to the accreted principal amount of the debentures and, if the market price of the Company’s common stock exceeds the conversion price in effect on the conversion date, holders will also receive a number of shares of the Company’s common stock, or the equivalent amount in cash at the option of the Company, per debenture as determined pursuant to a specified formula.
U.S. BANCORP  81
    In ~~April 2003,~~December 2005, the Company issued floating-rate convertible senior debentures of $2.0 billion, due December 11, 2035. These debentures bear interest at a floating-rate equal to three-month LIBOR, minus 1.46 percent, payable quarterly until December 11, 2030. After that date, the Company will not pay interest on the debentures prior to maturity. On the maturity date or certain earlier redemption dates, the holder will receive the original principal amount of $1,000 per debenture plus accrued interest. At December 31, 2005, the interest rate was 3.00 percent. The debentures are callable anytime on or after December 11, 2006, at a price equal to 100 percent of the accreted principle amount plus accrued and unpaid interest and putable December 11, 2006, March 11, 2007, June 11, 2007, September 11, 2007, December 11, 2007, 2010, and every five years, thereafter, until maturity at a price equal to 100 percent of the accreted principle amount plus accrued and unpaid interest. The debentures are convertible at any time on or prior to the maturity date at an initial conversion rate of 27.1370 shares for each $1,000 debenture. This results in a conversion price of approximately $36.85 per share and represents a premium of 20 percent over the closing sale price of $30.71 per share on December 5, 2005. If converted, holders of the convertible debentures will generally receive cash up to the accreted principal amount of the debentures and, if the market price of the Company’s common stock exceeds the conversion price in effect on the conversion date, holders will also receive a number of shares of the Company’s common stock, or the equivalent amount in cash at the option of the Company, per debenture as determined pursuant to a specified formula.
    Medium-term notes (“MTNs”) outstanding at December 31, 2005, mature from March 2006 through July 2010. The MTNs bear fixed interest rates ranging from 2.63 percent to 5.10 percent. The weighted-average interest rate of MTNs at December 31, 2005, was 3.82 percent.
    In March 2005, the Company issued $275 million of fixed-rate junior subordinated debentures due March 9, 2035. The interest rate is 5.75 percent per annum. In August 2005, the Company issued $300 million of fixed-rate junior subordinated debentures due August 15, 2035. The interest rate is 5.875 percent per annum. In December 2005, the Company also issued $375 million of fixed-rate junior subordinated debentures due December 29, 2065. The interest rate is 6.35 percent per annum.
    In October 2004, the Company’s subsidiary U.S. Bank National Association (“USBNA”) issued ~~$500~~$650 million of fixed-rate subordinated notes due ~~April 15,~~October 30, 2014. The interest rate is 4.95 percent per annum. In January of 2005, USBNA issued $200 million of fixed-rate subordinated notes due October 30, 2014. The interest rate is 4.95 percent per annum. In March 2005, USBNA issued $150 million of fixed-rate subordinated debentures due October 30, 2014. The interest rate is 4.95 percent per annum. In August 2005, USBNA issued $370 million of fixed-rate subordinated notes in foreign denomination due August 9, 2015. The interest rate is ~~4.80~~3.80 percent per annum. The Company presents these foreign notes in U.S. dollars on the balance sheet.
In October of 2004, USBNA issued floating-rate subordinated notes of $350 million, due October 14, 2014. These notes bear floating-rate interest of three-month LIBOR plus .28 percent. The interest rate at December 31, ~~2004~~2005, was ~~2.34~~4.42 percent. In ~~October of 2004,~~January 2005, USBNA ~~also~~ issued ~~$650 million of fixed-rate~~floating-rate subordinated notes of $200 million, due October ~~30,~~14, 2014. These notes bear floating-rate interest of three-month LIBOR plus ..28 percent. The interest rate ~~is 4.95 percent, per annum.~~
    ~~Medium-term notes (“MTNs”) outstanding~~ at December 31, ~~2004, mature from March~~ 2005, ~~through March 2008. The MTNs bear fixed or floating interest rates ranging from 2.63 percent to 5.10 percent. The weighted-average interest rate of MTNs at December 31, 2004,~~ was ~~3.51~~4.42 percent.
    Federal Home Loan Bank (“FHLB”) advances outstanding at December 31, ~~2004,~~2005, mature from ~~February 2005~~August 2006 through ~~October 2026.~~September 2035. The advances bear fixed or floating interest rates ranging from .50 percent to 8.25 percent. The Company has an arrangement with the FHLB whereby based on collateral available (residential and commercial mortgages), the Company could have borrowed an additional ~~$19.3~~$23.0 billion at December 31, ~~2004.~~2005. The weighted-average interest rate of FHLB advances at December 31, ~~2004,~~2005, was ~~2.64~~4.47 percent. ~~The Euro medium-term notes matured on April 13, 2004.~~
86  ~~U.S. BANCORP~~
    Bank notes outstanding at December 31, ~~2004,~~2005, mature from ~~January 2005~~February 2006 through March 2009. The bank notes bear fixed or floating interest rates ranging from ~~1.20~~2.40 percent to ~~5.63~~4.55 percent. The weighted-average interest rate of ~~Bank~~bank notes at December 31, ~~2004,~~2005, was ~~2.47~~4.09 percent.
    During ~~2004~~2005, the Company prepaid long-term debt, ~~principally representing FHLB advances,~~including subordinated notes and junior subordinated debentures, of ~~$4.8~~$.7 billion in connection with asset/liability management decisions, incurring ~~$154.8~~$54 million in prepayment charges.
82  U.S. BANCORP
Maturities of long-term debt outstanding at December 31, ~~2004,~~2005, were:

Parent Parent
(Dollars in Millions) Consolidated Company Company Consolidated
2005 $ 11,932 $ 1,320
2006 6,309 655 $ 626 $ 7,690
2007 5,819 1,501 1,378 8,226
2008 2,221 503 504 4,648
2009 1,018 5 5 997
2010 496 2,502
Thereafter 7,440 2,915 7,845 13,006

Total $ 34,739 $ 6,899 $ 10,854 $ 37,069

Note 1615   ~~Junior Subordinated Debentures~~JUNIOR SUBORDINATED DEBENTURES
The Company sponsors and wholly owns 100% of the common equity of ~~eight~~eleven trusts that were formed for the purpose of issuing Company-obligated mandatorily redeemable preferred securities (“Trust Preferred Securities”) to third-party investors and investing the proceeds from the sale of the Trust Preferred Securities solely in junior subordinated debt securities of the Company (the “Debentures”). The Debentures held by the trusts, which total ~~$2.6~~$3.2 billion, are the sole assets of each trust. The Company’s obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trusts. The guarantee covers the distributions and payments on liquidation or redemption of the Trust Preferred Securities, but only to the extent of funds held by the Trusts. The Company used the proceeds from the sales of the Debentures for general corporate purposes.
    The Company has the right to redeem retail Debentures in whole or in part, on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. The Company has the right to redeem institutional Debentures in whole, (but not in part), on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. The Debentures are redeemable in 2006, 2007 and ~~2007~~2010 in the amounts of ~~$2.3~~$1.9 billion, $310 million and ~~$310~~$979 million, respectively.
    In March 2004, as a result of adopting the provisions of Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, the Company was required to de-consolidate these subsidiary trusts from its financial statements. The de-consolidation of the net assets and results of operations of the trusts had an insignificant impact on the Company’s financial statements and liquidity position since the Company continues to be obligated to repay the Debentures held by the trusts and guarantees repayment of the Trust Preferred Securities issued by the trusts. The consolidated debt obligation related to the trusts increased $79 million upon de-consolidation with the increase representing the Company’s common equity ownership in the trusts. The Trust Preferred Securities held by the trusts qualify as Tier 1 capital for the Company under the Federal Reserve Board guidelines. The banking regulatory agencies have issued guidance that would continue the current regulatory capital treatment for Trust Preferred Securities.

U.S. BANCORP  8783
The following table is a summary of the Debentures included in long-term debt as of December 31, ~~2004:~~2005:

Trust Trust
Preferred Earliest Preferred
Issuance Securities Debentures Rate Maturity Redemption Securities Debentures Rate Earliest
Issuance Trust (Dollars in Millions) Issuance Trust (Dollars in Millions) Date Amount Amount (a) Type (b) Rate Date Date Issuance Trust (Dollars in Millions) Issuance Date Amount Amount Type (a) Rate Maturity Date Redemption Date
Retail
Retail

Retail

USB Capital V December 2001 $300 $309 Fixed 7.25 % December 2031 December 7, 2006 USB Capital VIII December 2005 $ 375 $ 387 Fixed 6.35 December 2065 December 29, 2010
USB Capital IV November 2001 500 515 Fixed 7.35 November 2031 November 1, 2006 USB Capital VII August 2005 300 309 Fixed 5.88 August 2035 August 15, 2010
USB Capital III May 2001 700 722 Fixed 7.75 May 2031 May 4, 2006 USB Capital VI March 2005 275 283 Fixed 5.75 March 2035 March 9, 2010
USB Capital V December 2001 300 309 Fixed 7.25 December 2031 December 7, 2006
USB Capital IV November 2001 500 515 Fixed 7.35 November 2031 November 1, 2006
USB Capital III May 2001 700 722 Fixed 7.75 May 2031 May 4, 2006
Institutional
Institutional

Institutional

Star Capital I June 1997 150 155 Variable 3.26 June 2027 June 15, 2007 Star Capital I June 1997 150 155 Variable 5.26 June 2027 June 15, 2007
Mercantile Capital Trust I February 1997 150 155 Variable 3.01 February 2027 February 1, 2007 Mercantile Capital Trust I February 1997 150 155 Variable 5.10 February 2027 February 1, 2007
USB Capital I December 1996 300 309 Fixed 8.27 December 2026 December 15, 2006 U.S. Bancorp Capital I December 1996 80 82 Fixed 8.27 December 2026 December 15, 2006
Firstar Capital Trust I December 1996 150 155 Fixed 8.32 December 2026 December 15, 2006 Firstar Capital Trust I December 1996 150 155 Fixed 8.32 December 2026 December 15, 2006
FBS Capital I November 1996 300 309 Fixed 8.09 November 2026 November 15, 2006 FBS Capital I November 1996 77 80 Fixed 8.09 November 2026 November 15, 2006

Total $ 3,057 $ 3,152
~~(a)~~ Junior subordinated debentures issued to unconsolidated subsidiary trusts that are designated in fair value hedges at December 31, 2004, are recorded on the balance sheet at fair value. Carrying value includes a fair value adjustment of $43 million related to hedges on certain junior subordinated debentures, as well as prepaid issuance fees of $(3) million.
~~(b)~~ ~~The variable-rate Trust Preferred Securities and Debentures reprice quarterly based on three-month LIBOR.~~
(a) The variable-rate Trust Preferred Securities and Debentures reprice quarterly based on three-month LIBOR.

Note 1716   ~~Shareholders’ Equity~~SHAREHOLDERS’ EQUITY
At December 31, ~~2004~~2005 and ~~2003,~~2004, the Company had authority to issue 4 billion shares of common stock and 1050 million shares of preferred stock. The Company had ~~1,857.6~~1,815 million and ~~1,922.9~~1,858 million shares of common stock outstanding at December 31, ~~2004~~2005 and ~~2003,~~2004, respectively. At December 31, ~~2004,~~2005, the Company had ~~170.5~~151 million shares of common stock reserved for future issuances, primarily under stock option plans.
    The Company has a preferred share purchase rights plan intended to preserve the long-term value of the Company by discouraging a hostile takeover of the Company. Under the plan, each share of common stock carries a right to purchase one one-thousandth of a share of preferred stock. The rights become exercisable in certain limited circumstances involving a potential business combination transaction or an acquisition of shares of the Company and are exercisable at a price of $100 per right, subject to adjustment. Following certain other events, each right entitles its holder to purchase for $100 an amount of common stock of the Company, or, in certain circumstances, securities of the acquirer, having a then-current market value of twice the exercise price of the right. The dilutive effect of the rights on the acquiring company is intended to encourage it to negotiate with the Company’s Board of Directors prior to attempting a takeover. If the Board of Directors believes a proposed acquisition is in the best interests of the Company and its shareholders, the Board may amend the plan or redeem the rights for a nominal amount in order to permit the acquisition to be completed without interference from the plan. Until a right is exercised, the holder of a right has no rights as a shareholder of the Company. The rights expire on February 27, 2011.
    On December 18, 2001, the Board of Directors approved an authorization to repurchase 100 million shares of common stock through 2003. In 2003, the Company repurchased ~~7.0~~7 million shares of common stock under the plan, which expired in December of 2003. On December 16, 2003, the Board of Directors approved an authorization to repurchase 150 million shares of outstanding common stock during the following 24 months. During 2003, the Company repurchased ~~8.0~~8 million shares ~~of common stock~~ under the December 2003 plan. In 2004, the Company repurchased ~~88.8~~89 million shares of common stock under the plan. On December 21, 2004, the Board of Directors approved an authorization to repurchase 150 million shares of outstanding common stock during the following 24 months. This new repurchase program replaces the Company’s December 16, 2003, program. In 2004, the Company repurchased ~~5.0~~5 million shares of common stock under the plan. During 2005, all share repurchases were made under the 2004 plan.
The following table summarizes the Company’s common stock repurchased in each of the last three years:

(Dollars and Shares in Millions) Shares Value Shares Value
2005 62 $ 1,807
2004 93.8 $ 2,656 94 2,656
2003 15.0 417 15 417
2002 45.3 1,040

88  84  U.S. BANCORP
    Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to Accumulated Other Comprehensive Income. The reconciliation of the transactions affecting Accumulated Other Comprehensive Income included in shareholders’ equity for the years ended December 31, is as follows:

Transactions Transactions
Balances
Balances
(Dollars in Millions) (Dollars in Millions) Pre-tax Tax-effect Net-of-tax Net-of-tax (Dollars in Millions) Pre-tax Tax-effect Net-of-tax Net-of-Tax
2005
2005

Unrealized loss on securities available-for-sale Unrealized loss on securities available-for-sale $ (539 ) $ 205 $ (334 ) $ (402 )
Unrealized loss on derivatives Unrealized loss on derivatives (58 ) 22 (36 ) (27 )
Foreign currency translation adjustment Foreign currency translation adjustment 3 (1 ) 2 7
Realized loss on derivatives Realized loss on derivatives (74 ) 28 (46 ) 16
Reclassification adjustment for losses realized in net income Reclassification adjustment for losses realized in net income 39 (15 ) 24 —
Minimum pension liability adjustment Minimum pension liability adjustment (38 ) 15 (23 ) (23 )

Total $ (667 ) $ 254 $ (413 ) $ (429 )

2004
2004

2004

Unrealized loss on securities available-for-sale Unrealized loss on securities available-for-sale $ (123 ) $ 47 $ (76 ) $ (135 ) Unrealized loss on securities available-for-sale $ (123 ) $ 47 $ (76 ) $ (135 )
Unrealized loss on derivatives Unrealized loss on derivatives (43 ) 16 (27 ) 9 Unrealized loss on derivatives (43 ) 16 (27 ) 9
Foreign currency translation adjustment Foreign currency translation adjustment (17 ) 6 (11 ) 5 Foreign currency translation adjustment (17 ) 6 (11 ) 5
Realized gain on derivatives Realized gain on derivatives 16 (6 ) 10 105 Realized gain on derivatives 16 (6 ) 10 105
Reclassification adjustment for losses realized in net income Reclassification adjustment for losses realized in net income 32 (12 ) 20 — Reclassification adjustment for losses realized in net income 32 (12 ) 20 —

Total $ (135 ) $ 51 $ (84 ) $ (16 ) Total $ (135 ) $ 51 $ (84 ) $ (16 )

2003
2003

2003

Unrealized loss on securities available-for-sale Unrealized loss on securities available-for-sale $ (716 ) $ 272 $ (444 ) $ (123 ) Unrealized loss on securities available-for-sale $ (716 ) $ 272 $ (444 ) $ (123 )
Unrealized loss on derivatives Unrealized loss on derivatives (373 ) 142 (231 ) 35 Unrealized loss on derivatives (373 ) 142 (231 ) 35
Foreign currency translation adjustment Foreign currency translation adjustment 23 (9 ) 14 16 Foreign currency translation adjustment 23 (9 ) 14 16
Realized gain on derivatives Realized gain on derivatives 199 (76 ) 123 140 Realized gain on derivatives 199 (76 ) 123 140
Reclassification adjustment for gains realized in net income Reclassification adjustment for gains realized in net income (288 ) 110 (178 ) — Reclassification adjustment for gains realized in net income (288 ) 110 (178 ) —

Total $ (1,155 ) $ 439 $ (716 ) $ 68 Total $ (1,155 ) $ 439 $ (716 ) $ 68

2002

Unrealized gain on securities available-for-sale $ 1,048 $ (398 ) $ 650 $ 473
Unrealized gain on derivatives 324 (123 ) 201 266
Foreign currency translation adjustment 7 (3 ) 4 2
Realized gain on derivatives 64 (24 ) 40 43
Reclassification adjustment for gains realized in net income (332 ) 126 (206 ) —

Total $ 1,111 $ (422 ) $ 689 $ 784
Regulatory CapitalThe measures used to assess capital include the capital ratios established by bank regulatory agencies, including the specific ratios for the “well capitalized” designation. For a description of the regulatory capital requirements and the actual ratios as of December 31, ~~2004~~2005 and ~~2003,~~2004, for the Company and its bank subsidiaries, see Table 2021 included in Management’s Discussion and Analysis, which is incorporated by reference into these Notes to Consolidated Financial Statements.

Note 1817   ~~Earnings Per Share~~EARNINGS PER SHARE
The components of earnings per share were:

(Dollars and Shares in Millions, Except Per Share Data) (Dollars and Shares in Millions, Except Per Share Data) 2004 2003 2002 (Dollars and Shares in Millions, Except Per Share Data) 2005 2004 2003
Income from continuing operations Income from continuing operations $ 4,166.8 $ 3,710.1 $ 3,228.0 Income from continuing operations $ 4,489 $ 4,167 $ 3,710
Income (loss) from discontinued operations (after-tax) — 22.5 (22.7 )
Cumulative effect of accounting change (after-tax) — — (37.2 )
Income from discontinued operations (after-tax) Income from discontinued operations (after-tax) — — 23

Net income $ 4,166.8 $ 3,732.6 $ 3,168.1 Net income $ 4,489 $ 4,167 $ 3,733

Average common shares outstanding Average common shares outstanding 1,887.1 1,923.7 1,916.0 Average common shares outstanding 1,831 1,887 1,924
Net effect of the assumed purchase of stock based on the treasury stock method for options and stock plans Net effect of the assumed purchase of stock based on the treasury stock method for options and stock plans 25.8 12.5 8.8 Net effect of the assumed purchase of stock based on the treasury stock method for options and stock plans 26 26 12

Average diluted common shares outstanding Average diluted common shares outstanding 1,912.9 1,936.2 1,924.8 Average diluted common shares outstanding 1,857 1,913 1,936

Earnings per share
Earnings per share

Earnings per share

Income from continuing operations $ 2.21 $ 1.93 $ 1.68 Income from continuing operations $ 2.45 $ 2.21 $ 1.93
Discontinued operations — .01 (.01 ) Discontinued operations — — .01
Cumulative effect of accounting change — — (.02 )

Net income $ 2.45 $ 2.21 $ 1.94
Net income $ 2.21 $ 1.94 $ 1.65

Diluted earnings per share
Diluted earnings per share

Diluted earnings per share

Income from continuing operations $ 2.18 $ 1.92 $ 1.68 Income from continuing operations $ 2.42 $ 2.18 $ 1.92
Discontinued operations — .01 (.01 ) Discontinued operations — — .01
Cumulative effect of accounting change — — (.02 )

Net income $ 2.42 $ 2.18 $ 1.93
Net income $ 2.18 $ 1.93 $ 1.65

U.S. BANCORP  8985
For the years ended December 31, 2005, 2004 ~~2003~~ and ~~2002,~~2003, options to purchase 16 million, 36 million ~~79 million~~ and ~~140~~79 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were antidilutive. For the year ended December 31, 2005, outstanding convertible notes that could potentially be converted into shares of the Company’s common stock pursuant to a specified formula, were not included in the computation of diluted earnings per share because they were antidilutive.

Note 1918   ~~Employee Benefits~~EMPLOYEE BENEFITS
Employee Investment PlanThe Company has a defined contribution retirement savings plan which allows qualified employees ~~at their option,~~ to make contributions up to 50 percent of ~~pre-tax base salary~~their annual compensation, subject to Internal Revenue Service limits, through salary deductions under Section 401(k) of the Internal Revenue Code. Employee contributions are invested, at the employees’ direction, among a variety of investment alternatives. Employee contributions are 100 percent matched by the Company, up to ~~the first~~ four percent of an employee’s eligible annual compensation. The Company’s matching contribution vests immediately; however, a participant must be employed in an eligible position on ~~December 31st~~the last business day of the year to receive that year’s matching contribution. Although the matching contribution is initially invested in the Company’s common stock, an employee can reinvest the matching contributions among various investment alternatives. Total expense was ~~$49.1~~$53 million, ~~$48.5~~$49 million and ~~$50.5~~$49 million in 2005, 2004 ~~2003~~ and ~~2002,~~2003, respectively.
Pension PlansPension benefits are provided to substantially all employees based on years of service and employees’ compensation while employed with the Company. Employees are fully vested after five years of service. Prior to their acquisition dates, employees of certain acquired companies were covered by separate, noncontributory pension plans that provided benefits based on years of service and compensation. Generally, the Company merges plans of acquired companies into its existing pension plans when it becomes practicable.
Under the current plan’s benefit structure, a participant’s future retirement benefits are based on a participant’s highest five-year average annual compensation during his or her last 10 years before retirement or termination from the Company. Prior to the merger with Firstar Corporation, two of the previous companies had cash balance pension benefit structures under which the participants earned retirement benefits based on their average compensation over their entire career, while the former Firstar Corporation retirement benefit structure was based on final average pay and years of service, similar to the current plan. Plan assets primarily consist of various equities, equity mutual funds and other miscellaneous assets.
    In general, the Company’s pension plan objectives include maintaining a funded status sufficient to meet participant benefit obligations over time while reducing long-term funding requirements and pension costs. The Company has an established process for evaluating all the plans, their performance and significant plan assumptions, including the assumed discount rate and the long-term rate of return (LTROR). At least annually, an independent consultant is engaged to assist U.S. Bancorp’s Compensation Committee (“the Committee”) in evaluating plan objectives, funding policies and plan investment policies considering its long-term investment time horizon and asset allocation strategies. The process also evaluates significant plan assumptions. Although plan assumptions are established annually, the Company may update its analysis on an interim basis in order to be responsive to significant events that occur during the year, such as plan mergers and amendments.
    In addition to the funded qualified retirement plan, the Company maintains a non-qualified plan that is unfunded and the aggregate accumulated benefit obligation exceeds the assets. The assumptions used in computing the present value of the accumulated benefit obligation, the projected benefit obligation and net pension expense are substantially consistent with those assumptions used for the funded qualified plan. The Company recognized a settlement loss of ~~$3.5~~$4 million on this plan in 2003, related to the level of payouts made from the plan. ~~In 2002, the Company recognized combined curtailment and settlement gains of $11.7 million related to changes in the non-qualified pension plans in connection with the mergers of the prior plans.~~
    In general, the Company’s pension plan objectives include maintaining a funded status sufficient to meet participant benefit obligations over time while reducing long-term funding requirements and pension costs. The Company has an established process for evaluating all the plans, their performance and significant plan assumptions, including the assumed discount rate and the long-term rate of return (“LTROR”). At least annually, an independent consultant is engaged to assist U.S. Bancorp’s Compensation Committee in evaluating plan objectives, funding policies and plan investment policies considering its long-term investment time horizon and asset allocation strategies. The process also evaluates significant plan assumptions. Although plan assumptions are established annually, the Company may update its analysis on an interim basis in order to be responsive to significant events that occur during the year, such as plan mergers and amendments.
Funding PracticesThe Company’s funding policy is to contribute amounts to its plans sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company determines to be appropriate. ~~In 2003, the Company made a contribution of $310.8 million to the qualified pension plan in accordance with this policy.~~ No contributions were made in ~~2004.~~2004 or 2005. In ~~2005,~~2006, the Company anticipates no minimum funding requirement and therefore does not expect to make any contributions to the plan. Contributions made to the plan were invested in accordance with established investment policies and asset allocation strategies.
Investment Policies and Asset AllocationIn establishing its investment policies and asset allocation strategies, the Company considers expected returns and the volatility associated with different strategies. ~~The~~An independent consultant performs modeling that projects numerous
86  U.S. BANCORP
outcomes using a broad range of possible scenarios, including a mix of possible rates of inflation and economic growth. Some of the scenarios included are: low inflation and high growth (ideal growth), low inflation and low growth (recession), high inflation and low growth (stagflation) and high inflation and high growth (inflationary growth). Starting with current economic information, the model bases its projections on past relationships between inflation, fixed income rates and equity returns when these types of economic conditions have existed over the previous 30 years, both in the U.S. and in foreign countries.
    ~~Based~~Generally, based on ~~an analysis of~~ historical performance byof the various investment asset ~~class, over any 20-year period since the mid-1940’s,~~classes, investments in equities have outperformed other investment classes but are subject to higher volatility. While an asset allocation including bonds and other assets generally has lower volatility and may provide protection in a declining interest rate environment, it limits the pension plan’s long-term up-side potential. Given the pension plan’s investment horizon and the financial viability of the Company to meet
90  ~~U.S. BANCORP~~
its funding objectives, the Committee has determined that an asset allocation strategy investing in 100 percent equities diversified among various domestic equity categories and international equities is appropriate.
The following unaudited table provides a summary of asset allocations adopted by the Company compared with a typical asset allocation alternative:

2004 2005
Asset Allocation Expected Returns Asset Allocation Expected Returns
December 2004 December 2003 December 2005 December 2004
Typical
Standard Typical
Standard
Asset Class Asset Class Asset Mix Actual Target Actual Target (a) Compound Average Deviation Asset Class Asset Mix Actual Target Actual Target (a) Compound Average Deviation
Domestic equities
Domestic equities

Domestic equities

Large Cap 30 % 53 % 55 % 42 % 55 % 8.0 % 9.5 % 18.0 % Large Cap 30 % 56 % 55 % 53 % 55 % 8.0 % 9.5 % 18.0 %
Mid Cap 15 16 19 15 19 8.4 10.4 21.1 Mid Cap 15 16 19 16 19 8.2 10.2 21.1
Small Cap 15 7 6 19 6 8.6 11.1 24.0 Small Cap 15 5 6 7 6 8.4 10.9 24.0
International equities
International equities
10 22 20 21 20 8.3 10.4 21.9
International equities
10 21 20 22 20 8.2 10.3 21.9
Fixed income
Fixed income
30 — — — —
Fixed income
30 — — — —
Other
Other
— 2 — 3 —
Other
— 2 — 2 —

Total mix or weighted rates
Total mix or weighted rates
100 % 100 % 100 % 100 % 100 % 8.5 10.0 18.0
Total mix or weighted rates
100 % 100 % 100 % 100 % 100 % 8.3 9.8 17.8

LTROR assumed 7.8 % 8.9 % (b) 8.9 % LTROR assumed 7.6 % 8.9 % (b) 8.9 %
Standard deviation 13.9 % 18.0 % 18.0 % Standard deviation 13.5 % 17.8 % 18.0 %
Sharpe ratio (c) .409 .386 .389 Sharpe ratio (c) .405 .379 .386
(a) The target asset allocation was modified in December 2003, effective January 1, 2004, to reduce the potential volatility of the portfolio without significantly reducing the expected returns. The change in the allocation was completed by the second quarter of 2004 and the year end variations from the target allocation were a result of that change.
(b) The LTROR assumed for the target asset allocation strategy of 8.9 percent is based on a range of estimates evaluated by the Company including the compound expected return of ~~8.5~~8.3 percent and the average expected return of ~~10.0~~9.8 percent.
(c) The Sharpe ratio is a direct measure of reward-to-risk. The Sharpe ratio for these asset allocation strategies is considered to be within acceptable parameters.
    In accordance with its existing practices, the independent pension consultant utilized by the Company updated the analysis of expected rates of return and evaluated peer group data, market conditions and other factors relevant to determining the LTROR assumptions for pension costs for ~~2003~~2004 and ~~2004.~~2005. The analysis performed ~~late in 2004~~ indicated that the LTROR assumption of 8.9 percent, used in both ~~2003~~2004 and ~~2004,~~2005, continued to be in line with expected returns based on current economic conditions and the Company expects to continue using this LTROR in ~~2005.~~2006. The LTROR was first reduced to the current LTROR of 8.9 percent in 2003 to reflect the ~~longer~~long range impact of the poor market performance of equities in 2001 and 2002. Regardless of the extent of the Company’s analysis of alternative asset allocation strategies, economic scenarios and possible outcomes, plan assumptions developed for the LTROR are subject to imprecision and changes in economic factors. As a result of the modeling imprecision and uncertainty, the Company considers a range of potential expected rates of return, economic conditions for several scenarios, historical performance relative to assumed rates of return and asset allocation and LTROR information for a peer group in establishing its assumptions.
Post-Retirement Medical PlansIn addition to providing pension benefits, the Company provides health care and death benefits to certain retired employees through ~~several retiree medical programs. The Company adopted~~ one retiree medical ~~program for~~program. Generally, all future retirees on January 1, 2002. For certain eligible employees, the provisions of the USBM retiree medical plan and the Mercantile retiree medical plan remained in place until December 31, 2002. Generally, allactive employees may become eligible for retiree health care benefits by meeting defined age and service requirements. The Company may also subsidize the cost of coverage for employees meeting certain age and service requirements. The medical plan contains other cost-sharing features such as deductibles and coinsurance. The estimated cost of these retiree benefit payments is accrued during the employees’ active service.

U.S. BANCORP  87
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was enacted. The Act established a prescription drug benefit under Medicare, known as “Medicare Part D”, and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. ~~As a result, the~~The Company recognized the estimated expected benefit prospectively from July 1, 2004. The expected subsidy reduced the accumulated postretirement benefit obligation (APBO) at September 30, 2004, by $40 million, and net periodic cost for 2004 by $2 million. Based on final regulations issued during 2005, the expected benefit impact of the ~~Act on its retiree~~Medicare subsidy increased and the accumulated postretirement benefit obligation was reduced by an additional $10 million as of September 30, 2005. The net periodic cost for 2005 was reduced by $5 million. The Company does not expect a significant reduction in future participation in the postretirement medical plan onas a ~~prospective basis in 2004 and reduced~~result of the ~~liability by $34.6 million.~~Act.
~~U.S. BANCORP~~  91
The Company uses a measurement date of September 30 for its retirement plans. The following table summarizes benefit obligation and plan asset activity for the retirement plans:

Post-Retirement Post-Retirement
Pension Plans Medical Plans Pension Plans Medical Plans
(Dollars in Millions) (Dollars in Millions) 2004 2003 2004 2003 (Dollars in Millions) 2005 2004 2005 2004
Projected benefit obligation
Projected benefit obligation

Projected benefit obligation

Benefit obligation at beginning of measurement period $ 1,801.1 $ 1,671.1 $ 320.3 $ 282.5 Benefit obligation at beginning of measurement period $ 1,951 $ 1,801 $ 281 $ 320
Service cost 58.5 56.5 3.7 3.4 Service cost 63 59 5 4
Interest cost 109.5 107.7 18.1 18.5 Interest cost 112 109 16 18
Plan participants’ contributions — — 16.2 14.9 Plan participants’ contributions — — 17 16
Actuarial (gain) loss 150.3 161.7 (40.2 ) 38.9 Actuarial (gain) loss 145 150 (38 ) (40 )
Benefit payments (162.6 ) (140.8 ) (36.7 ) (36.5 ) Benefit payments (88 ) (86 ) (36 ) (37 )
Curtailments — — — — Curtailments — — — —
Settlements (5.7 ) (23.8 ) — — Settlements (36 ) (82 ) — —
Benefit obligation transferred to Piper Jaffray Companies — (31.3 ) — (1.4 ) Amendments — — — —

Benefit obligation at end of measurement period (a)(b) $ 1,951.1 $ 1,801.1 $ 281.4 $ 320.3 Benefit obligation at end of measurement period (a)(b) $ 2,147 $ 1,951 $ 245 $ 281
Fair value of plan assets
Fair value of plan assets

Fair value of plan assets

Fair value at beginning of measurement period $ 1,975.8 $ 1,442.7 $ 38.9 $ 30.2 Fair value at beginning of measurement period $ 2,127 $ 1,976 $ 39 $ 39
Actual return on plan assets 298.7 351.7 .2 .4 Actual return on plan assets 398 298 1 —
Employer contributions 20.8 346.0 20.2 29.9 Employer contributions 18 21 18 21
Plan participants’ contributions — — 16.2 14.9 Plan participants’ contributions — — 17 16
Settlements (5.7 ) (23.8 ) — — Settlements (36 ) (82 ) — —
Benefit payments (162.6 ) (140.8 ) (36.7 ) (36.5 ) Benefit payments (88 ) (86 ) (36 ) (37 )

Fair value at end of measurement period (c) $ 2,127.0 $ 1,975.8 $ 38.8 $ 38.9 Fair value at end of measurement period $ 2,419 $ 2,127 $ 39 $ 39
Funded status
Funded status

Funded status

Funded status at end of measurement period $ 175.9 $ 174.7 $ (242.6 ) $ (281.4 ) Funded status at end of measurement period $ 272 $ 176 $ (206 ) $ (242 )
Unrecognized transition (asset) obligation — — 5.9 6.6 Unrecognized transition (asset) obligation — — 5 6
Unrecognized prior service cost (44.8 ) (51.1 ) (6.3 ) (7.2 ) Unrecognized prior service cost (39 ) (45 ) (5 ) (6 )
Unrecognized net (gain) loss 840.8 854.7 38.6 80.0 Unrecognized net (gain) loss 724 841 — 38
Fourth quarter contribution 4.5 4.8 3.8 5.4 Fourth quarter contribution 11 4 155 4

Net amount recognized $ 976.4 $ 983.1 $ (200.6 ) $ (196.6 ) Net amount recognized $ 968 $ 976 $ (51 ) $ (200 )
Components of statement of financial position
Components of statement of financial position

Components of statement of financial position

Prepaid benefit cost $ 1,155.6 $ 1,123.8 $ — $ — Prepaid benefit cost $ 1,146 $ 1,155 $ — $ —
Accrued benefit liability (179.2 ) (140.7 ) (200.6 ) (196.6 ) Accrued benefit liability (178 ) (179 ) (51 ) (200 )

Additional minimum liability (47 ) — — —
Net amount recognized $ 976.4 $ 983.1 $ (200.6 ) $ (196.6 ) Intangible asset 9 — — —
Accumulated other comprehensive income 38 — — —

Net amount recognized $ 968 $ 976 $ (51 ) $ (200 )
(a) At December 31, ~~2004~~2005 and ~~2003,~~2004, the accumulated benefit obligation for all qualified pension plans was ~~$1.7~~$1.8 billion and ~~$1.6~~$1.7 billion, respectively.
(b) U.S. Bancorp retained the qualified pension plan obligation for the inactive participants, relating to employees of the Piper Jaffray Companies. Therefore, all liabilities and plan assets related to inactive participants in the qualified pension plan associated with the Piper Jaffray Companies are included in the pension plans benefit obligation.
~~(c)~~ At December 31, 2004, the Company’s qualified pension plans held no company stock, and at December 31, 2003, the Company’s qualified pension plans held 799,803 shares of U.S. Bancorp common stock with a fair value of $23.8 million. Dividends paid on the shares of U.S. Bancorp common stock held by the qualified pension plans totaled $.2 million and $.6 million for the years ended December 31, 2004 and 2003, respectively.
88  U.S. BANCORP
The following table sets forth the components of net periodic benefit cost (income) for the retirement plans:

Pension Plans Post-Retirement Medical Plans Pension Plans Post-Retirement Medical Plans
(Dollars in Millions) (Dollars in Millions) 2004 2003 2002 2004 2003 2002 (Dollars in Millions) 2005 2004 2003 2005 2004 2003
Components of net periodic benefit cost (income) Components of net periodic benefit cost (income) Components of net periodic benefit cost (income)
Service cost $ 58.5 $ 56.5 $ 49.9 $ 3.7 $ 3.4 $ 3.3 Service cost $ 63 $ 59 $ 56 $ 5 $ 4 $ 3
Interest cost 109.5 107.7 115.1 18.1 18.5 19.1 Interest cost 112 109 108 16 18 19
Expected return on plan assets (203.1 ) (184.4 ) (214.1 ) (1.4 ) (1.2 ) (1.6 ) Expected return on plan assets (194 ) (203 ) (184 ) (1 ) (1 ) (1 )
Net amortization and deferral (6.3 ) (6.7 ) (6.5 ) (.1 ) (.2 ) (.1 ) Net amortization and deferral (6 ) (6 ) (7 ) — — —
Recognized actuarial (gain) loss 50.4 (.5 ) .8 2.4 .5 — Recognized actuarial (gain) loss 58 50 (1 ) — 2 —

Net periodic benefit cost (income) Net periodic benefit cost (income) 9.0 (27.4 ) (54.8 ) 22.7 21.0 20.7 Net periodic benefit cost (income) 33 9 (28 ) 20 23 21
Curtailment and settlement (gain) loss — 3.5 (11.7 ) — — — Curtailment and settlement (gain) loss — — 4 — — —
Cost of special or contractual termination benefits recognized — — 2.7 — — —

Net periodic benefit cost (income) after curtailment and settlement (gain) loss, and cost of special or contractual termination benefits recognized Net periodic benefit cost (income) after curtailment and settlement (gain) loss, and cost of special or contractual termination benefits recognized $ 9.0 $ (23.9 ) $ (63.8 ) $ 22.7 $ 21.0 $ 20.7 Net periodic benefit cost (income) after curtailment and settlement (gain) loss, and cost of special or contractual termination benefits recognized $ 33 $ 9 $ (24 ) $ 20 $ 23 $ 21
92  ~~U.S. BANCORP~~
The following table sets forth the weighted-average plan assumptions and other data:

Company

(Dollars in Millions) (Dollars in Millions) 2004 2003 2002 (Dollars in Millions) 2005 2004 2003
Pension plan actuarial computations Pension plan actuarial computations Pension plan actuarial computations
Expected long-term return on plan assets (c) 8.9 % 8.9 % 10.9 % Expected long-term return on plan assets 8.9 % 8.9 % 8.9 %
Discount rate in determining benefit obligations (a) 6.0 6.2 6.8 Discount rate in determining benefit obligations (a) 5.7 6.0 6.2
Rate of increase in future compensation 3.5 3.5 3.5 Rate of increase in future compensation 3.5 3.5 3.5
Post-retirement medical plan actuarial computations Post-retirement medical plan actuarial computations Post-retirement medical plan actuarial computations
Expected long-term return on plan assets 3.5 % 3.5 % 5.0 % Expected long-term return on plan assets 3.5 % 3.5 % 3.5 %
Discount rate in determining benefit obligations 6.0 6.2 6.8 Discount rate in determining benefit obligations 5.7 6.0 6.2
Health care cost trend rate (b) Health care cost trend rate (b)
Prior to age 65 10.0 % 11.0 % 12.0 % Prior to age 65 9.0 % 10.0 % 11.0 %
After age 65 12.0 13.0 14.0 After age 65 11.0 12.0 13.0
Effect of one percent increase in health care cost trend rate Effect of one percent increase in health care cost trend rate Effect of one percent increase in health care cost trend rate
Service and interest costs $ 1.4 $ 1.4 $ 1.3 Service and interest costs $ 1 $ 1 $ 1
Accumulated post-retirement benefit obligation 21.1 22.5 19.7 Accumulated post-retirement benefit obligation 18 21 23
Effect of one percent decrease in health care cost trend rate Effect of one percent decrease in health care cost trend rate Effect of one percent decrease in health care cost trend rate
Service and interest costs $ (1.3 ) $ (1.3 ) $ (1.2 ) Service and interest costs $ (1 ) $ (1 ) $ (1 )
Accumulated post-retirement benefit obligation (18.8 ) (20.0 ) (17.5 ) Accumulated post-retirement benefit obligation (16 ) (19 ) (20 )
(a) The discount rate at the measurement date approximated the Moody’s Aa corporate bond rating for projected benefit distributions with a duration of ~~11.9~~12.7 and ~~12.2~~11.9 years for ~~2004~~2005 and ~~2003,~~2004, respectively.
(b) The pre-65 and post-65 rates are assumed to decrease gradually to 5.5% and 6.0% respectively by 2011 and remain at these levels ~~thereafter~~
~~(c)~~ In light of the market performance and the results of the independent analysis, the Company made a decision to re-measure its pension plans effective in the third quarter of 2002 based on the current information at that time with respect to asset values, a reduction in the LTROR, discount rates, census data and other relevant factors. As a result of the remeasurement, the LTROR was reduced to 9.9% for the last half of 2002.thereafter.
The following table provides information for pension plans with benefit obligations in excess of plan assets:

(Dollars in Millions) 2004 2003 2005 2004
Benefit obligation $ 233.9 $ 183.9 $ 236 $ 234
Accumulated benefit obligation 222.6 174.8 225 223
Fair value of plan assets — — — —
The following benefit payments (net of participant contributions) are expected to be paid from the ~~retirement plans:~~U.S. Bancorp Pension and Postretirement Medical Plans:

Pension Post-Retirement Pension Post-Retirement
(Dollars in Millions) (Dollars in Millions) Plans Medical Plans (Dollars in Millions) Plans Medical Plans
Estimated Future Benefit Payments Estimated Future Benefit Payments Estimated Future Benefit Payments
2005 $ 158.6 $ 24.8 2006 $ 137 $ 20
2006 132.9 21.9 2007 124 21
2007 130.9 22.6 2008 122 21
2008 127.3 23.2 2009 123 21
2009 125.9 23.7 2010 127 21
2010 — 2014 606.3 119.6 2011 — 2015 690 104

U.S. BANCORP  9389

Note 2019   ~~Stock-based Compensation~~STOCK-BASED COMPENSATION
As part of its employee and director compensation programs, the Company may grant certain stock awards under the provisions of the existing stock compensation plans, including plans assumed in acquisitions. The plans provide for grants of options to purchase shares of common stock at a fixed price generally equal to the fair value of the underlying stock at the date of grant. Option grants are generally exercisable up to ten years from the date of grant. In addition, the plans provide for grants of shares of common stock or stock units that are subject to restriction on transfer. Most stock awards vest over three to five years and are subject to forfeiture if certain vesting requirements are not met.
    Stock incentive plans of acquired companies are generally terminated at the merger closing dates. Option holders under such plans receive the Company’s common stock, or options to buy the Company’s stock, based on the conversion terms of the various merger agreements. The historical stock award information presented below has been restated to reflect the options originally granted under acquired companies’ plans.
    At December 31, ~~2004,~~2005, there were ~~35.2~~25 million shares (subject to adjustment for forfeitures) available for grant under various plans.
The following is a summary of stock options outstanding and exercised under various stock options plans of the Company:

2004 2003 2002 2005 2004 2003
Stock Weighted-Average Stock Weighted-Average Stock Weighted-Average Stock Weighted-Average Stock Weighted-Average Stock Weighted-Average
Year Ended December 31 Year Ended December 31 Options/Shares Exercise Price Options/Shares Exercise Price Options/Shares Exercise Price Options/Shares Exercise Price Options/Shares Exercise Price Options/Shares Exercise Price
Stock option plans
Stock option plans

Number outstanding at beginning of year Number outstanding at beginning of year 165,522,354 $ 22.93 206,252,590 $ 22.77 201,610,265 $ 22.58 134,727,285 $ 23.41 165,522,354 $ 22.93 206,252,590 $ 22.77
Granted 8,741,521 28.46 1,872,653 23.00 29,742,189 21.81
Assumed/converted (a) — — 1,116,884 — — —
Exercised (27,319,242 ) 21.59 (22,484,069 ) 18.27 (9,594,213 ) 13.26
Cancelled (b) (12,217,348 ) 24.56 (21,235,704 ) 25.13 (15,505,651 ) 24.18
Granted 12,489,062 30.14 8,741,521 28.46 1,872,653 23.00
Assumed/converted (a) — — — — 1,116,884 —
Exercised (17,719,565 ) 20.96 (27,319,242 ) 21.59 (22,484,069 ) 18.27
Cancelled (b) (3,513,321 ) 25.07 (12,217,348 ) 24.56 (21,235,704 ) 25.13

Number outstanding at end of year Number outstanding at end of year 134,727,285 $ 23.41 165,522,354 $ 22.93 206,252,590 $ 22.77 125,983,461 $ 24.38 134,727,285 $ 23.41 165,522,354 $ 22.93
Exercisable at end of year Exercisable at end of year 101,027,155 $ 23.51 116,427,321 $ 23.60 123,195,273 $ 23.63 100,110,188 $ 23.64 101,027,155 $ 23.51 116,427,321 $ 23.60
Weighted-average fair value of options granted $ 8.75 $ 6.82 $ 7.03
Weighted-average fair value of shares granted $ 6.65 $ 8.75 $ 6.82
Restricted share plans
Restricted share plans

Number outstanding at beginning of year Number outstanding at beginning of year 1,304,106 2,280,057 2,177,588 2,265,625 1,304,106 2,280,057
Granted 1,338,054 58,481 806,355
Cancelled/vested (376,535 ) (1,034,432 ) (703,886 )
Granted 1,024,622 1,338,054 58,481
Cancelled/vested (646,076 ) (376,535 ) (1,034,432 )

Number outstanding at end of year Number outstanding at end of year 2,265,625 1,304,106 2,280,057 2,644,171 2,265,625 1,304,106
Weighted-average fair value of shares granted Weighted-average fair value of shares granted $ 28.42 $ 24.43 $ 20.51 $ 30.03 $ 28.42 $ 24.43
(a) In connection with the December 31, 2003, tax-free distribution of Piper Jaffray Companies, stock options were adjusted in accordance with provisions of the contracts based on an exchange ratio of 1.0068 representing the relative stock price adjustment at the time of distribution.
(b) Options cancelled includes both non-vested (i.e., forfeitures) and vested shares.

94  90  U.S. BANCORP
Additional information regarding stock options outstanding as of December 31, ~~2004,~~2005, is as follows:

Options Outstanding Exercisable Options Options Outstanding Exercisable Options
Weighted- Weighted-
Average Weighted- Weighted- Average Weighted- Weighted-
Remaining Average Average Remaining Average Average
Contractual Exercise Exercise Contractual Exercise Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price Shares Life (Years) Price Shares Price
$3.28 — $10.00 726,431 1.0 $ 7.06 724,664 $ 7.05
$5.05 — $10.00 91,470 .7 $ 7.31 91,470 $ 7.31
$10.01 — $15.00 3,072,352 2.7 11.51 2,835,094 11.39 2,107,124 1.7 11.37 2,107,124 11.37
$15.01 — $20.00 26,115,430 6.1 18.81 19,671,582 18.71 20,476,728 5.1 18.80 20,295,870 18.80
$20.01 — $25.00 63,059,643 6.1 22.39 45,466,324 22.54 52,679,575 5.1 22.37 45,685,591 22.48
$25.01 — $30.00 37,433,500 5.1 28.55 28,066,483 28.66 35,825,425 4.3 28.58 27,713,694 28.68
$30.01 — $35.00 4,020,322 2.4 32.73 3,963,401 32.75 14,515,311 7.0 30.91 3,928,611 32.72
$35.01 — $36.95 299,607 2.4 35.89 299,607 35.89 287,828 1.4 35.90 287,828 35.90

134,727,285 5.6 $ 23.41 101,027,155 $ 23.51 125,983,461 5.0 $ 24.38 100,110,188 $ 23.64
    Stock-based compensation was ~~$175.6~~$132 million in 2005, compared with $176 million and $158 million in 2004 ~~compared with $158.1 million~~ and ~~$185.0 million in~~ 2003, ~~and 2002,~~ respectively. At the time employee stock options expire, are exercised or cancelled, the Company determines the tax benefit associated with the stock award and under certain circumstances may be required to recognize an adjustment to tax expense. On an after-tax basis, stock-based compensation was ~~$138.5~~$83 million in 2005, compared with $139 million and $123 million in 2004 ~~compared with $123.4 million~~ and ~~$113.3 million in~~ 2003, ~~and 2002,~~ respectively.
The following table provides a summary of the valuation assumptions utilized by the Company to determine the estimated value of stock option grants:

Weighted-average assumptions in stock option valuation 2005 2004 2003
Risk-free interest rates 3.6 % 3.5 % 2.8 %
Dividend yields 3.5 % 3.5 % 3.0 %
Stock volatility factor .29 .40 .40
Expected life of options (in years) 5.4 5.9 5.3
Stock-based compensation expense is based on the fair value of the award at the date of grant or modification. The fair value of options was estimated using the Black-Scholes option-pricing model requiring the use of subjective valuation assumptions. Because employee stock options have characteristics that differ from those of traded options, including vesting provisions and trading limitations that impact their liquidity, the determined value used to measure compensation expense may vary from their actual fair value.
~~The following table provides a summary of the valuation assumptions utilized by the Company to determine the estimated value of stock option grants:~~

Weighted-average assumptions in stock option valuation 2004 2003 2002
Risk-free interest rates 3.5 % 2.8 % 3.3 %
Dividend yields 3.5 % 3.0 % 3.0 %
Stock volatility factor .40 .40 .41
Expected life of options (in years) 5.9 5.3 6.0

U.S. BANCORP  9591

Note 2120   ~~Income Taxes~~INCOME TAXES
The components of income tax expense were:

(Dollars in Millions) (Dollars in Millions) 2004 2003 2002 (Dollars in Millions) 2005 2004 2003
Federal
Federal

Federal

Current Current $ 1,530.9 $ 1,528.8 $ 1,268.9 Current $ 2,107 $ 1,531 $ 1,529
Deferred Deferred 260.2 222.9 256.9 Deferred (281 ) 260 223

Federal income tax 1,791.1 1,751.7 1,525.8 Federal income tax 1,826 1,791 1,752
State
State

State

Current Current 197.4 139.8 146.9 Current 276 197 139
Deferred Deferred 21.1 49.8 34.8 Deferred (20 ) 21 50

State income tax 218.5 189.6 181.7 State income tax 256 218 189

Total income tax provision $ 2,009.6 $ 1,941.3 $ 1,707.5 Total income tax provision $ 2,082 $ 2,009 $ 1,941
A reconciliation of expected income tax expense at the federal statutory rate of ~~35%~~35 percent to the Company’s applicable income tax expense follows:

(Dollars in Millions) (Dollars in Millions) 2004 2003 2002 (Dollars in Millions) 2005 2004 2003
Tax at statutory rate (35%) $ 2,161.7 $ 1,978.0 $ 1,727.4
Tax at statutory rate (35 percent) Tax at statutory rate (35 percent) $ 2,300 $ 2,162 $ 1,978
State income tax, at statutory rates, net of federal tax benefit State income tax, at statutory rates, net of federal tax benefit 142.0 123.2 116.5 State income tax, at statutory rates, net of federal tax benefit 166 142 123
Tax effect of Tax effect of Tax effect of
Tax credits (145.6 ) (109.6 ) (85.5 ) Tax credits (221 ) (146 ) (110 )
Resolution of federal and state income tax examinations (106.3 ) — — Resolution of federal and state income tax examinations (94 ) (106 ) —
Tax-exempt interest, net (21.4 ) (21.7 ) (24.9 ) Tax-exempt income from life insurance (48 ) (37 ) (37 )
Other items (20.8 ) (28.6 ) (26.0 ) Tax-exempt interest, net (22 ) (22 ) (22 )

Other items 1 16 9

Applicable income taxes Applicable income taxes $ 2,009.6 $ 1,941.3 $ 1,707.5 Applicable income taxes $ 2,082 $ 2,009 $ 1,941
    The tax effects of fair value adjustments on securities available-for-sale, derivative instruments in cash flow hedges and certain tax benefits related to stock options are recorded directly to shareholders’ equity as part of other comprehensive income.
    In preparing its tax returns, the Company is required to interpret complex tax laws and regulations and utilize income and cost allocation methods to determine its taxable income. On an ongoing basis, the Company is subject to examinations by federal and state taxing authorities that may give rise to differing interpretations of these complex laws, regulations and methods. Due to the nature of the examination process, it generally takes years before these examinations are completed and matters are resolved. ~~During~~Included in 2005 was a $94 million reduction in income tax expense related to the resolution of federal income tax examinations covering substantially all of the Company’s legal entities for the years 2000 through 2002. In addition, included in 2004 was a reduction in income tax expense of $90 million related to the ~~Company resolved~~resolution of federal income tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999 and ~~certain~~$16 million related to the resolution of a state tax ~~examinations~~examination for ~~the~~tax years ~~1995~~ through 2000. ~~These examinations were resolved through a series~~The resolution of these cycles was the result of negotiations held between the Company and representatives of ~~the~~ various taxing authorities ~~at both~~throughout the ~~examination and appellate levels.~~examinations. The resolution of these matters and the taxing authorities’ acceptance of submitted claims and tax return adjustments resulted in athe reduction of ~~accrued~~estimated income tax expense of $106.3 million. At December 31, 2004, the Company is in various stages of the examination process for federal tax return matters of U.S. Bancorp and its predecessor companies for periods dating back to 2000. In addition, examinations by various state taxing authorities date back to 1997. At year-end, the Company believes the aggregate amount of any additional tax liabilities that may result from these examinations, if any, will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.liabilities.
    Deferred income tax assets and liabilities reflect the tax effect of temporary ~~differences~~difference between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for the same items for income tax reporting purposes.

96  92  U.S. BANCORP
The significant components of the Company’s net deferred tax liability as of December 31 were:

(Dollars in Millions) (Dollars in Millions) 2004 2003 (Dollars in Millions) 2005 2004
Deferred tax assets
Deferred tax assets

Deferred tax assets

Allowance for credit losses Allowance for credit losses $ 924.4 $ 977.6 Allowance for credit losses $ 907 $ 925
Stock compensation Stock compensation 303.3 318.2 Stock compensation 325 303
Accrued expenses 148.9 140.1
Securities available-for-sale and financial instruments Securities available-for-sale and financial instruments 254 13
Intangible asset basis Intangible asset basis 146.1 133.1 Intangible asset basis 134 146
Federal AMT credits and capital losses Federal AMT credits and capital losses 59.1 59.1 Federal AMT credits and capital losses 91 59
Accrued expenses Accrued expenses 71 149
Accrued severance, pension and retirement benefits Accrued severance, pension and retirement benefits 16.3 69.3 Accrued severance, pension and retirement benefits 19 16
Securities available-for-sale and financial instruments 13.1 (31.2 )
Federal and state net operating loss carryforwards Federal and state net operating loss carryforwards 9.2 21.2 Federal and state net operating loss carryforwards 9 9
Other deferred tax assets, net Other deferred tax assets, net 84.5 62.0 Other deferred tax assets, net 90 85

Gross deferred tax assets 1,704.9 1,749.4 Gross deferred tax assets 1,900 1,705
Deferred tax liabilities
Deferred tax liabilities

Deferred tax liabilities

Leasing activities Leasing activities (2,770.7 ) (2,509.6 ) Leasing activities (2,560 ) (2,771 )
Pension and postretirement benefits Pension and postretirement benefits (272.2 ) (308.0 ) Pension and postretirement benefits (267 ) (272 )
Mortgage servicing rights Mortgage servicing rights (93.8 ) (60.0 ) Mortgage servicing rights (113 ) (94 )
Loans Loans (96 ) (59 )
Other investment basis differences Other investment basis differences (80.4 ) (60.2 ) Other investment basis differences (88 ) (80 )
Deferred fees Deferred fees (77.8 ) 29.9 Deferred fees (85 ) (78 )
Loans (59.0 ) (59.0 )
Accelerated depreciation Accelerated depreciation (55.7 ) (142.3 ) Accelerated depreciation (51 ) (56 )
Other deferred tax liabilities, net Other deferred tax liabilities, net (193.2 ) (195.6 ) Other deferred tax liabilities, net (254 ) (193 )

Gross deferred tax liabilities (3,602.8 ) (3,304.8 ) Gross deferred tax liabilities (3,514 ) (3,603 )
Valuation allowance Valuation allowance (1.0 ) (1.0 ) Valuation allowance (1 ) (1 )

Net deferred tax liability
Net deferred tax liability
$ (1,898.9 ) $ (1,556.4 )
Net deferred tax liability
$ (1,615 ) $ (1,899 )
    The Company has established a valuation allowance to offset deferred tax assets related to state net operating loss carryforwards which are expected to expire unused. The Company has approximately ~~$134~~$138 million of net operating loss carryforwards which expire at various times through ~~2009.~~2023.
    Certain events covered by Internal Revenue Code section 593(e), which was not repealed, will trigger a recapture of base year reserves of acquired thrift institutions. The base year reserves of acquired thrift institutions would be recaptured if an entity ceases to qualify as a bank for federal income tax purposes. The base year reserves of thrift institutions also remain subject to income tax penalty provisions that, in general, require recapture upon certain stock redemptions of, and excess distributions to, stockholders. At December 31, ~~2004,~~2005, retained earnings included approximately ~~$101.8~~$102 million of base year reserves for which no deferred federal income tax liability has been recognized.

Note 2221   ~~Derivative Instruments~~DERIVATIVE INSTRUMENTS
In the ordinary course of business, the Company enters into derivative transactions to manage its interest rate, prepayment and foreign currency risks and to accommodate the business requirements of its customers. The Company does not enter into derivative transactions for speculative purposes. Refer to Note 1 “Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a discussion of the Company’s accounting policies for derivative instruments. For information related to derivative positions held for asset and liability management purposes and customer-related derivative positions, see Table 1718 “Derivative Positions,” included in Management’s Discussion and Analysis, which is incorporated by reference in these Notes to Consolidated Financial Statements.
ASSET AND LIABILITY MANAGEMENT POSITIONS
Cash Flow HedgesThe Company has ~~$24.3~~$17.2 billion of designated cash flow hedges at December 31, ~~2004.~~2005. These derivatives are interest rate swaps that are hedges of the forecasted cash flows from the underlying variable-rate LIBOR loans and floating-rate debt. All cash flow hedges are highly effective for the year ended December 31, ~~2004,~~2005, and the change in fair value attributed to hedge ineffectiveness was not material.
    At December 31, ~~2004~~2005 and ~~2003,~~2004, accumulated other comprehensive income included a deferred after-tax net loss of $10 million and a deferred after-tax net gain of ~~$113.4 million and $174.9~~$113 million, respectively, related to ~~derivatives used to hedge~~ cash ~~flows.~~flow hedges. The unrealized gain or loss will be reflected in earnings when the related cash flows or hedged transactions occur and will offset the related performance of the hedged items. The ~~occurrence of these~~

U.S. BANCORP  9793
occurrence of these related cash flows and hedged transactions remains probable. The estimated amount of after-tax gain to be reclassified from accumulated other comprehensive income into earnings during ~~2005~~2006 is ~~$65.8 million, which~~$26 million. This includes gains related to hedges that were terminated early ~~when~~and the ~~associated~~ forecasted transactions ~~were~~are still probable.
Fair Value HedgesThe Company has ~~$7.8~~$10.1 billion of designated fair value hedges at December 31, ~~2004.~~2005. These derivatives are primarily interest rate ~~contracts~~swaps that hedge the change in fair value related to interest rate changes of underlying fixed-rate debt, ~~and~~ trust preferred ~~securities.~~securities and deposit obligations. In addition, the Company uses forward commitments to sell residential mortgage loans to hedge its interest rate risk related to residential mortgage loans held for sale. The Company commits to sell the loans at specified prices in a future period, typically within 90 days. The Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market.
    All fair value hedges are considered highly effective for the year ended December 31, ~~2004.~~2005. The change in fair value attributed to hedge ineffectiveness was a ~~gain~~loss of ~~$.7~~$4 million, related to the Company’s mortgage loans held for sale and its ~~2004~~2005 production volume of ~~$17.4~~$23.0 billion.
Net Investment Hedges~~In 2004, the~~ The Company ~~entered~~enters into derivatives to protect its net investment in certain foreign operations. The Company uses forward commitments to sell specified amounts of certain foreign currencies to hedge its capital volatility risk associated with fluctuations in foreign currency exchange rates. The net amount of gains or losses included in the cumulative translation adjustment for ~~2004~~2005 was not significant.
Other Asset and Liability Management Derivative PositionsThe Company has derivative positions that are used for interest rate risk and other risk management purposes but are not designated as cash flow hedges or fair value hedges in accordance with the provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” At December 31, ~~2004,~~2005, the Company had $1.1 billion of forward commitments to sell residential mortgage loans to hedge the Company’s interest rate risk related to ~~$1.0~~$1.1 billion of unfunded residential loan commitments. Gains and losses on mortgage banking derivatives and the unfunded loan commitments are included in mortgage banking revenue on the ~~Consolidated Statement of Income.~~income statement.
CUSTOMER-RELATED POSITIONS
The Company acts as a seller and buyer of interest rate contracts and foreign exchange rate contracts on behalf of customers. At December 31, ~~2004,~~2005, the Company had ~~$20.0~~$26.9 billion of aggregate customer derivative positions, including ~~$15.8~~$22.7 billion of interest rate swaps, caps, and floors and $4.2 billion of foreign exchange rate contracts. The Company minimizes its market and liquidity risks by taking similar offsetting positions. Gains or losses on customer-related transactions were not significant for the year ended December 31, ~~2004.~~2005.

Note 2322   ~~Fair Values of Financial Instruments~~FAIR VALUES OF FINANCIAL INSTRUMENTS
Due to the nature of its business and its customers’ needs, the Company offers a large number of financial instruments, most of which are not actively traded. When market quotes are unavailable, valuation techniques including discounted cash flow calculations and pricing models or services are used. The Company also uses various aggregation methods and assumptions, such as the discount rate and cash flow timing and amounts. As a result, the fair value estimates can neither be substantiated by independent market comparisons, nor realized by the immediate sale or settlement of the financial instrument. Also, the estimates reflect a point in time and could change significantly based on changes in economic factors, such as interest rates. Furthermore, the disclosure of certain financial and nonfinancial assets and liabilities ~~are~~is not required. Finally, the fair value disclosure is not intended to estimate a market value of the Company as a whole. A summary of the Company’s valuation techniques and assumptions follows.
Cash and Cash EquivalentsThe carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements was assumed to approximate fair value.
SecuritiesInvestment securities were valued using available market quotes. In some instances, for securities that are not widely traded, market quotes for comparable securities were used.
LoansThe loan portfolio includes adjustable and fixed-rate loans, the fair value of which was estimated using discounted cash flow analyses and other valuation techniques. To calculate discounted cash flows, the loans were aggregated into pools of similar types and expected repayment terms. The expected cash flows of loans considered historical prepayment experiences and estimated credit losses for nonperforming loans and were discounted using current rates offered to borrowers of similar credit characteristics. The fair value of ~~floating-rate~~adjustable rate loans ~~are~~is assumed to be equal to their ~~carrying~~par value.
Deposit LiabilitiesThe fair value of demand deposits, savings accounts and certain money market deposits is equal to the amount payable on demand at year-end. The fair value of fixed-rate certificates of deposit was estimated
98  ~~U.S. BANCORP~~
by discounting the contractual cash flow using the discount rates implied by ~~the~~ high-grade corporate bond yield ~~curve.~~
curves.
Short-term BorrowingsFederal funds purchased, securities sold under agreements to repurchase, commercial paper and
94  U.S. BANCORP
other short-term funds borrowed are at floating rates or have short-term maturities. Their ~~carrying~~par value is assumed to approximate their fair value.
Long-term DebtThe estimated fair value of medium-term notes, bank notes, ~~Federal Home Loan Bank advances, capital lease obligations~~ and ~~mortgage note obligations~~subordinated debt was determined by using a discounted cash flow analysis based on ~~current market rates of similar maturity~~high-grade corporate bond yield curves. Floating rate debt ~~securities~~is assumed to ~~discount cash flows. Other~~be equal to par value. Capital trust and other long-term debt instruments were valued using ~~available~~ market quotes.
Interest Rate Swaps, Equity Contracts ~~Basis Swaps~~ and OptionsThe interest rate options and swap cash flows were estimated using a third-party pricing model and discounted based on appropriate LIBOR, eurodollar futures, swap, treasury note yield curves and equity market prices.
Loan Commitments, Letters of Credit and GuaranteesThe fair value of commitments, letters of credit and guarantees represents the estimated costs to terminate or otherwise settle the obligations with a third-party. Residential mortgage commitments are actively traded and the fair value is estimated using available market quotes. Other loan commitments, letters of credit and guarantees are not actively traded. Substantially all loan commitments have floating rates and do not expose the Company to interest rate risk assuming no premium or discount was ascribed to loan commitments because funding could occur at market rates. The Company estimates the fair value of loan commitments, letters of credit and guarantees based on the related amount of unamortized deferred commitment fees adjusted for the probable losses for these arrangements.
The estimated fair values of the Company’s financial instruments at December 31 are shown in the table below.

2004 2003 2005 2004
Carrying Fair Carrying Fair Carrying Fair Carrying Fair
(Dollars in Millions) (Dollars in Millions) Amount Value Amount Value (Dollars in Millions) Amount Value Amount Value
Financial Assets
Financial Assets

Financial Assets

Cash and cash equivalents $ 6,537 $ 6,537 $ 8,782 $ 8,782 Cash and cash equivalents $ 8,202 $ 8,202 $ 6,537 $ 6,537
Investment securities 41,481 41,486 43,334 43,343 Investment securities 39,768 39,772 41,481 41,486
Loans held for sale 1,439 1,439 1,433 1,433 Loans held for sale 1,686 1,686 1,439 1,439
Loans 124,235 124,611 116,051 117,058 Loans 135,765 134,614 124,235 124,611

Total financial assets 173,692 $ 174,073 169,600 $ 170,616 Total financial assets 185,421 $ 184,274 173,692 $ 174,073

Nonfinancial assets 21,412 19,871 Nonfinancial assets 24,044 21,412

Total assets $ 195,104 $ 189,471 Total assets $ 209,465 $ 195,104

Financial Liabilities
Financial Liabilities

Financial Liabilities

Deposits $ 120,741 $ 120,788 $ 119,052 $ 119,120 Deposits $ 124,709 $ 124,532 $ 120,741 $ 120,788
Short-term borrowings 13,084 13,084 10,850 10,850 Short-term borrowings 20,200 20,201 13,084 13,084
Long-term debt 34,739 35,160 33,816 34,425 Long-term debt 37,069 37,114 34,739 35,160

Total financial liabilities 168,564 $ 169,032 163,718 $ 164,395 Total financial liabilities 181,978 $ 181,847 168,564 $ 169,032

Nonfinancial liabilities 7,001 6,511 Nonfinancial liabilities 7,401 7,001
Shareholders’ equity 19,539 19,242 Shareholders’ equity 20,086 19,539

Total liabilities and shareholders’ equity $ 195,104 $ 189,471 Total liabilities and shareholders’ equity $ 209,465 $ 195,104
Derivative Positions
Derivative Positions

Derivative Positions

Asset and liability management positions Asset and liability management positions
Interest rate swaps $ 435 $ 435 $ 631 $ 631 Interest rate swaps $ 57 $ 57 $ 435 $ 435
Forward commitments to sell residential mortgages (4 ) (4 ) — — Futures and forwards (15 ) (15 ) (4 ) (4 )
Foreign exchange forward contracts (12 ) (12 ) — — Foreign exchange contracts 18 18 (12 ) (12 )
Equity contracts 4 4 — — Options 3 3 1 1
Customer related positions Equity contracts 3 3 4 4
Interest rate contracts 36 36 31 31 Customer related positions
Foreign exchange contracts 4 4 2 2 Interest rate contracts 53 53 36 36
Foreign exchange contracts 4 4 4 4
    The fair value of unfunded commitments, standby letters of credit and other guarantees is approximately equal to their carrying value. The carrying value of unfunded commitments and standby letters of credit was ~~$253.8~~$276 million. The carrying value of other guarantees was ~~$74.9~~$79 million.

U.S. BANCORP  9995

Note 2423   ~~Guarantees and Contingent Liabilities~~GUARANTEES AND CONTINGENT LIABILITIES
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit are legally binding and generally have fixed expiration dates or other termination clauses. The contractual amount represents the Company’s exposure to credit loss, in the event of default by the borrower. The Company manages this credit risk by using the same credit policies it applies to loans. Collateral is obtained to secure commitments based on management’s credit assessment of the borrower. The collateral may include marketable securities, receivables, inventory, equipment and real estate. Since the Company expects many of the commitments to expire without being drawn, total commitment amounts do not necessarily represent the Company’s future liquidity requirements. In addition, the commitments include consumer credit lines that are cancelable upon notification to the consumer.
LETTERS OF CREDIT
Standby letters of credit are commitments the Company issues to guarantee the performance of a customer to a third-party. The guarantees frequently support public and private borrowing arrangements, including commercial paper issuances, bond financings and other similar transactions. The Company issues commercial letters of credit on behalf of customers to ensure payment or collection in connection with trade transactions. In the event of a customer’s nonperformance, the Company’s credit loss exposure is the same as in any extension of credit, up to the letter’s contractual amount. Management assesses the borrower’s credit to determine the necessary collateral, which may include marketable securities, receivables, inventory, equipment and real estate. Since the conditions requiring the Company to fund letters of credit may not occur, the Company expects its liquidity requirements to be less than the total outstanding commitments. The maximum potential future payments guaranteed by the Company under standby letter of credit arrangements at December 31, ~~2004,~~2005, were approximately ~~$10.6~~$10.7 billion with a weighted-average term of approximately 2223 months. The estimated fair value of standby letters of credit was approximately ~~$75.5~~$82 million at December 31, ~~2004.~~2005.
    The contract or notional amounts of commitments to extend credit and letters of credit at December 31, ~~2004,~~2005, were as follows:

Less Than After Less Than After
(Dollars in Millions) (Dollars in Millions) One Year (a) One Year Total (Dollars in Millions) One Year One Year Total
Commitments to extend credit
Commercial $ 23,453 $ 33,771 $ 57,224 Commercial $ 19,493 $ 37,973 $ 57,466
Corporate and purchasing cards 12,941 25 12,966 Corporate and purchasing cards 11,730 25 11,755
Consumer credit cards 28,074 — 28,074 Consumer credit cards 41,040 — 41,040
Other consumer 2,100 11,355 13,455 Other consumer 3,439 12,512 15,951
Letters of credit Letters of credit Letters of credit
Standby 5,083 5,515 10,598 Standby 5,212 5,531 10,743
Commercial 327 36 363 Commercial 242 74 316
~~(a)~~ ~~Discretionary facilities are included in less than one year.~~
LEASE COMMITMENTS
Rental expense for operating leases amounted to ~~$184.6~~$192 million in 2005, $187 million in 2004 ~~$205.0~~and $208 million in ~~2003 and $201.5 million in 2002.~~2003. Future minimum payments, net of sublease rentals, under capitalized leases and noncancelable operating leases with initial or remaining terms of one year or more, consisted of the following at December 31, ~~2004:~~2005:

Capitalized Operating Capitalized Operating
(Dollars in Millions) Leases Leases Leases Leases
2005 $ 7.9 $ 197.9
2006 7.4 183.7 $ 5 $ 171
2007 6.6 167.6 4 159
2008 6.2 146.6 3 140
2009 6.1 125.8 3 122
2010 3 105
Thereafter 32.4 596.0 12 461

Total minimum lease payments 66.6 $ 1,417.6 30 $ 1,158

Less amount representing interest 24.6 21

Present value of net minimum lease payments $ 42.0 $ 9
GUARANTEES
Guarantees are contingent commitments issued by the Company to customers or other third-parties. The Company’s guarantees primarily include parent guarantees related to subsidiaries’ third-party borrowing arrangements; third-party performance guarantees inherent in the Company’s business operations such as indemnified securities lending programs and merchant charge-back guarantees; indemnification or buy-back provisions related to certain asset sales; and contingent consideration arrangements related to acquisitions. For certain guarantees, the Company has recorded a liability related to the potential obligation, or has access to collateral to support the guarantee or through the exercise of other recourse provisions can offset some or all of the maximum potential future payments made under these guarantees.
96  U.S. BANCORP
Third-Party Borrowing ArrangementsThe Company provides guarantees to third-parties as a part of certain
~~100~~  ~~U.S. BANCORP~~
subsidiaries’ borrowing arrangements, primarily representing guaranteed operating or capital lease payments or other debt obligations with maturity dates extending through 2013. The maximum potential future payments guaranteed by the Company under these arrangements were approximately ~~$1.9 billion~~$466 million at December 31, ~~2004.~~2005. The Company’s recorded liabilities as of December 31, ~~2004,~~2005, included ~~$10.7~~$8 million representing outstanding amounts owed to these third-parties and required to be recorded on the Company’s balance sheet in accordance with accounting principles generally accepted in the United States.
Commitments from Securities LendingThe Company participates in securities lending activities by acting as the customer’s agent involving the ~~lending~~loan of securities. The Company indemnifies customers for the difference between the market value of the securities lent and the market value of the collateral received. Cash collateralizes these transactions. The maximum potential future payments guaranteed by the Company under these arrangements were approximately ~~$11.4~~$13.0 billion at December 31, ~~2004,~~2005, and represented the market value of the securities lent to third-parties. At December 31, ~~2004,~~2005, the Company held assets with a market value of ~~$11.7~~$13.4 billion as collateral for these arrangements.
Asset SalesThe Company has provided guarantees to certain third-parties in connection with the sale of certain assets, primarily loan portfolios and low-income housing tax credits. These guarantees are generally in the form of asset buy-back or make-whole provisions that are triggered upon a credit event or a change in the tax-qualifying status of the related projects, as applicable, and remain in effect until the loans are collected or final tax credits are realized, respectively. The maximum potential future payments guaranteed by the Company under these arrangements were approximately ~~$487.5~~$843 million at December 31, ~~2004,~~2005, and represented the ~~total~~ proceeds or guaranteed portion received from the buyer in these transactions where the buy-back or make-whole provisions have not yet expired. Recourse available to the Company includes guarantees from the Small Business Administration (for SBA loans sold), recourse against the correspondent that originated the loan or to the private mortgage issuer, the right to collect payments from the debtors, and/or the right to liquidate the underlying collateral, if any, and retain the proceeds. Based on its established loan-to-value guidelines, the Company believes the recourse available is sufficient to recover future payments, if any, under the loan buy-back guarantees.
Merchant ProcessingThe Company, through its subsidiaries NOVA Information Systems, Inc. and NOVA European Holdings Company, provides merchant processing services. Under the rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In this situation, the transaction is “charged back” to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant, it bears the loss for the amount of the refund paid to the cardholder.
    A cardholder, through its issuing bank, generally has until the latter of up to four months after the date the transaction is processed or the receipt of the product or service to present a charge-back to the Company as the merchant processor. The absolute maximum potential liability is estimated to be the total volume of credit card transactions that meet the associations’ requirements to be valid charge-back transactions at any given time. Management estimates that the maximum potential exposure for charge-backs would approximate the total amount of merchant transactions processed through the credit card associations for the last four months. For the last four months this amount totaled approximately ~~$51.5~~$49.0 billion. In most cases, this contingent liability is unlikely to arise, as most products and services are delivered when purchased and amounts are refunded when items are returned to merchants. However, where the product or service is not provided until a future date (“future delivery”), the potential for this contingent liability increases. To mitigate this risk, the Company may require the merchant to make an escrow deposit, may place maximum volume limitations on future delivery transactions processed by the merchant at any point in time, or may require various credit ~~policy~~ enhancements (including letters of credit and bank guarantees). Also, merchant processing contracts may include event triggers to provide the Company more financial and operational control in the event of financial deterioration of the merchant. ~~At December 31, 2004,~~
    The Company’s primary exposure to future delivery is related to merchant processing for the ~~Company held $35.7 million of merchant escrow deposits as collateral.~~
airline industry. The Company currently processes card transactions for ~~several of the largest~~various airlines in the United ~~States.~~States and Europe. In the event of liquidation of these airlines, the Company could become financially liable for refunding tickets purchased through the credit card associations under the charge-back provisions. Charge-back risk related to an airline is evaluated in a manner similar to credit risk assessments and as such merchant processing contracts consider the potential risk of default. Under certain situations, the Company may obtain various forms of collateral to minimize the risk of charge-backs. At December 31, ~~2004,~~2005, the value of ~~future delivery~~ airline tickets purchased to be delivered at a future date was
U.S. BANCORP  97
approximately ~~$1.9~~$1.7 billion, and the Company held collateral of ~~$191.9 million~~$1.2 billion in escrow deposits, ~~and~~ letters of credit and liens on various assets. With respect to future delivery risk for non-airline merchants, the Company held $33 million of merchant escrow deposits as collateral. In addition to specific collateral or other credit enhancements, the Company maintains a liability for its implied guarantees associated with future delivery. At December 31, 2005, the liability was $24 million primarily related to these airline ~~customer transactions.~~processing arrangements.
~~U.S. BANCORP~~  ~~101~~
    In the normal course of business, the Company has unresolved charge-backs that are in process of resolution. The Company assesses the likelihood of its potential liability based on the extent and nature of unresolved charge-backs and its historical loss experience. At December 31, ~~2004,~~2005, the Company had a recorded liability for potential losses of ~~$31.8~~$19 million. ~~In addition,~~
Contingent Consideration ArrangementsThe Company has contingent payment obligations related to certain business combination transactions. Payments are guaranteed as long as certain post-acquisition performance-based criteria are met or customer relationships are maintained. At December 31, 2005, the maximum potential future payments required to be made by the Company ~~had~~under these arrangements was approximately $80 million and represented contingent payments related to the acquisition of the Wachovia Corporation’s corporate trust and institutional custody business on December 30, 2005. If required, these contingent payments would be payable within the next 12 months.
Minimum Revenue GuaranteesIn the normal course of business, the Company may enter into revenue share agreements with third party business partners who generate customer referrals or provide marketing or other services related to the generation of revenue. In certain of these agreements, the Company may guarantee that a ~~$53.8 million liability for obligations associated with its airline processing business.~~
minimum amount of revenue share payments will be made to the third party over a specified period of time. For the period ending December 31, 2005, the maximum potential future payments required to be made by the Company under these agreements was $42 million.
Other GuaranteesThe Company provides liquidity and credit enhancement facilities to a Company-sponsored conduit, as more fully described in the ~~Note 10.~~“Off-Balance Sheet Arrangements” section within Management’s Discussion and Analysis. Although management believes a draw against these facilities is remote, the maximum potential future payments guaranteed by the Company under these arrangements were approximately ~~$5.7~~$3.8 billion at December 31, ~~2004.~~2005. The recorded fair value of the Company’s liability for the credit enhancement ~~recourse obligation and~~ liquidity facility was ~~$32.4~~$20 million at December 31, ~~2004,~~2005, and was included in other liabilities.
    The Company has also made financial performance guarantees related to the operations of its subsidiaries. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $1.8 billion at December 31, 2005.
OTHER CONTINGENT LIABILITIES
In connection with the spin-off of Piper Jaffray Companies, the Company has agreed to indemnify Piper Jaffray Companies against losses that may result from third-party claims relating to certain specified matters. The Company’s indemnification obligation related to these specified matters is capped at ~~$17.5~~$18 million and can be terminated by the Company if there is a change in control event for Piper Jaffray Companies. Through December 31, ~~2004,~~2005, the Company has paid approximately ~~$3.3~~$4 million to Piper Jaffray Companies under this agreement.
    The Company is subject to various other litigation, investigations and legal and administrative cases and proceedings that arise in the ordinary course of its businesses. Due to their complex nature, it may be years before some matters are resolved. While it is impossible to ascertain the ultimate resolution or range of financial liability with respect to these contingent matters, the Company believes that the aggregate amount of such liabilities will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

~~102~~  98  U.S. BANCORP

Note 2524   U.S. ~~Bancorp (Parent Company)~~BANCORP (PARENT COMPANY)
Condensed Balance Sheet

December 31 (Dollars in Millions) December 31 (Dollars in Millions) 2004 2003 December 31 (Dollars in Millions) 2005 2004
Assets
Assets

Assets

Deposits with subsidiary banks, principally interest-bearing Deposits with subsidiary banks, principally interest-bearing $ 6,806 $ 4,726 Deposits with subsidiary banks, principally interest-bearing $ 9,882 $ 6,806
Available-for-sale securities Available-for-sale securities 126 127 Available-for-sale securities 107 126
Investments in bank and bank holding company subsidiaries Investments in bank and bank holding company subsidiaries 20,082 22,628 Investments in bank and bank holding company subsidiaries 21,681 20,082
Investments in nonbank subsidiaries Investments in nonbank subsidiaries 371 605 Investments in nonbank subsidiaries 376 371
Advances to nonbank subsidiaries Advances to nonbank subsidiaries 5 16 Advances to nonbank subsidiaries 10 5
Other assets Other assets 690 676 Other assets 659 690

Total assets $ 28,080 $ 28,778 Total assets $ 32,715 $ 28,080

Liabilities and Shareholders’ Equity
Liabilities and Shareholders’ Equity

Liabilities and Shareholders’ Equity

Short-term funds borrowed Short-term funds borrowed $ 683 $ 699 Short-term funds borrowed $ 782 $ 683
Long-term debt Long-term debt 6,899 7,880 Long-term debt 10,854 6,899
Other liabilities Other liabilities 959 957 Other liabilities 993 959
Shareholders’ equity Shareholders’ equity 19,539 19,242 Shareholders’ equity 20,086 19,539

Total liabilities and shareholders’ equity $ 28,080 $ 28,778 Total liabilities and shareholders’ equity $ 32,715 $ 28,080
Condensed Statement of Income

Year Ended December 31 (Dollars in Millions) Year Ended December 31 (Dollars in Millions) 2004 2003 2002 Year Ended December 31 (Dollars in Millions) 2005 2004 2003
Income
Income

Income

Dividends from bank and bank holding company subsidiaries Dividends from bank and bank holding company subsidiaries $ 4,900.0 $ 27.0 $ 3,140.0 Dividends from bank and bank holding company subsidiaries $ 2,609 $ 4,900 $ 27
Dividends from nonbank subsidiaries Dividends from nonbank subsidiaries 229.0 5.8 15.2 Dividends from nonbank subsidiaries — 229 6
Interest from subsidiaries Interest from subsidiaries 54.1 69.1 96.9 Interest from subsidiaries 200 54 69
Other income Other income 20.9 62.1 54.5 Other income 22 21 62

Total income 5,204.0 164.0 3,306.6 Total income 2,831 5,204 164

Expense
Expense

Expense

Interest on short-term funds borrowed Interest on short-term funds borrowed 7.5 8.0 8.9 Interest on short-term funds borrowed 25 8 8
Interest on long-term debt Interest on long-term debt 256.4 270.8 340.9 Interest on long-term debt 311 256 271
Merger and restructuring-related charges — 2.9 6.7
Other expense Other expense 46.9 86.5 76.0 Other expense 93 47 89

Total expense 310.8 368.2 432.5 Total expense 429 311 368

Income (loss) before income taxes and equity in undistributed income of subsidiaries Income (loss) before income taxes and equity in undistributed income of subsidiaries 4,893.2 (204.2 ) 2,874.1 Income (loss) before income taxes and equity in undistributed income of subsidiaries 2,402 4,893 (204 )
Income tax credit Income tax credit (52.9 ) (37.1 ) (84.6 ) Income tax credit (73 ) (53 ) (37 )

Income (loss) of parent company Income (loss) of parent company 4,946.1 (167.1 ) 2,958.7 Income (loss) of parent company 2,475 4,946 (167 )
Equity (deficiency) in undistributed income of subsidiaries Equity (deficiency) in undistributed income of subsidiaries (779.3 ) 3,899.7 209.4 Equity (deficiency) in undistributed income of subsidiaries 2,014 (779 ) 3,900

Net income $ 4,166.8 $ 3,732.6 $ 3,168.1 Net income $ 4,489 $ 4,167 $ 3,733

U.S. BANCORP  ~~103~~99
Condensed Statement of Cash Flows

Year Ended December 31 (Dollars in Millions) Year Ended December 31 (Dollars in Millions) 2004 2003 2002 Year Ended December 31 (Dollars in Millions) 2005 2004 2003
Operating Activities
Operating Activities

Operating Activities

Net income Net income $ 4,166.8 $ 3,732.6 $ 3,168.1 Net income $ 4,489 $ 4,167 $ 3,733
Adjustments to reconcile net income to net cash provided by operating activities Adjustments to reconcile net income to net cash provided by operating activities Adjustments to reconcile net income to net cash provided by operating activities
(Equity) deficiency in undistributed income of subsidiaries 779.3 (3,899.7 ) (209.4 ) (Equity) deficiency in undistributed income of subsidiaries (2,014 ) 779 (3,900 )
Other, net 43.6 172.2 43.8 Other, net 128 43 172

Net cash provided by (used in) operating activities 4,989.7 5.1 3,002.5 Net cash provided by (used in) operating activities 2,603 4,989 5
Investing Activities
Investing Activities

Investing Activities

Proceeds from sales and maturities of investment securities Proceeds from sales and maturities of investment securities 76.1 20.9 113.1 Proceeds from sales and maturities of investment securities 13 76 21
Purchases of investment securities Purchases of investment securities (76.4 ) (73.0 ) (52.9 ) Purchases of investment securities — (76 ) (73 )
Investments in subsidiaries Investments in subsidiaries (.1 ) (283.9 ) (536.4 ) Investments in subsidiaries (43 ) — (284 )
Equity distributions from subsidiaries Equity distributions from subsidiaries 1,915.9 536.5 1,200.0 Equity distributions from subsidiaries 39 1,916 536
Net (increase) decrease in short-term advances to subsidiaries Net (increase) decrease in short-term advances to subsidiaries 10.8 35.5 415.1 Net (increase) decrease in short-term advances to subsidiaries (5 ) 11 35
Long-term advances to subsidiaries — — (410.0 )
Principal collected on long-term advances to subsidiaries Principal collected on long-term advances to subsidiaries — 572.6 1,770.0 Principal collected on long-term advances to subsidiaries — — 573
Other, net Other, net (11.5 ) 130.7 44.5 Other, net (18 ) (12 ) 131

Net cash provided by (used in) investing activities 1,914.8 939.3 2,543.4
Net cash provided by (used in) investing activities (14 ) 1,915 939
Financing Activities
Financing Activities

Financing Activities

Net increase (decrease) in short-term advances from subsidiaries Net increase (decrease) in short-term advances from subsidiaries — (117.2 ) 48.4 Net increase (decrease) in short-term advances from subsidiaries — — (117 )
Net increase (decrease) in short-term borrowings Net increase (decrease) in short-term borrowings (15.8 ) 318.5 (72.3 ) Net increase (decrease) in short-term borrowings 99 (16 ) 319
Principal payments or redemptions of long-term debt Principal payments or redemptions of long-term debt (909.0 ) (1,954.3 ) (2,537.5 ) Principal payments or redemptions of long-term debt (1,862 ) (909 ) (1,954 )
Proceeds from issuance of long-term debt Proceeds from issuance of long-term debt — 1,150.0 2,075.0 Proceeds from issuance of long-term debt 5,979 — 1,150
Proceeds from issuance of common stock Proceeds from issuance of common stock 580.6 398.4 147.0 Proceeds from issuance of common stock 371 581 398
Repurchase of common stock Repurchase of common stock (2,659.6 ) (326.3 ) (1,040.4 ) Repurchase of common stock (1,855 ) (2,660 ) (326 )
Cash dividends paid Cash dividends paid (1,820.5 ) (1,556.8 ) (1,480.7 ) Cash dividends paid (2,245 ) (1,820 ) (1,557 )

Net cash provided by (used in) financing activities (4,824.3 ) (2,087.7 ) (2,860.5 ) Net cash provided by (used in) financing activities 487 (4,824 ) (2,087 )

Change in cash and cash equivalents 2,080.2 (1,143.3 ) 2,685.4 Change in cash and cash equivalents 3,076 2,080 (1,143 )
Cash and cash equivalents at beginning of year Cash and cash equivalents at beginning of year 4,725.7 5,869.0 3,183.6 Cash and cash equivalents at beginning of year 6,806 4,726 5,869

Cash and cash equivalents at end of year $ 6,805.9 $ 4,725.7 $ 5,869.0 Cash and cash equivalents at end of year $ 9,882 $ 6,806 $ 4,726
    Transfer of funds (dividends, loans or advances) from bank subsidiaries to the Company is restricted. Federal law prohibits loans unless they are secured and generally limits any loan to the Company or individual affiliate to 10 percent of each bank’s unimpaired capital and surplus. In aggregate, loans to the Company and all affiliates cannot exceed 20 percent of each bank’s unimpaired capital and surplus.
    Dividend payments to the Company by its subsidiary banks are subject to regulatory review and statutory limitations and, in some instances, regulatory approval. The approval of the Comptroller of the Currency is required if total dividends by a national bank in any calendar year exceed the bank’s net income for that year combined with its retained net income for the preceding two calendar years or if the bank’s retained earnings are less than zero. Furthermore, dividends are restricted by the Comptroller of the Currency’s minimum capital constraints for all national banks. Within these guidelines, all bank subsidiaries have the ability to pay dividends without prior regulatory approval. The amount of dividends available to the parent company from the bank subsidiaries at December 31, ~~2004,~~2005, was approximately ~~$1.2~~$1.0 billion.

~~104~~  100  U.S. BANCORP
~~REPORT OF~~
~~INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~The Board~~Report of ~~Directors and Shareholders of~~
~~U.S. Bancorp:~~
We have audited the accompanying consolidated balance sheets of U.S. Bancorp as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. Bancorp at December 31, 2004 and 2003, and the consolidated results of its operations and cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of U.S. Bancorp’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18, 2005 expressed an unqualified opinion thereon.
~~Minneapolis, Minnesota~~
~~February 18, 2005~~
~~REPORT OF~~
~~INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~
~~To the Shareholders and Board of Directors of U.S. Bancorp:~~
In our opinion, the accompanying consolidated statements of income, shareholders’ equity and cash flows of U.S. Bancorp and its subsidiaries present fairly, in all material respects, the results of their operations and their cash flows for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 13 of the Notes to Consolidated Financial Statements, in 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
~~Minneapolis, Minnesota~~
January 21, 2003, except for the effects of the adoption of the fair value provisions under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” as discussed in Note 2 of the Notes to Consolidated Financial Statements, and the effects of presenting discontinued operations, as discussed in Note 4 of the Notes to Consolidated Financial Statements, as to which the date is December 31, 2003.
~~U.S. BANCORP~~  ~~105~~
~~REPORT OF MANAGEMENT~~Management
Responsibility for the financial statements and other information presented throughout the Annual Report on Form 10-K rests with the management of U.S. Bancorp. The Company believes that the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and present the substance of transactions based on the circumstances and management’s best estimates and judgment.
In meeting its responsibilities for the reliability of the financial statements, management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined by Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s system of internal controls is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of publicly filed financial statements in accordance with accounting principles generally accepted in the United States.
To test compliance, the Company carries out an extensive audit program. This program includes a review for compliance with written policies and procedures and a comprehensive review of the adequacy and effectiveness of the internal control system. Although control procedures are designed and tested, it must be recognized that there are limits inherent in all systems of internal control and, therefore, errors and irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. Projection of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Board of Directors of the Company has an Audit Committee composed of directors who are independent of U.S. Bancorp. The committee meets periodically with management, the internal auditors and the independent accountants to consider audit results and to discuss internal accounting control, auditing and financial reporting matters.
Management assessed the effectiveness of the Company’s internal controls over financial reporting as of December 31, ~~2004.~~2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control-Integrated Framework. Based on our assessment and those criteria, management believes that the Company designed and maintained effective internal control over financial reporting as of December 31, ~~2004.~~2005.
The Company’s independent accountants, Ernst & Young LLP, have been engaged to render an independent professional opinion on the financial statements and issue an attestation report on management’s assessment of the Company’s system of internal control over financial reporting. Their opinion on the financial statements appearing on page ~~105~~102 and their attestation on the system of internal controls over financial reporting appearing on page ~~107~~103 are based on procedures conducted in accordance with auditing standards of the Public Company Accounting Oversight Board (United States).

~~106~~  U.S. BANCORP  101
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
The Board of Directors and Shareholders of U.S. Bancorp:
We have audited the accompanying consolidated balance sheets of U.S. Bancorp as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. Bancorp at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of U.S. Bancorp’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 17, 2006 expressed an unqualified opinion thereon.
Minneapolis, Minnesota
February 17, 2006
102  ~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING~~U.S. BANCORP
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of U.S. Bancorp:
We have audited management’s assessment, included in the accompanying Report of Management, that U.S. Bancorp maintained effective internal control over financial reporting as of December 31, ~~2004,~~2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). U.S. Bancorp’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that U.S. Bancorp maintained effective internal control over financial reporting as of December 31, ~~2004,~~2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, U.S. Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2004,~~2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of U.S. Bancorp as of December 31, ~~2004~~2005 and ~~2003,~~2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the ~~two~~three years in the period ended December 31, ~~2004~~2005 and our report dated February ~~18, 2005~~17, 2006 expressed an unqualified opinion thereon.
Minneapolis, Minnesota
February ~~18, 2005~~17, 2006

U.S. BANCORP  ~~107~~103
U.S. BANCORP
CONSOLIDATED BALANCE SHEET — FIVE-YEAR SUMMARY

% Change % Change
December 31 (Dollars in Millions) December 31 (Dollars in Millions) 2004 2003 2002 2001 2000 2004 v 2003 December 31 (Dollars in Millions) 2005 2004 2003 2002 2001 2005 v 2004
Assets
Assets

Assets

Cash and due from banks Cash and due from banks $ 6,336 $ 8,630 $ 10,758 $ 9,120 $ 8,475 (26.6 )% Cash and due from banks $ 8,004 $ 6,336 $ 8,630 $ 10,758 $ 9,120 26.3 %
Held-to-maturity securities Held-to-maturity securities 127 152 233 299 252 (16.4 ) Held-to-maturity securities 109 127 152 233 299 (14.2 )
Available-for-sale securities Available-for-sale securities 41,354 43,182 28,255 26,309 17,390 (4.2 ) Available-for-sale securities 39,659 41,354 43,182 28,255 26,309 (4.1 )
Loans held for sale Loans held for sale 1,439 1,433 4,159 2,820 764 .4 Loans held for sale 1,686 1,439 1,433 4,159 2,820 17.2
Loans Loans 126,315 118,235 116,251 114,405 122,365 6.8 Loans 137,806 126,315 118,235 116,251 114,405 9.1
Less allowance for loan losses (2,080 ) (2,184 ) (2,422 ) (2,457 ) (1,787 ) (4.8 ) Less allowance for loan losses (2,041 ) (2,080 ) (2,184 ) (2,422 ) (2,457 ) (1.9 )

Net loans 124,235 116,051 113,829 111,948 120,578 7.1 Net loans 135,765 124,235 116,051 113,829 111,948 9.3
Other assets Other assets 21,613 20,023 22,793 20,894 17,462 7.9 Other assets 24,242 21,613 20,023 22,793 20,894 12.2

Total assets $ 195,104 $ 189,471 $ 180,027 $ 171,390 $ 164,921 3.0 % Total assets $ 209,465 $ 195,104 $ 189,471 $ 180,027 $ 171,390 7.4 %

Liabilities and Shareholders’ Equity
Liabilities and Shareholders’ Equity

Liabilities and Shareholders’ Equity

Deposits Deposits Deposits
Noninterest-bearing $ 30,756 $ 32,470 $ 35,106 $ 31,212 $ 26,633 (5.3 )% Noninterest-bearing $ 32,214 $ 30,756 $ 32,470 $ 35,106 $ 31,212 4.7 %
Interest-bearing 89,985 86,582 80,428 74,007 82,902 3.9 Interest-bearing 92,495 89,985 86,582 80,428 74,007 2.8

Total deposits 120,741 119,052 115,534 105,219 109,535 1.4 Total deposits 124,709 120,741 119,052 115,534 105,219 3.3
Short-term borrowings Short-term borrowings 13,084 10,850 7,806 14,670 11,833 20.6 Short-term borrowings 20,200 13,084 10,850 7,806 14,670 54.4
Long-term debt Long-term debt 34,739 33,816 31,582 28,542 23,276 2.7 Long-term debt 37,069 34,739 33,816 31,582 28,542 6.7
Other liabilities Other liabilities 7,001 6,511 6,669 6,214 4,944 7.5 Other liabilities 7,401 7,001 6,511 6,669 6,214 5.7

Total liabilities 175,565 170,229 161,591 154,645 149,588 3.1 Total liabilities 189,379 175,565 170,229 161,591 154,645 7.9
Shareholders’ equity Shareholders’ equity 19,539 19,242 18,436 16,745 15,333 1.5 Shareholders’ equity 20,086 19,539 19,242 18,436 16,745 2.8

Total liabilities and shareholders’ equity $ 195,104 $ 189,471 $ 180,027 $ 171,390 $ 164,921 3.0 % Total liabilities and shareholders’ equity $ 209,465 $ 195,104 $ 189,471 $ 180,027 $ 171,390 7.4 %

~~108~~  104  U.S. BANCORP
U.S. BANCORP
CONSOLIDATED STATEMENT OF INCOME — FIVE-YEAR SUMMARY

% Change % Change
Year Ended December 31 (Dollars in Millions) Year Ended December 31 (Dollars in Millions) 2004 2003 2002 2001 2000 2004 v 2003 Year Ended December 31 (Dollars in Millions) 2005 2004 2003 2002 2001 2005 v 2004
Interest Income
Interest Income

Interest Income

Loans Loans $ 7,168.1 $ 7,272.0 $ 7,743.0 $ 9,413.7 $ 10,519.3 (1.4 )% Loans $ 8,381 $ 7,168 $ 7,272 $ 7,743 $ 9,414 16.9%
Loans held for sale Loans held for sale 91.5 202.2 170.6 146.9 102.1 (54.7 ) Loans held for sale 106 91 202 171 147 16.5
Investment securities Investment securities 1,827.1 1,684.0 1,484.3 1,295.6 1,148.9 8.5 Investment securities 1,954 1,827 1,684 1,484 1,296 7.0
Other interest income Other interest income 99.8 99.8 96.0 90.2 114.8 — Other interest income 110 100 100 96 90 10.0

Total interest income 9,186.5 9,258.0 9,493.9 10,946.4 11,885.1 (.8 )

Total interest income 10,551 9,186 9,258 9,494 10,947 14.9
Interest Expense
Interest Expense

Interest Expense

Deposits Deposits 904.3 1,096.6 1,485.3 2,828.1 3,618.8 (17.5 ) Deposits 1,559 904 1,097 1,485 2,828 72.5
Short-term borrowings Short-term borrowings 262.7 166.8 222.9 475.6 682.2 57.5 Short-term borrowings 690 263 167 223 476 *
Long-term debt Long-term debt 908.2 805.3 971.4 1,292.0 1,593.7 12.8 Long-term debt 1,247 908 805 972 1,292 37.3

Total interest expense 2,075.2 2,068.7 2,679.6 4,595.7 5,894.7 .3 Total interest expense 3,496 2,075 2,069 2,680 4,596 68.5

Net interest income Net interest income 7,111.3 7,189.3 6,814.3 6,350.7 5,990.4 (1.1 ) Net interest income 7,055 7,111 7,189 6,814 6,351 (.8 )
Provision for credit losses Provision for credit losses 669.6 1,254.0 1,349.0 2,528.8 828.0 (46.6 ) Provision for credit losses 666 669 1,254 1,349 2,529 (.4 )

Net interest income after provision for credit losses Net interest income after provision for credit losses 6,441.7 5,935.3 5,465.3 3,821.9 5,162.4 8.5 Net interest income after provision for credit losses 6,389 6,442 5,935 5,465 3,822 (.8 )

Noninterest Income
Noninterest Income

Noninterest Income

Credit and debit card revenue Credit and debit card revenue 649.3 560.7 517.0 465.9 431.0 15.8 Credit and debit card revenue 713 649 561 517 466 9.9
Corporate payment products revenue Corporate payment products revenue 406.8 361.3 325.7 297.7 299.2 12.6 Corporate payment products revenue 488 407 361 326 298 19.9
ATM processing services ATM processing services 175.3 165.9 160.6 153.0 141.9 5.7 ATM processing services 229 175 166 161 153 30.9
Merchant processing services Merchant processing services 674.6 561.4 567.3 308.9 120.0 20.2 Merchant processing services 770 675 561 567 309 14.1
Trust and investment management fees Trust and investment management fees 981.2 953.9 892.1 887.8 920.6 2.9 Trust and investment management fees 1,009 981 954 892 888 2.9
Deposit service charges Deposit service charges 806.4 715.8 690.3 644.9 555.6 12.7 Deposit service charges 928 807 716 690 645 15.0
Treasury management fees Treasury management fees 466.7 466.3 416.9 347.3 292.4 .1 Treasury management fees 437 467 466 417 347 (6.4 )
Commercial products revenue Commercial products revenue 432.2 400.5 479.2 437.4 350.0 7.9 Commercial products revenue 400 432 401 479 437 (7.4 )
Mortgage banking revenue Mortgage banking revenue 397.3 367.1 330.2 234.0 189.9 8.2 Mortgage banking revenue 432 397 367 330 234 8.8
Investment products fees and commissions Investment products fees and commissions 156.0 144.9 132.7 130.8 66.4 7.7 Investment products fees and commissions 152 156 145 133 131 (2.6 )
Securities gains (losses), net Securities gains (losses), net (104.9 ) 244.8 299.9 329.1 8.1 * Securities gains (losses), net (106 ) (105 ) 245 300 329 (1.0 )
Merger and restructuring-related gains — — — 62.2 — —
Other Other 478.3 370.4 398.8 370.4 591.9 29.1 Other 593 478 370 399 432 24.1

Total noninterest income 5,519.2 5,313.0 5,210.7 4,669.4 3,967.0 3.9

Total noninterest income 6,045 5,519 5,313 5,211 4,669 9.5
Noninterest Expense
Noninterest Expense

Noninterest Expense

Compensation Compensation 2,252.2 2,176.8 2,167.5 2,036.6 1,993.9 3.5 Compensation 2,383 2,252 2,177 2,167 2,037 5.8
Employee benefits Employee benefits 389.4 328.4 317.5 285.5 303.7 18.6 Employee benefits 431 389 328 318 285 10.8
Net occupancy and equipment Net occupancy and equipment 630.8 643.7 658.7 666.6 653.0 (2.0 ) Net occupancy and equipment 641 631 644 659 667 1.6
Professional services Professional services 148.9 143.4 129.7 116.4 102.2 3.8 Professional services 166 149 143 130 116 11.4
Marketing and business development Marketing and business development 193.5 180.3 171.4 178.0 188.0 7.3 Marketing and business development 235 194 180 171 178 21.1
Technology and communications Technology and communications 429.6 417.4 392.1 353.9 362.1 2.9 Technology and communications 466 430 418 392 354 8.4
Postage, printing and supplies Postage, printing and supplies 248.4 245.6 243.2 241.9 241.6 1.1 Postage, printing and supplies 255 248 246 243 242 2.8
Goodwill Goodwill — — — 236.7 219.9 — Goodwill — — — — 237 —
Other intangibles Other intangibles 550.1 682.4 553.0 278.4 157.3 (19.4 ) Other intangibles 458 550 682 553 278 (16.7 )
Merger and restructuring-related charges — 46.2 321.2 1,044.8 327.9 *
Debt prepayment Debt prepayment 154.8 — (.2 ) 6.8 — * Debt prepayment 54 155 — — 7 (65.2 )
Other Other 786.8 732.7 786.4 703.4 433.3 7.4 Other 774 787 779 1,107 1,748 (1.7 )

Total noninterest expense 5,784.5 5,596.9 5,740.5 6,149.0 4,982.9 3.4 Total noninterest expense 5,863 5,785 5,597 5,740 6,149 1.3

Income from continuing operations before income taxes Income from continuing operations before income taxes 6,176.4 5,651.4 4,935.5 2,342.3 4,146.5 9.3 Income from continuing operations before income taxes 6,571 6,176 5,651 4,936 2,342 6.4
Applicable income taxes Applicable income taxes 2,009.6 1,941.3 1,707.5 818.3 1,422.0 3.5 Applicable income taxes 2,082 2,009 1,941 1,708 818 3.6

Income from continuing operations Income from continuing operations 4,166.8 3,710.1 3,228.0 1,524.0 2,724.5 12.3 Income from continuing operations 4,489 4,167 3,710 3,228 1,524 7.7
Income (loss) from discontinued operations (after-tax) — 22.5 (22.7 ) (45.2 ) 27.6 *
Cumulative effect of accounting change (after-tax) — — (37.2 ) — — —
Income (loss) from discontinued operations (after-tax) Income (loss) from discontinued operations (after-tax) — — 23 (23 ) (45 ) —
Cumulative effect of accounting change (after-tax) Cumulative effect of accounting change (after-tax) — — — (37 ) — —

Net income Net income $ 4,166.8 $ 3,732.6 $ 3,168.1 $ 1,478.8 $ 2,752.1 11.6 Net income $ 4,489 $ 4,167 $ 3,733 $ 3,168 $ 1,479 7.7
* Not meaningful

U.S. BANCORP  ~~109~~105
U.S. BANCORP
QUARTERLY CONSOLIDATED FINANCIAL DATA

2004 2003 2005 2004
First Second Third Fourth First Second Third Fourth First Second Third Fourth First Second Third Fourth
(Dollars in Millions, Except Per Share Data) (Dollars in Millions, Except Per Share Data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter (Dollars in Millions, Except Per Share Data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Interest Income
Interest Income

Interest Income

Loans Loans $ 1,747.0 $ 1,740.0 $ 1,802.8 $ 1,878.3 $ 1,836.7 $ 1,821.0 $ 1,818.3 $ 1,796.0 Loans $ 1,911 $ 2,027 $ 2,167 $ 2,276 $ 1,747 $ 1,740 $ 1,803 $ 1,878
Loans held for sale Loans held for sale 19.9 27.3 21.1 23.2 59.6 51.8 59.5 31.3 Loans held for sale 21 24 30 31 20 27 21 23
Investment securities Investment securities 469.3 443.4 453.2 461.2 405.0 429.9 410.3 438.8 Investment securities 476 486 492 500 469 444 453 461
Other interest income Other interest income 21.9 25.5 25.7 26.7 29.9 25.1 23.2 21.6 Other interest income 27 28 29 26 22 25 26 27

Total interest income 2,258.1 2,236.2 2,302.8 2,389.4 2,331.2 2,327.8 2,311.3 2,287.7 Total interest income 2,435 2,565 2,718 2,833 2,258 2,236 2,303 2,389

Interest Expense
Interest Expense

Interest Expense

Deposits Deposits 227.0 205.3 221.4 250.6 306.6 288.5 256.4 245.1 Deposits 308 361 414 476 227 205 222 250
Short-term borrowings Short-term borrowings 49.9 58.9 74.5 79.4 39.5 38.9 44.9 43.5 Short-term borrowings 112 143 205 230 50 59 74 80
Long-term debt Long-term debt 209.4 199.6 232.3 266.9 215.7 208.5 191.5 189.6 Long-term debt 271 307 317 352 209 200 232 267

Total interest expense 486.3 463.8 528.2 596.9 561.8 535.9 492.8 478.2 Total interest expense 691 811 936 1,058 486 464 528 597

Net interest income Net interest income 1,771.8 1,772.4 1,774.6 1,792.5 1,769.4 1,791.9 1,818.5 1,809.5 Net interest income 1,744 1,754 1,782 1,775 1,772 1,772 1,775 1,792
Provision for credit losses Provision for credit losses 235.0 204.5 165.1 65.0 335.0 323.0 310.0 286.0 Provision for credit losses 172 144 145 205 235 204 166 64

Net interest income after provision for credit losses Net interest income after provision for credit losses 1,536.8 1,567.9 1,609.5 1,727.5 1,434.4 1,468.9 1,508.5 1,523.5 Net interest income after provision for credit losses 1,572 1,610 1,637 1,570 1,537 1,568 1,609 1,728

Noninterest Income
Noninterest Income

Noninterest Income

Credit and debit card revenue Credit and debit card revenue 141.8 158.8 164.3 184.4 127.4 142.3 137.6 153.4 Credit and debit card revenue 154 177 185 197 142 159 164 184
Corporate payment products revenue Corporate payment products revenue 94.8 102.7 108.5 100.8 86.0 90.9 95.7 88.7 Corporate payment products revenue 107 120 135 126 95 103 108 101
ATM processing services ATM processing services 42.2 44.9 45.2 43.0 42.4 41.9 41.3 40.3 ATM processing services 47 57 64 61 42 45 45 43
Merchant processing services Merchant processing services 141.1 165.1 187.5 180.9 127.3 141.8 146.3 146.0 Merchant processing services 178 198 200 194 141 165 188 181
Trust and investment management fees Trust and investment management fees 248.6 251.7 240.2 240.7 228.6 238.9 239.8 246.6 Trust and investment management fees 247 253 251 258 249 251 240 241
Deposit service charges Deposit service charges 185.2 202.1 207.4 211.7 163.2 179.0 187.0 186.6 Deposit service charges 210 234 246 238 185 202 208 212
Treasury management fees Treasury management fees 117.5 121.5 117.9 109.8 112.0 111.8 126.2 116.3 Treasury management fees 107 117 109 104 118 121 118 110
Commercial products revenue Commercial products revenue 110.4 107.4 106.7 107.7 104.2 100.0 97.8 98.5 Commercial products revenue 96 100 103 101 110 108 106 108
Mortgage banking revenue Mortgage banking revenue 94.2 109.9 97.2 96.0 95.4 90.3 89.5 91.9 Mortgage banking revenue 102 110 111 109 94 110 97 96
Investment products fees and commissions Investment products fees and commissions 39.3 42.2 37.1 37.4 35.1 38.1 35.5 36.2 Investment products fees and commissions 39 39 37 37 39 43 37 37
Securities gains (losses), net Securities gains (losses), net — (171.7 ) 87.3 (20.5 ) 140.7 213.1 (108.9 ) (.1 ) Securities gains (losses), net (59 ) 1 1 (49 ) — (172 ) 88 (21 )
Other Other 103.2 107.1 124.7 143.3 103.8 84.8 89.6 92.2 Other 154 135 134 170 103 107 125 143

Total noninterest income 1,318.3 1,241.7 1,524.0 1,435.2 1,366.1 1,472.9 1,177.4 1,296.6 Total noninterest income 1,382 1,541 1,576 1,546 1,318 1,242 1,524 1,435

Noninterest Expense
Noninterest Expense

Noninterest Expense

Compensation Compensation 535.8 572.6 564.6 579.2 546.0 547.6 543.8 539.4 Compensation 567 612 603 601 536 573 564 579
Employee benefits Employee benefits 100.2 91.2 100.0 98.0 91.7 79.6 75.8 81.3 Employee benefits 116 108 106 101 100 91 100 98
Net occupancy and equipment Net occupancy and equipment 155.7 153.4 159.2 162.5 161.3 159.5 161.3 161.6 Net occupancy and equipment 154 159 162 166 156 153 159 163
Professional services Professional services 32.4 34.7 37.2 44.6 26.4 32.9 39.9 44.2 Professional services 36 39 44 47 32 35 37 45
Marketing and business development Marketing and business development 35.3 48.7 60.6 48.9 29.8 51.1 48.6 50.8 Marketing and business development 43 67 61 64 35 49 61 49
Technology and communications Technology and communications 101.7 102.4 109.8 115.7 104.9 104.1 102.1 106.3 Technology and communications 106 113 118 129 102 102 110 116
Postage, printing and supplies Postage, printing and supplies 61.6 60.5 61.4 64.9 60.4 61.8 61.6 61.8 Postage, printing and supplies 63 63 64 65 62 60 61 65
Other intangibles Other intangibles 226.1 (47.6 ) 210.2 161.4 235.1 312.3 10.8 124.2 Other intangibles 71 181 125 81 226 (47 ) 210 161
Merger and restructuring-related charges — — — — 17.6 10.8 10.2 7.6
Debt prepayment Debt prepayment 35.4 1.3 5.6 112.5 — — — — Debt prepayment — 54 — — 35 2 5 113
Other Other 170.7 215.4 210.4 190.3 181.4 186.9 199.2 165.2 Other 175 199 190 210 171 215 211 190

Total noninterest expense 1,454.9 1,232.6 1,519.0 1,578.0 1,454.6 1,546.6 1,253.3 1,342.4 Total noninterest expense 1,331 1,595 1,473 1,464 1,455 1,233 1,518 1,579

Income from continuing operations before income taxes 1,400.2 1,577.0 1,614.5 1,584.7 1,345.9 1,395.2 1,432.6 1,477.7
Income before income taxes Income before income taxes 1,623 1,556 1,740 1,652 1,400 1,577 1,615 1,584
Applicable income taxes Applicable income taxes 391.8 540.1 549.0 528.7 461.8 480.2 491.9 507.4 Applicable income taxes 552 435 586 509 392 540 549 528

Income from continuing operations 1,008.4 1,036.9 1,065.5 1,056.0 884.1 915.0 940.7 970.3
Income from discontinued operations (after- tax) — — — — .7 4.9 10.2 6.7

Net income Net income $ 1,008.4 $ 1,036.9 $ 1,065.5 $ 1,056.0 $ 884.8 $ 919.9 $ 950.9 $ 977.0 Net income $ 1,071 $ 1,121 $ 1,154 $ 1,143 $ 1,008 $ 1,037 $ 1,066 $ 1,056

Earnings per share Earnings per share $ .53 $ .55 $ .57 $ .57 $ .46 $ .48 $ .49 $ .51 Earnings per share $ .58 $ .61 $ .63 $ .63 $ .53 $ .55 $ .57 $ .57
Diluted earnings per share Diluted earnings per share $ .52 $ .54 $ .56 $ .56 $ .46 $ .48 $ .49 $ .50 Diluted earnings per share $ .57 $ .60 $ .62 $ .62 $ .52 $ .54 $ .56 $ .56

~~110~~  106  U.S. BANCORP
U.S. BANCORP

SUPPLEMENTAL FINANCIAL DATA

Earnings Per Share Summary 2004 2003 2002 2001 2000 2005 2004 2003 2002 2001
Earnings per share from continuing operations $2.21 $1.93 $1.68 $ .79 $1.43 $ 2.45 $ 2.21 $ 1.93 $ 1.68 $ .79
Discontinued operations — .01 (.01 ) (.02 ) .01 — — .01 (.01 ) (.02 )
Cumulative effect of accounting change — — (.02 ) — — — — — (.02 ) —

Earnings per share $2.21 $1.94 $1.65 $ .77 $1.44 $ 2.45 $ 2.21 $ 1.94 $ 1.65 $ .77

Diluted earnings per share from continuing operations $2.18 $1.92 $1.68 $.79 $1.42 $ 2.42 $ 2.18 $ 1.92 $ 1.68 $ .79
Discontinued operations — .01 (.01 ) (.03 ) .01 — — .01 (.01 ) (.03 )
Cumulative effect of accounting change — — (.02 ) — — — — — (.02 ) —

Diluted earnings per share $2.18 $1.93 $1.65 $ .76 $1.43 $ 2.42 $ 2.18 $ 1.93 $ 1.65 $ .76

Ratios Ratios
Return on average assets Return on average assets 2.17 % 1.99 % 1.84 % .89 % 1.74 % 2.21 % 2.17 % 1.99 % 1.84 % .89 %
Return on average equity Return on average equity 21.4 19.2 18.3 9.0 19.0 22.5 21.4 19.2 18.3 9.0
Average total equity to average assets Average total equity to average assets 10.2 10.3 10.0 9.9 9.1 9.8 10.2 10.3 10.0 9.9
Dividends per share to net income per share Dividends per share to net income per share 46.2 44.1 47.3 97.4 45.1 50.2 46.2 44.1 47.3 97.4

Other Statistics(Dollars and Shares in Millions)

Common shares outstanding (a) 1,857.6 1,922.9 1,917.0 1,951.7 1,902.1
Average common shares outstanding and common stock equivalents
Earnings per share 1,887.1 1,923.7 1,916.0 1,927.9 1,906.0
Diluted earnings per share 1,912.9 1,936.2 1,924.8 1,940.3 1,918.5
Number of shareholders (b) 71,492 74,341 74,805 76,395 46,052
Common dividends declared $1,917 $1,645 $1,488 $1,447 $1,267

Other Statistics(Dollars and Shares in Millions)
Common shares outstanding (a) 1,815 1,858 1,923 1,917 1,952
Average common shares outstanding and common stock equivalents
Earnings per share 1,831 1,887 1,924 1,916 1,928
Diluted earnings per share 1,857 1,913 1,936 1,925 1,940
Number of shareholders (b) 69,217 71,492 74,341 74,805 76,395
Common dividends declared $ 2,246 $ 1,917 $ 1,645 $ 1,488 $ 1,447
(a) Defined as total common shares less common stock held in treasury at December 31.
(b) Based on number of common stock shareholders of record at December 31.
Stock Price Range and Dividends

2004 2003 2005 2004
Sales Price Sales Price Sales Price Sales Price
Closing Dividends Closing Dividends Closing Dividends Closing Dividends
High Low Price Declared High Low Price Declared High Low Price Declared High Low Price Declared
First quarter $ 29.70 $ 26.41 $ 27.65 $ .240 $ 23.47 $ 18.56 $ 18.98 $ .205 $ 31.36 $ 28.17 $ 28.82 $ .300 $ 29.70 $ 26.41 $ 27.65 $ .240
Second quarter 28.65 24.89 27.56 .240 24.99 18.96 24.50 .205 29.91 26.80 29.20 .300 28.65 24.89 27.56 .240
Third quarter 30.00 27.42 28.90 .240 25.82 22.93 23.99 .205 30.91 27.77 28.08 .300 30.00 27.42 28.90 .240
Fourth quarter 31.65 27.52 31.32 .300 30.00 24.04 29.78 .240 31.21 27.32 29.89 .330 31.65 27.52 31.32 .300
The common stock of U.S. Bancorp is traded on the New York Stock Exchange, under the ticker symbol “USB.”
~~Reconciliation of Quarterly Consolidated Financial Data~~

2003
First Second Third
(Dollars in Millions and After-tax) Quarter Quarter Quarter
Income before cumulative effect of accounting change, as previously reported $ 911.2 $ 953.6 $ 984.9
Less
Discontinued operations of Piper Jaffray Companies (a) .7 4.9 10.2
Adoption of SFAS 123 for stock options (a) 26.4 33.7 34.0

Income from continuing operations $ 884.1 $ 915.0 $ 940.7
~~(a)~~ The Company’s quarterly financial results previously filed on Form 10-Q with the Securities and Exchange Commission have been retroactively restated to give effect to the spin-off of Piper Jaffray Companies on December 31, 2003, and the adoption of the fair value method of accounting for stock-based compensation. The accounting change was adopted using the retroactive restatement method.

U.S. BANCORP  ~~111~~107
U.S. BANCORP
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND

Year Ended December 31 Year Ended December 31 2004 2003 Year Ended December 31 2005 2004
Average Yields Average Yields Average Yields Average Yields
(Dollars in Millions) (Dollars in Millions) Balances Interest and Rates Balances Interest and Rates (Dollars in Millions) Balances Interest and Rates Balances Interest and Rates
Assets
Assets

Assets

Investment securities Investment securities $ 43,009 $ 1,835.5 4.27 % $ 37,248 $ 1,696.7 4.56 % Investment securities $ 42,103 $ 1,962 4.66 % $ 43,009 $ 1,836 4.27 %
Loans held for sale Loans held for sale 1,608 91.5 5.69 3,616 202.2 5.59 Loans held for sale 1,795 106 5.88 1,608 91 5.69
Loans (b) Loans (b) Loans (b)
Commercial 39,348 2,212.9 5.62 41,326 2,315.4 5.60 Commercial 42,641 2,501 5.87 39,348 2,213 5.62
Commercial real estate 27,267 1,543.3 5.66 27,142 1,584.6 5.84 Commercial real estate 27,964 1,804 6.45 27,267 1,543 5.66
Residential mortgages 14,322 812.1 5.67 11,696 713.4 6.10 Residential mortgages 18,036 1,001 5.55 14,322 812 5.67
Retail 41,204 2,619.7 6.36 38,198 2,673.8 7.00 Retail 44,464 3,100 6.97 41,204 2,620 6.36

Total loans 122,141 7,188.0 5.89 118,362 7,287.2 6.16 Total loans 133,105 8,406 6.32 122,141 7,188 5.89
Other earning assets Other earning assets 1,365 100.1 7.33 1,582 100.1 6.32 Other earning assets 1,422 110 7.77 1,365 100 7.33

Total earning assets 168,123 9,215.1 5.48 160,808 9,286.2 5.77 Total earning assets 178,425 10,584 5.93 168,123 9,215 5.48
Allowance for credit losses Allowance for credit losses (2,303 ) (2,467 ) Allowance for credit losses (2,098 ) (2,303 )
Unrealized gain (loss) on available-for-sale securities Unrealized gain (loss) on available-for-sale securities (346 ) 120 Unrealized gain (loss) on available-for-sale securities (368 ) (346 )
Other assets (c) Other assets (c) 26,119 29,169 Other assets (c) 27,239 26,119

Total assets $ 191,593 $ 187,630 Total assets $ 203,198 $ 191,593

Liabilities and Shareholders’ Equity
Liabilities and Shareholders’ Equity

Liabilities and Shareholders’ Equity

Noninterest-bearing deposits Noninterest-bearing deposits $ 29,816 $ 31,715 Noninterest-bearing deposits $ 29,229 $ 29,816
Interest-bearing deposits Interest-bearing deposits Interest-bearing deposits
Interest checking 20,933 70.8 .34 19,104 84.3 .44 Interest checking 22,785 135 .59 20,933 71 .34
Money market accounts 32,854 235.2 .72 32,310 317.7 .98 Money market savings 29,314 358 1.22 32,854 235 .72
Savings accounts 5,866 15.4 .26 5,612 21.2 .38 Savings accounts 5,819 15 .26 5,866 15 .26
Time certificates of deposit less than $100,000 13,074 341.3 2.61 15,493 450.9 2.91 Time certificates of deposit less than $100,000 13,199 389 2.95 13,074 341 2.61
Time deposits greater than $100,000 13,679 241.6 1.77 12,319 222.5 1.81 Time deposits greater than $100,000 20,655 662 3.20 13,679 242 1.77

Total interest-bearing deposits 86,406 904.3 1.05 84,838 1,096.6 1.29 Total interest-bearing deposits 91,772 1,559 1.70 86,406 904 1.05
Short-term borrowings Short-term borrowings 14,534 262.7 1.81 10,503 166.8 1.59 Short-term borrowings 19,382 690 3.56 14,534 263 1.81
Long-term debt Long-term debt 35,115 908.2 2.59 33,663 805.3 2.39 Long-term debt 36,141 1,247 3.45 35,115 908 2.59

Total interest-bearing liabilities 136,055 2,075.2 1.53 129,004 2,068.7 1.60 Total interest-bearing liabilities 147,295 3,496 2.37 136,055 2,075 1.53
Other liabilities (d) Other liabilities (d) 6,263 7,518 Other liabilities (d) 6,721 6,263
Shareholders’ equity Shareholders’ equity 19,459 19,393 Shareholders’ equity 19,953 19,459

Total liabilities and shareholders’ equity $ 191,593 $ 187,630 Total liabilities and shareholders’ equity $ 203,198 $ 191,593

Net interest income Net interest income $ 7,139.9 $ 7,217.5 Net interest income $ 7,088 $ 7,140

Gross interest margin Gross interest margin 3.95 % 4.17 % Gross interest margin 3.56 % 3.95 %

Gross interest margin without taxable-equivalent increments Gross interest margin without taxable-equivalent increments 3.93 4.15 Gross interest margin without taxable-equivalent increments 3.54 3.93

Percent of Earning Assets
Percent of Earning Assets

Percent of Earning Assets

Interest income Interest income 5.48 % 5.77 % Interest income 5.93 % 5.48 %
Interest expense Interest expense 1.23 1.28 Interest expense 1.96 1.23

Net interest margin Net interest margin 4.25 % 4.49 % Net interest margin 3.97 % 4.25 %

Net interest margin without taxable-equivalent increments Net interest margin without taxable-equivalent increments 4.23 % 4.47 % Net interest margin without taxable-equivalent increments 3.95 % 4.23 %
* ~~Not meaningful.~~
(a) Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent.
(b) Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
(c) Includes approximately $1,427 million, $1,733 million, ~~$1,664 million,~~ and ~~$1,970~~$1,664 million of earning assets from discontinued operations in 2003, 2002, ~~2001,~~ and ~~2000,~~2001, respectively.
(d) Includes approximately $1,034 million, $1,524 million, ~~$1,776 million,~~ and ~~$2,072~~$1,776 million of interest-bearing liabilities from discontinued operations in 2003, 2002, ~~2001,~~ and ~~2000,~~2001, respectively.

~~112~~  108  U.S. BANCORP
RELATED YIELDS AND RATES (a)

2002 2001 2000 2004 v 2003
% Change
Average Yields Average Yields Average Yields Average
Balances Interest and Rates Balances Interest and Rates Balances Interest and Rates Balances
$ 28,829 $ 1,503.5 5.22 % $ 21,916 $ 1,335.0 6.09 % $ 17,311 $ 1,211.4 7.00 % 15.5%
2,644 170.6 6.45 1,911 146.9 7.69 1,303 102.1 7.84 (55.5 )
43,817 2,622.2 5.98 50,072 3,609.3 7.21 50,062 4,222.6 8.43 (4.8 )
25,723 1,636.3 6.36 26,081 2,002.7 7.68 26,040 2,296.9 8.82 .5
8,412 595.3 7.08 8,576 658.2 7.67 11,207 863.7 7.71 22.5
36,501 2,902.8 7.95 33,448 3,158.2 9.44 31,008 3,155.1 10.18 7.9

114,453 7,756.6 6.78 118,177 9,428.4 7.98 118,317 10,538.3 8.91 3.2
1,484 96.1 6.48 1,497 90.6 6.05 1,705 115.3 6.76 (13.7 )

147,410 9,526.8 6.46 143,501 11,000.9 7.67 138,636 11,967.1 8.63 4.5
(2,542 ) (1,979 ) (1,781 ) (6.6 )
409 165 (247 ) *
26,671 24,257 21,873 (10.5 )

$ 171,948 $ 165,944 $ 158,481 2.1

$ 28,715 $ 25,109 $ 23,820 (6.0 )
15,631 102.3 .65 13,962 203.6 1.46 13,035 270.4 2.07 9.6
25,237 312.8 1.24 24,932 711.0 2.85 22,774 1,000.0 4.39 1.7
4,928 25.1 .51 4,571 42.5 .93 5,027 74.0 1.47 4.5
19,283 743.4 3.86 23,328 1,241.4 5.32 25,861 1,458.3 5.64 (15.6 )
11,330 301.7 2.66 13,054 629.6 4.82 12,909 816.1 6.32 11.0

76,409 1,485.3 1.94 79,847 2,828.1 3.54 79,606 3,618.8 4.55 1.8
10,116 222.9 2.20 11,679 475.6 4.07 11,008 682.1 6.20 38.4
32,172 971.4 3.02 26,088 1,292.0 4.95 23,316 1,593.8 6.84 4.3

118,697 2,679.6 2.26 117,614 4,595.7 3.91 113,930 5,894.7 5.17 5.5
7,263 6,795 6,232 (16.7 )
17,273 16,426 14,499 .3

$ 171,948 $ 165,944 $ 158,481 2.1 %

$ 6,847.2 $ 6,405.2 $ 6,072.4

4.20 % 3.76 % 3.46 %

4.18 3.72 3.40

6.46 % 7.67 % 8.63 %
1.81 3.21 4.25

4.65 % 4.46 % 4.38 %

4.63 % 4.43 % 4.32 %

2003 2002 2001 2005 v 2004
% Change
Average Yields Average Yields Average Yields Average
Balances Interest and Rates Balances Interest and Rates Balances Interest and Rates Balances
$ 37,248 $ 1,697 4.56 % $ 28,829 $ 1,504 5.22 % $ 21,916 $ 1,335 6.09 % (2.1 )%
3,616 202 5.59 2,644 171 6.45 1,911 147 7.69 11.6
41,326 2,315 5.60 43,817 2,622 5.98 50,072 3,609 7.21 8.4
27,142 1,585 5.84 25,723 1,636 6.36 26,081 2,003 7.68 2.6
11,696 713 6.10 8,412 595 7.08 8,576 658 7.67 25.9
38,198 2,674 7.00 36,501 2,903 7.95 33,448 3,158 9.44 7.9

118,362 7,287 6.16 114,453 7,756 6.78 118,177 9,428 7.98 9.0
1,582 100 6.32 1,484 96 6.48 1,497 91 6.05 4.2

160,808 9,286 5.77 147,410 9,527 6.46 143,501 11,001 7.67 6.1
(2,467 ) (2,542 ) (1,979 ) 8.9
120 409 165 (6.4 )
29,169 26,671 24,257 4.3

$ 187,630 $ 171,948 $ 165,944 6.1

$ 31,715 $ 28,715 $ 25,109 (2.0 )
19,104 84 .44 15,631 102 .65 13,962 204 1.46 8.8
32,310 318 .98 25,237 313 1.24 24,932 711 2.85 (10.8 )
5,612 21 .38 4,928 25 .51 4,571 42 .93 (.8 )
15,493 451 2.91 19,283 743 3.86 23,328 1,241 5.32 1.0
12,319 223 1.81 11,330 302 2.66 13,054 630 4.82 51.0

84,838 1,097 1.29 76,409 1,485 1.94 79,847 2,828 3.54 6.2
10,503 167 1.59 10,116 223 2.20 11,679 476 4.07 33.4
33,663 805 2.39 32,172 972 3.02 26,088 1,292 4.95 2.9

129,004 2,069 1.60 118,697 2,680 2.26 117,614 4,596 3.91 8.3
7,518 7,263 6,795 7.3
19,393 17,273 16,426 2.5

$ 187,630 $ 171,948 $ 165,944 6.1 %

$ 7,217 $ 6,847 $ 6,405

4.17 % 4.20 % 3.76 %

4.15 4.18 3.72

5.77 % 6.46 % 7.67 %
1.28 1.81 3.21

4.49 % 4.65 % 4.46 %

4.47 % 4.63 % 4.43 %

U.S. BANCORP  ~~113~~109
~~ANNUAL REPORT ON FORM~~Annual Report on Form 10-K
United States Securities and Exchange Commission
Washington, D.C. 20549
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, ~~2004~~2005
Commission File Number 1-6880
U.S. Bancorp
Incorporated in the State of Delaware
IRS Employer Identification #41-0255900
Address: 800 Nicollet Mall
Minneapolis, Minnesota 55402-7014
Telephone: (651) 466-3000
Securities registered pursuant to Section 12(b) of the Act (and listed on the New York Stock Exchange): Common Stock, par value $.01.
    Securities registered pursuant to section 12(g) of the Act: None.
    U.S. Bancorp is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act,
    U.S. Bancorp is required to file reports pursuant to Section 13 or Section 15(d) of the Act.
    U.S. Bancorp (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
    Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained in this Form 10-K and in the registrant’s definitive proxy statement incorporated by reference in Part III of this Form 10-K.
    ~~As of January 31, 2005,~~ U.S. Bancorp ~~had 1,855,858,980 shares~~is a larger accelerated filer, as defined by Rule 12b-2 of ~~common stock outstanding and 71,196 registered holders~~the Exchange Act.
    U.S. Bancorp is not a shell company, as defined by Rule 12b-2 of ~~its common stock.~~the Exchange Act.
    The aggregate market value of common stock held by non-affiliates as of June 30, ~~2004,~~2005, was approximately ~~$51.9 billion.~~$53.4 billion based on the closing sale price as reported on the New York Stock Exchange.
    As of February 27, 2006, U.S. Bancorp had 1,800,880,986 shares of common stock outstanding and 68,868 registered holders of its common stock.
    This report incorporates into a single document the requirements of the Securities and Exchange Commission with respect to annual reports on Form 10-K and annual reports to shareholders. Only those sections of this report referenced in the following cross-reference index and the information under the caption ~~“Forward-Looking Statements”~~‘Safe Harbor’ statement under the Private Securities Litigation Reform Act of 1995 are incorporated in the Form 10-K.
    ~~The registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).~~

Index Page
Part I

Item 1
Business
General Business Description ~~20-21, 115-116~~20, 111-112
Line of Business Financial Performance ~~54-60~~52-57
Website Access to SEC Reports ~~117~~116
Item 1A
Risk Factors 112-116
Item 1B
Unresolved Staff Comments none
Item 2
Properties 116
Item 3
Legal Proceedings none
Item 4
Submission of Matters to a Vote of Security Holders none

Part II

Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 3, ~~51-52, 66, 87-89, 94-95, 111, 114~~49-50, 64, 83-85, 90-91, 107, 110
Item 6
Selected Financial Data 19
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations ~~18-62~~18-60
Item 7A
Quantitative and Qualitative Disclosures About Market Risk ~~43-51~~42-49
Item 8
Financial Statements and Supplementary Data ~~64-113~~62-109
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure none
Item 9A
Controls and Procedures 6259-60
Item 9B
Other Information none
Part III

Item 10
Directors and Executive Officers of the Registrant *
Item 11
Executive Compensation *
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ~~116-117~~*
Item 13
Certain Relationships and Related Transactions *
Item 14
Principal Accountant Fees and Services *
Part IV

Item 15
Exhibits and Financial Statement Schedules 117-119
Signatures
120
Certifications
121-123
* U.S. Bancorp’s definitive proxy statement for the ~~2005~~2006 Annual Meeting of Shareholders is incorporated herein by reference, other than the sections entitled “Report of the Compensation Committee” and “Stock Performance Chart.”

~~114~~  110  U.S. BANCORP
General Business Description U.S. Bancorp is a multi-state financial holding company headquartered in Minneapolis, Minnesota. U.S. Bancorp was incorporated in Delaware in 1929 and operates as a financial holding company and a bank holding company under the Bank Holding Company Act of 1956. U.S. Bancorp provides a full range of financial services, including lending and depository services, cash management, foreign exchange and trust and investment management services. It also engages in credit card services, merchant and automated teller machine (“ATM”) processing, mortgage banking, insurance, brokerage ~~leasing~~ and ~~investment banking.~~leasing.
    U.S. Bancorp’s banking subsidiaries are engaged in the general banking business, principally in domestic markets. The subsidiaries range in size from ~~$25~~$35 million to ~~$128~~$136 billion in deposits and provide a wide range of products and services to individuals, businesses, institutional organizations, governmental entities and other financial institutions. Commercial and consumer lending services are principally offered to customers within the Company’s domestic markets, to domestic customers with foreign operations and within certain niche national venues. Lending services include traditional credit products as well as credit card services, financing and import/export trade, asset-backed lending, agricultural finance and other products. Leasing products are offered through bank leasing subsidiaries. Depository services include checking accounts, savings accounts and time certificate contracts. Ancillary services such as foreign exchange, treasury management and receivable lock-box collection are provided to corporate customers. U.S. Bancorp’s bank and trust subsidiaries provide a full range of asset management and fiduciary services for individuals, estates, foundations, business corporations and charitable organizations.
    U.S. Bancorp’s non-banking subsidiaries primarily offer investment and insurance products to the Company’s customers principally within its markets and mutual fund processing services to a broad range of mutual funds.
    Banking and investment services are provided through a network of ~~2,370~~2,419 banking offices principally operating in 24 states in the Midwest and West. The Company operates a network of ~~4,620~~5,003 branded ATMs and provides 24-hour, seven day a week telephone customer service. Mortgage banking services are provided through banking offices and loan production offices throughout the Company’s markets. Consumer lending products may be originated through banking offices, indirect correspondents, brokers or other lending sources, and a consumer finance division. The Company is also one of the largest providers of ~~Visa®~~Visa^® corporate and purchasing card services and corporate trust services in the United States. A wholly-owned subsidiary, NOVA Information Systems, Inc. (“NOVA”), provides merchant processing services directly to merchants and through a network of banking affiliations. Affiliates of NOVA provide similar merchant services in Canada and segments of Europe. These foreign operations are not significant to the Company.
    On a full-time equivalent basis, as of December 31, ~~2004,~~2005, U.S. Bancorp employed ~~48,831 persons.~~49,684 people.
CompetitionThe commercial banking business is highly competitive. Subsidiary banks compete with other commercial banks and with other financial institutions, including savings and loan associations, mutual savings banks, finance companies, mortgage banking companies, credit unions and investment companies. In recent years, competition has increased from institutions not subject to the same regulatory restrictions as domestic banks and bank holding companies.
Government PoliciesThe operations of the Company’s various operating units are affected by state and federal legislative changes and by policies of various regulatory authorities, including those of the numerous states in which they operate, the United States and foreign governments. These policies include, for example, statutory maximum legal lending rates, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policy, international currency regulations and monetary policies, U.S. Patriot Act and capital adequacy and liquidity constraints imposed by bank regulatory agencies.
Supervision and RegulationAs a registered bank holding company and financial holding company under the Bank Holding Company Act, U.S. Bancorp is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System.
    Under the Bank Holding Company Act, a financial holding company may engage in banking, managing or controlling banks, furnishing or performing services for banks it controls, and conducting other financial activities. U.S. Bancorp must obtain the prior approval of the Federal Reserve Board before acquiring more than 5 percent of the outstanding shares of another bank or bank holding company, and must provide notice to, and in some situations obtain the prior approval of, the Federal Reserve Board in connection with engaging in, or acquiring more than 5 percent of the outstanding shares of a company engaged in, a new financial activity.
    Under the Bank Holding Company Act, U.S. Bancorp may acquire banks throughout the United States, subject only to state or federal deposit caps and state minimum age requirements.
    National banks are subject to the supervision of, and are examined by, the Comptroller of the Currency. All subsidiary banks of the Company are members of the Federal Deposit Insurance Corporation and are subject to

U.S. BANCORP  ~~115~~111
examination by the FDIC. In practice, the primary federal regulator makes regular examinations of each subsidiary bank subject to its regulatory review or participates in joint examinations with other federal regulators. Areas subject to regulation by federal authorities include the allowance for credit losses, investments, loans, mergers, issuance of securities, payment of dividends, establishment of branches and other aspects of operations.
Risk FactorsThere are a number of factors, including those specified below, that may adversely affect the Company’s business, financial results or stock price. Additional risks that the Company currently does not know about or currently views as immaterial may also impair the Company’s business or adversely impact its financial results or stock price.
Industry Risk Factors
The Company’s business and financial results are significantly affected by general business and economic conditions.The Company’s business activities and earnings are affected by general business conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and the local economies in which the Company operates. For example, an economic downturn, an increase in unemployment, or other events that affect household and/or corporate incomes could result in a deterioration of credit quality, a change in the allowance for credit losses, or reduced demand for credit or fee-based products and services. Changes in the financial performance and condition of the Company’s borrowers could negatively affect repayment of those borrowers’ loans. In addition, changes in securities market conditions and monetary fluctuations could adversely affect the availability and terms of funding necessary to meet the Company’s liquidity needs.
Changes in the domestic interest rate environment could reduce the Company’s net interest income.The operations of financial institutions such as the Company are dependent to a large degree on net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. An institution’s net interest income is significantly affected by market rates of interest, which in turn are affected by prevailing economic conditions, by the fiscal and monetary policies of the federal government and by the policies of various regulatory agencies. Like all financial institutions, the Company’s balance sheet is affected by fluctuations in interest rates. Volatility in interest rates can also result in the flow of funds away from financial institutions into direct investments. Direct investments, such as U.S. Government and corporate securities and other investment vehicles (including mutual funds) generally pay higher rates of return than financial institutions, because of the absence of federal insurance premiums and reserve requirements.
Changes in the laws, regulations and policies governing financial services companies could alter the Company’s business environment and adversely affect operations.The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its fiscal and monetary policies determine in a large part the Company’s cost of funds for lending and investing and the return that can be earned on those loans and investments, both of which affect the Company’s net interest margin. Federal Reserve Board policies can also materially affect the value of financial instruments that the Company holds, such as debt securities and mortgage servicing rights.
    The Company and its bank subsidiaries are heavily regulated at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole. Congress and state legislatures and federal and state agencies continually review banking laws, regulations and policies for possible changes. Changes in statutes, regulations or policies could affect the Company in substantial and unpredictable ways, including limiting the types of financial services and products that the Company offers and/or increasing the ability of non-banks to offer competing financial services and products. The Company cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it or any regulations would have on the Company’s financial condition or results of operations.
The financial services industry is highly competitive, and competitive pressures could intensify and adversely affect the Company’s financial results.The Company operates in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. The Company competes with other commercial banks, savings and loan associations, mutual savings banks, finance companies, mortgage banking companies, credit unions and investment companies. In addition, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks. Many of the Company’s competitors have fewer regulatory constraints and some have lower cost structures. Also, the potential need to adapt to industry changes in information technology systems, on which the Company and financial services industry are highly dependent, could present operational issues and require capital spending.
Changes in consumer use of banks and changes in consumer spending and saving habits could adversely affect the Company’s financial results.Technology and other changes now allow many consumers to complete
112  U.S. BANCORP
financial transactions without using banks. For example, consumers can pay bills and transfer funds directly without going through a bank. This “disintermediation” could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. In addition, changes in consumer spending and saving habits could adversely affect the Company’s operations, and the Company may be unable to timely develop competitive new products and services in response to these changes that are accepted by new and existing customers.
Acts or threats of terrorism and political or military actions taken by the United States or other governments could adversely affect general economic or industry conditions.Geopolitical conditions may also affect the Company’s earnings. Acts or threats or terrorism and political or military actions taken by the United States or other governments in response to terrorism, or similar activity, could adversely affect general economic or industry conditions.
Company Risk Factors
The Company’s allowance for loan losses may not be adequate to cover actual losses.Like all financial institutions, the Company maintains an allowance for loan losses to provide for loan defaults and non-performance. The Company’s allowance for loan losses is based on its historical loss experience as well as an evaluation of the risks associated with its loan portfolio, including the size and composition of the loan portfolio, current economic conditions and geographic concentrations within the portfolio. The Company’s allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect its financial results.
The Company may suffer losses in its loan portfolio despite its underwriting practices.The Company seeks to mitigate the risks inherent in its loan portfolio by adhering to specific underwriting practices. These practices often include: analysis of a borrower’s credit history, financial statements, tax returns and cash flow projections; valuation of collateral based on reports of independent appraisers; and verification of liquid assets. Although the Company believes that its underwriting criteria are appropriate for the various kinds of loans it makes, the Company may incur losses on loans that meet these criteria.
Maintaining or increasing the Company’s market share may depend on lowering prices and market acceptance of new products and services.The Company’s success depends, in part, on its ability to adapt its products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices. Lower prices can reduce the Company’s net interest margin and revenues from its fee-based products and services. In addition, the widespread adoption of new technologies, including internet services, could require the Company to make substantial expenditures to modify or adapt the Company’s existing products and services. Also, these and other capital investments in the Company’s businesses may not produce expected growth in earnings anticipated at the time of the expenditure. The Company might not be successful in introducing new products and services, achieving market acceptance of its products and services, or developing and maintaining loyal customers.
Because the nature of the financial services business involves a high volume of transactions, the Company faces significant operational risks.The Company operates in many different businesses in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from the Company’s operations, including, but not limited to, the risk of fraud by employees or persons outside of the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements and business continuation and disaster recovery. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation.
The change in residual value of leased assets may have an adverse impact on the Company’s financial results.The Company engages in leasing activities and is subject to the risk that the residual value of the property under lease will be less than the Company’s recorded asset value. Adverse changes in the residual value of leased assets can have a negative impact on the Company’s financial results. The risk of changes in the realized value of the leased assets compared to recorded residual values depends on many factors outside of the Company’s control, including supply and demand for the assets, collecting insurance claims, condition of the assets at the end of the lease term, and other economic factors.
Negative publicity could damage the Company’s reputation and adversely impact its business and financial results.Reputation risk, or the risk to the Company’s earnings and capital from negative publicity, is inherent in the Company’s business. Negative publicity can result from the Company’s actual or alleged conduct in any number of
U.S. BANCORP  113
activities, including lending practices, corporate governance and acquisitions, and actions taken by government regulators and community organizations in response to those activities. Negative publicity can adversely affect the Company’s ability to keep and attract customers and can expose the Company to litigation and regulatory action. Because most of the Company’s businesses operate under the “U.S. Bank” brand, actual or alleged conduct by one business can result in negative publicity about other businesses the Company operates. Although the Company takes steps to minimize reputation risk in dealing with customers and other constituencies, the Company, as a large diversified financial services company with a high industry profile, is inherently exposed to this risk.
The Company’s reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates.The Company’s accounting policies and methods are fundamental to how the Company records and reports its financial condition and results of operations. The Company’s management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report the Company’s financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in the Company’s reporting materially different results than would have been reported under a different alternative.
    Certain accounting policies are critical to presenting the Company’s financial condition and results. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include: the allowance for credit losses; the valuation of mortgage servicing rights; the valuation of goodwill and other intangible assets; and income taxes. Because of the uncertainty of estimates involved in these matters, the Company may be required to do one or more of the following: significantly increase the allowance for credit losses and/or sustain credit losses that are significantly higher than the reserve provided; recognize significant provision for impairment of its mortgage servicing rights; recognize significant impairment on its goodwill and other intangible asset balances; or significantly increase its accrued taxes liability.
    For more information, refer to “Critical Accounting Policies” in this Annual Report and Form 10-K.
Changes in accounting standards could materially impact the Company’s financial statements.From time to time, the Financial Accounting Standards Board (FASB) changes the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the Company’s restating prior period financial statements.
Acquisitions may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated and may result in unforeseen integration difficulties.The Company regularly explores opportunities to acquire financial services businesses or assets and may also consider opportunities to acquire other banks or financial institutions. The Company cannot predict the number, size or timing of acquisitions.
    Difficulty in integrating an acquired business or company may cause the Company not to realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from the acquisition. The integration could result in higher than expected deposit attrition (run-off), loss of key employees, disruption of the Company’s business or the business of the acquired company, or otherwise adversely affect the Company’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected.
    The Company must generally receive federal regulatory approval before it can acquire a bank or bank holding company. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on the competition, financial condition, and future prospects. The regulators also review current and projected capital ratios and levels, the competence, experience, and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including the acquiring institution’s record of compliance under the Community Reinvestment Act) and the effectiveness of the acquiring institution in combating money laundering activities. In addition, the Company cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. The Company may be required to sell banks or branches as a condition to receiving regulatory approval.
If new laws were enacted that restrict the ability of the Company and its subsidiaries to share information about customers, the Company’s financial results could be negatively affected.The Company’s business model
114  U.S. BANCORP
depends on sharing information among the family of companies owned by U.S. Bancorp to better satisfy the Company’s customer needs. Laws that restrict the ability of the companies owned by U.S. Bancorp to share information about customers could negatively affect the Company’s revenue and profit.
The Company’s business could suffer if the Company fails to attract and retain skilled people.The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities the Company engages in can be intense. The Company may not be able to hire the best people or to keep them.
The Company relies on other companies to provide key components of the Company’s business infrastructure.Third party vendors provide key components of the Company’s business infrastructure such as internet connections, network access and mutual fund distribution. While the Company has selected these third party vendors carefully, it does not control their actions. Any problems caused by these third parties, including as a result of their not providing the Company their services for any reason or their performing their services poorly, could adversely affect the Company’s ability to deliver products and services to the Company’s customers and otherwise to conduct its business. Replacing these third party vendors could also entail significant delay and expense.
Significant legal actions could subject the Company to substantial uninsured liabilities.The Company is from time to time subject to claims related to its operations. These claims and legal actions, including supervisory actions by the Company’s regulators, could involve large monetary claims and significant defense costs. To protect itself from the cost of these claims, the Company maintains insurance coverage in amounts and with deductibles that it believes are appropriate for its operations. However, the Company’s insurance coverage may not cover all claims against the Company or continue to be available to the Company at a reasonable cost. As a result, the Company may be exposed to substantial uninsured liabilities, which could adversely affect the Company’s results of operations and financial condition.
The Company is exposed to risk of environmental liability when it takes title to properties.In the course of the Company’s business, the Company may foreclose on and take title to real estate. As a result, the Company could be subject to environmental liabilities with respect to these properties. The Company may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if the Company is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If the Company becomes subject to significant environmental liabilities, its financial condition and results of operations could be adversely affected.
A natural disaster could harm the Company’s business.Natural disasters could harm the Company’s operations directly through interference with communications, including the interruption or loss of the Company’s websites, which would prevent the Company from gathering deposits, originating loans and processing and controlling its flow of business, as well as through the destruction of facilities and the Company’s operational, financial and management information systems.
The Company faces systems failure risks as well as security risks, including “hacking” and “identity theft.”The computer systems and network infrastructure the Company and others use could be vulnerable to unforeseen problems. These problems may arise in both our internally developed systems and the systems of our third-party service providers. Our operations are dependent upon our ability to protect computer equipment against damage from fire, power loss or telecommunication failure. Any damage or failure that causes an interruption in our operations could adversely affect our business and financial results. In addition, our computer systems and network infrastructure present security risks, and could be susceptible to hacking or identity theft.
The Company relies on dividends from its subsidiaries for its liquidity needs.The Company is a separate and distinct legal entity from its bank subsidiaries and non-bank subsidiaries. The Company receives substantially all of its cash from dividends paid by its subsidiaries. These dividends are the principal source of funds to pay dividends on the Company’s stock and interest and principal on its debt. Various federal and state laws and regulations limit the amount of dividends that our bank subsidiaries and certain of our non-bank subsidiaries may pay to the Company. Also, the Company’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to prior claims of the subsidiary’s creditors.
The Company has non-banking businesses that are subject to various risks and uncertainties.The Company is a diversified financial services company and the Company’s
U.S. BANCORP  115
business model is based on a mix of businesses that provide a broad range of products and services delivered through multiple distribution channels. In addition to banking, the Company provides payment services, investments, mortgages and corporate and personal trust services. Although the Company believes its diversity helps lessen the effect of downturns in any one segment of its industry, it also means the Company’s earnings could be subject to various specific risks and uncertainties related to these non-banking businesses.
The Company’s stock price can be volatile.The Company’s stock price can fluctuate widely in response to a variety of factors, including: actual or anticipated variations in the Company’s quarterly operating results; recommendations by securities analysts; significant acquisitions or business combinations; strategic partnerships, joint ventures or capital commitments by or involving the Company or the Company’s competitors; operating and stock price performance of other companies that investors deem comparable to the Company; new technology used or services offered by the Company’s competitors; news reports relating to trends, concerns and other issues in the financial services industry, and changes in government regulations.
    General market fluctuations, industry factors and general economic and political conditions and events, including terrorist attacks, economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, could also cause the Company’s stock price to decrease regardless of the Company’s operating results.
PropertiesU.S. Bancorp and its significant subsidiaries occupy headquarter offices under a long-term lease in Minneapolis, Minnesota. The Company also leases eight freestanding operations centers in Cincinnati, Denver, Milwaukee, Minneapolis, Portland and St. ~~Paul, Portland, Milwaukee and Denver.~~Paul. The Company owns ~~six~~nine principal operations centers in Cincinnati, Coeur d’Alene, Fargo, Milwaukee, Owensboro, Portland, St. Louis ~~Fargo, Milwaukee~~ and St. Paul. At December 31, ~~2004,~~2005, the Company’s subsidiaries owned and operated a total of ~~1,484~~1,431 facilities and leased an additional ~~1,462~~1,405 facilities, all of which are well maintained. The Company believes its current facilities are adequate to meet its needs. Additional information with respect to premises and equipment is presented in Notes 1110 and 2423 of the Notes to Consolidated Financial Statements.
~~Equity Compensation Plan Information~~~~The following table summarizes information regarding equity compensation plans in effect as of December 31, 2004.~~

Number of securities remaining
Number of securities to be issued Weighted-average exercise available for future issuance under
upon exercise of outstanding options, price of outstanding options, equity compensation plans (excluding
Plan Category warrants and rights warrants and rights securities reflected in the first column) (a)
Equity compensation plans approved by security holders (b) 83,464,408 $21.83 35,154,782
Equity compensation plans not approved by security holders (c)(d) 11,777,683 $22.62 —

   Total 95,242,091 $21.90 35,154,782
~~(a)~~ No shares are available for the granting of future awards under the U.S. Bancorp 1998 Executive Stock Incentive Plan or the U.S. Bancorp 1991 Executive Stock Incentive plan. The 35,154,782 shares available under the U.S. Bancorp 2001 Stock Incentive Plan may become the subject of future awards in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards or other stock-based awards, except that only 7,476,383 of these shares are available for future grants of awards other than stock options or stock appreciation rights.
~~(b)~~ Includes shares underlying stock options and restricted stock units (convertible into shares of the Company’s common stock on a one-for-one basis) under the U.S. Bancorp 2001 Stock Incentive Plan, the U.S. Bancorp 1998 Executive Stock Incentive Plan and the U.S. Bancorp 1991 Executive Stock Incentive Plan. Excludes 43,728,386 shares underlying outstanding stock options and warrants assumed by U.S. Bancorp in connection with acquisitions by U.S. Bancorp. Of the excluded shares, 39,283,290 underlie stock options granted under equity compensation plans of the former U.S. Bancorp that were approved by the shareholders of the former U.S. Bancorp.
~~(c)~~ Includes 3,585,410 shares of common stock issuable pursuant to the U.S. Bancorp Deferred Compensation Plan. All of the remaining identified shares underlie stock options granted to a broad-based employee population pursuant to the U.S. Bancorp 2001 Employee Stock Incentive plan, the Firstar Corporation 1999 Employee Stock Incentive Plan, the Firstar Corporation 1998 Employee Stock Incentive Plan and the Star Banc Corporation 1996 Starshare Stock Incentive Plan for Employees.
~~(d)~~ ~~The weighted-average exercise price does not include any assumed price at issuance of shares that may be issuable pursuant to the Deferred Compensation Plan.~~
The U.S. Bancorp Deferred Compensation Plan allows non-employee directors and members of our senior management, including all of our executive officers, to defer all or part of their compensation until retirement or earlier termination of employment. The deferred compensation is deemed to be invested in one of several investment alternatives at the option of the participant, including shares of U.S. Bancorp common stock. Deferred compensation deemed to be invested in U.S. Bancorp stock may be received at the time of distribution at the election of the participant, in the form of shares of U.S. Bancorp common stock. The 3,585,410 shares included in the table assumes that participants in the plan whose deferred compensation had been deemed to be invested in U.S. Bancorp common stock had elected to receive all of that deferred compensation in shares of U.S. Bancorp common stock on December 31, 2004.
    Under the U.S. Bancorp 2001 Employee Stock Incentive Plan (“2001 Plan”), 11,678,800 shares are authorized for issuance pursuant to the grant of nonqualified stock options to any full-time or part-time employee actively employed by U.S. Bancorp on the grant date, other than individuals eligible to participate in any of the Company’s executive stock incentive plans or in U.S. Bancorp Piper Jaffray Inc.’s annual option plan. As of December 31, 2004, options to purchase an aggregate of 4,506,987 shares were outstanding under the plan. All options under the plan were granted on February 27, 2001.
    As of December 31, 2004, options to purchase an aggregate of 1,355,214 shares of the Company’s common stock were outstanding under the Firstar Corporation 1999 Employee Stock Incentive Plan (“1999 Plan”). Under this plan, stock options were granted to each full-time or part-time employee actively employed by Firstar Corporation on the grant date, other than managers who participated in an executive stock incentive plan.
    As of December 31, 2004, options to purchase an aggregate of 2,041,696 shares of the Company’s common stock were outstanding under the Firstar Corporation 1998 Employee Stock Incentive Plan (“1998 Plan”). Under this plan, stock options were granted to each full-time or part-time employee actively employed by Firstar Corporation on the grant date, other than managers who participated in an executive stock incentive plan.
    ~~As of December 31, 2004, options to purchase an aggregate of 288,376 shares of the Company’s common~~
~~116~~  ~~U.S. BANCORP~~
stock were outstanding under the Star Banc Corporation 1996 Starshare Stock Incentive Plan for Employees (“1996 Plan”). Under the plan, stock options were granted to each employee of Star Banc Corporation, a predecessor company, other than managers who participated in an executive stock incentive plan.
    No further options will be granted under any of these plans. Under all of the plans, the exercise price of the options equals the fair market value of the underlying common stock on the grant date. All options granted under the plan have a term of 10 years from the grant date and become exercisable over a period of time set forth in the plan or determined by the committee administering the plan. Options granted under the plan are nontransferable and, during the optionee’s lifetime, are exercisable only by the optionee.
    If an optionee is terminated as a result of his or her gross misconduct or offense, all options terminate immediately, whether or not vested. Under the 2001 Plan, the 1999 Plan and the 1998 Plan, in the event an optionee is terminated immediately following a change in control (as defined in the plans) of U.S. Bancorp, and the termination is due to business needs resulting from the change in control and not as a result of the optionee’s performance or conduct, all of the optionee’s outstanding options will become immediately vested and exercisable as of the date of such termination. Under the 1996 Plan, all outstanding options vest and become exercisable immediately following a change in control.
    If the outstanding shares of common stock of U.S. Bancorp are changed into or exchanged for a different number or kind of shares of stock or other securities as a result of a reorganization, recapitalization, stock dividend, stock split, combination of shares, reclassification, merger, consolidation or similar event, the number of shares underlying outstanding options also may be adjusted. The plans may be terminated, amended or modified by the Board of Directors at any time.
Website Access to SEC ReportsU.S. Bancorp’s internet website can be found at usbank.com. U.S. Bancorp makes available free of charge on its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act, as well as all other reports filed by U.S. Bancorp with the SEC, as soon as reasonably practicable after electronically filed with, or furnished to, the SEC.
CertificationsWe have filed as exhibits to this annual report on Form 10-K the Chief Executive Officer and Chief Financial Officer certifications required by Section 302 of the Sarbanes-Oxley Act. We have also submitted the required annual Chief Executive Officer certification to the New York Stock Exchange.
Governance DocumentsOur Corporate Governance Guidelines, Code of Ethics and Business Conduct and Board of Directors committee charters are available free of charge on our web site at usbank.com, by clicking on “About U.S. Bancorp,” then “Corporate Governance.” Shareholders may request a free printed copy of any of these documents from our investor relations department by contacting them atinvestorrelations@usbank.com or calling (866) 775-9668.
116  U.S. BANCORP
ENTRY INTO CERTAIN COVENANTS
USB Capital VIII Replacement Capital CovenantOn December 29, 2005, the Company and USB Capital VIII, a Delaware statutory trust and wholly owned subsidiary of U.S. Bancorp, closed the public offering of $375,000,000 principal amount of 6.35% Trust Preferred Securities (the “Capital Securities”), representing preferred beneficial interests in the assets of USB Capital VIII. The proceeds from the sale by USB Capital VIII of the Capital Securities to investors, and its common securities to the Company, were invested by USB Capital VIII in the Company’s 6.35% Income Capital Obligation Notes (the “ICONs”), due 2065 (the “ICONs Offering”).
    Simultaneously with the closing of the ICONs Offering, the Company entered into a replacement capital covenant for the benefit of persons that buy, hold or sell a specified series of long-term indebtedness of the Company or U.S. Bank National Association (“ICONs Covered Debt”). We will provide a copy of the ICONs Replacement Capital Covenant to holders of ICONs Covered Debt upon request made to the Investor Relations contact listed inside the back cover of this annual report.
    The ICONs replacement capital covenant provides that the Company will not redeem or repurchase, and will cause USB Capital VIII not to redeem or repurchase, all or any part of the ICONs or the Capital Securities on or before December 29, 2035, except, with certain limited exceptions, to the extent that, during the 180 days prior to the date of that redemption or repurchase, the Company has received proceeds from the sale of qualifying securities that (i) have equity-like characteristics that are the same as, or more equity-like than, the applicable characteristics of the ICONs at the time of redemption or repurchase and qualify as Tier 1 capital of the Company under the capital guidelines of the Federal Reserve Board, and (ii) the Company has obtained prior approval of the Federal Reserve Board, if such approval is then required by the Federal Reserve Board.
    As of the date of this Annual Report, the U.S. Bancorp 4.50% Medium-Term Notes, Series P, CUSIP No. 91159HGJ3, constitutes ICONs Covered Debt whose holders are entitled to the benefits of the ICONS Replacement Capital Covenant.
Exhibits
~~Financial Statements Filed~~ ~~Page~~
~~U.S. Bancorp and Subsidiaries Consolidated Financial Statements~~ ~~64-67~~
~~Notes to Consolidated Financial Statements~~ ~~68-104~~
~~Reports of Independent Auditors and Accountants~~ ~~105~~
Schedules to the consolidated financial statements required by Regulation S-X are omitted since the required information is included in the footnotes or is not applicable.
    The following Exhibit Index lists the Exhibits to the Annual Report on Form 10-K.

⁽¹⁾3.1 Restated Certificate of Incorporation, as amended. Filed as Exhibit 3.1 to Form ~~10-K~~10-Q for the ~~year~~quarterly period ended ~~December~~March 31, ~~2000.~~2005.
⁽¹⁾3.2 Restated bylaws, as amended. Filed as Exhibit 3.2 to Form 10-K for the year ended December 31, ~~2001.~~2001

4.1 [Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. U.S. Bancorp agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.]

⁽¹⁾4.2
Warrant Agreement, dated as of October 2, 1995, between U.S. Bancorp and First Chicago Trust Company of New York, as Warrant Agent and Form of Warrant. Filed as Exhibits 4.18 and 4.19 to Registration Statement on Form S-3, File No. 33-61667.
⁽¹⁾~~4.3~~
Amended and Restated Rights Agreement, dated as of December 31, 2002, between U.S. Bancorp and Mellon Investor Services LLC. Filed as Exhibit 4.2 to Amendment No. 1 to Registration Statement on Form 8-A (File No. 001-06880) on December 31, ~~2002.~~2002

⁽¹⁾⁽²⁾10.1 U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 10-K for the year ended December 31, ~~2001.~~2001

⁽¹⁾⁽²⁾10.2 Amendment No. 1 to U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.2 to Form 10-K for the year ended December 31, ~~2002.~~2002
~~U.S. BANCORP~~  ~~117~~

⁽¹⁾⁽²⁾10.3 U.S. Bancorp 1998 Executive Stock Incentive Plan. Filed as Exhibit 10.3 to Form 10-K for the year ended December 31, ~~2002.~~2002

⁽¹⁾⁽²⁾10.4 Summary of U.S. Bancorp 1991 Executive Stock Incentive Plan. Filed as Exhibit 10.4 to Form 10-K for the year ended December 31, ~~2002.~~2002

⁽¹⁾⁽²⁾10.5 U.S. Bancorp 2001 Employee Stock Incentive Plan. Filed as Exhibit 10.5 to Form 10-K for the year ended December 31, ~~2002.~~2002

⁽¹⁾⁽²⁾10.6 Firstar Corporation 1999 Employee Stock Incentive Plan. Filed as Exhibit 10.6 to Form 10-K for the year ended December 31, ~~2002.~~2002

⁽¹⁾⁽²⁾10.7 Firstar Corporation 1998 Employee Stock Incentive Plan. Filed as Exhibit 10.7 to Form 10-K for the year ended December 31, ~~2002.~~2002
U.S. BANCORP  117

⁽¹⁾⁽²⁾10.8
Star Banc Corporation 1996 Starshare Stock Incentive Plan for Employees. Filed as Exhibit 10.8 to Form 10-K for the year ended December 31, ~~2002.~~2002

⁽¹⁾⁽²⁾10.9 U.S. Bancorp Executive Incentive Plan. Filed as Exhibit 10.2 to Form 10-K for the year ended December 31, ~~2001.~~2001

⁽¹⁾⁽²⁾10.10 U.S. Bancorp Executive Deferral Plan, as amended. Filed as Exhibit 10.7 to Form 10-K for the year ended December 31, ~~1999.~~1999

⁽¹⁾⁽²⁾10.11
Summary of Nonqualified Supplemental Executive Retirement Plan, as amended, of the former U.S. Bancorp. Filed as Exhibit 10.4 to Form 10-K for the year ended December 31, ~~2001.~~2001

⁽¹⁾⁽²⁾10.12
1991 Performance and Equity Incentive Plan of the former U.S. Bancorp. Filed as Exhibit 10.13 to Form 10-K for the year ended December 31, ~~1997.~~1997

⁽¹⁾⁽²⁾10.13
Form of Director Indemnification Agreement entered into with former directors of the former U.S. Bancorp. Filed as Exhibit 10.15 to Form 10-K for the year ended December 31, ~~1997.~~1997

⁽¹⁾⁽²⁾10.14
U.S. Bancorp Independent Director Retirement and Death Benefit Plan, as amended. Filed as Exhibit 10.17 to Form 10-K for the year ended December 31, ~~1999.~~1999

⁽¹⁾⁽²⁾10.15
U.S. Bancorp Deferred Compensation Plan for Directors, as amended. Filed as Exhibit 10.18 to Form 10-K for the year ended December 31, ~~1999.~~1999

⁽¹⁾⁽²⁾10.16 U.S. Bancorp Non Qualified Executive Retirement Plan. Filed as Exhibit 10.16 to Form 10-K for the year ended December 31, ~~2002.~~2002

⁽¹⁾⁽²⁾10.17 Appendix B-10 to U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.1 to Form 10-Q for the quarterly period ended March 31, 2005
⁽¹⁾⁽²⁾10.18 Amendments No. 1, 2 and 3 to U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.17 to Form 10-K for the year ended December 31, ~~2003.~~2003

⁽¹⁾⁽²⁾~~10.18~~10.19 Amendment No. 4 to U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.1 to Form 8-K filed on December 23, ~~2004.~~2004

⁽¹⁾⁽²⁾~~10.19~~10.20
Amendment No. 5 to U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.2 to Form 10-Q for the quarterly period ended March 31, 2005
⁽¹⁾⁽²⁾10.21 Amendment No. 6 to U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.1 to Form 8-K filed on October 20, 2005
⁽¹⁾⁽²⁾10.22 U.S. Bancorp Executive Employees Deferred Compensation Plan. Filed as Exhibit 10.18 to Form 10-K for the year ended December 31, ~~2003.~~2003

⁽¹⁾⁽²⁾~~10.20~~10.23
U.S. Bancorp 2005 Executive Employees Deferred Compensation Plan. Filed as Exhibit 10.2 to Form 8-K filed on December 21, 2005
⁽¹⁾⁽²⁾10.24 U.S. Bancorp Outside Directors Deferred Compensation Plan. Filed as Exhibit 10.19 to Form 10-K for the year ended December 31, ~~2003.~~2003

⁽¹⁾⁽²⁾~~10.21~~10.25
U.S. Bancorp 2005 Outside Directors Deferred Compensation Plan. Filed as Exhibit 10.1 to Form 8-K filed on December 21, 2005
⁽¹⁾⁽²⁾10.26 Form of Change in Control Agreement, effective November 16, 2001, between U.S. Bancorp and certain executive officers of U.S. Bancorp. Filed as Exhibit 10.12 to Form 10-K for the year ended December 31, ~~2001.~~2001

⁽¹⁾⁽²⁾~~10.22~~10.27
Form of Executive Officer Stock Option Agreement with cliff and performance vesting under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 10-Q for the quarterly period ended September 30, ~~2004.~~2004

⁽¹⁾⁽²⁾~~10.23~~10.28
Form of Executive Officer Stock Option Agreement with annual vesting under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.2 to Form 10-Q for the quarterly period ended September 30, ~~2004.~~2004

⁽¹⁾⁽²⁾~~10.24~~10.29
Form of 2006 Executive Officer Stock Option Agreement with annual vesting under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 8-K filed on January 17, 2006
⁽¹⁾⁽²⁾10.30 Form of Executive Officer Restricted Stock Award Agreement under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.3 to Form 10-Q for the quarterly period ended September 30, ~~2004.~~2004

⁽¹⁾⁽²⁾~~10.25~~10.31
Form of Director Stock Option Agreement under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.4 to Form 10-Q for the quarterly period ended September 30, ~~2004.~~2004

⁽¹⁾⁽²⁾~~10.26~~10.32
Form of Director Restricted Stock Unit Agreement under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.5 to Form 10-Q for the quarterly period ended September 30, ~~2004.~~2004
118  U.S. BANCORP

⁽¹⁾⁽²⁾~~10.27~~10.33
Form of Executive Officer Restricted Stock Unit Agreement under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.6 to Form 10-Q for the quarterly period ended September 30, ~~2004.~~2004
~~118~~  ~~U.S. BANCORP~~

⁽¹⁾⁽²⁾~~10.28~~10.34
Employment Agreement with Jerry A. Grundhofer. Filed as Exhibit 10.13 to Form 10-K for the year ended December 31, ~~2001.~~2001

⁽¹⁾⁽²⁾~~10.29~~10.35
Amendment of Employment Agreement with Jerry A. Grundhofer. Filed as Exhibit 10.1 to Form 10-Q for the quarterly period ended June 30, ~~2004.~~2004

⁽¹⁾⁽²⁾~~10.30~~10.36
Amendment No. 2 of Employment Agreement with Jerry A. Grundhofer. Filed as Exhibit 10.8 to Form 10-Q for the quarterly period ended September 30, ~~2004.~~2004

⁽¹⁾⁽²⁾~~10.31~~10.37
Restricted Stock Unit Award Agreement with Jerry A. Grundhofer dated January 2, 2002. Filed as Exhibit 10.7 to Form 10-Q for the quarterly period ended September 30, ~~2004.~~2004

⁽¹⁾⁽²⁾~~10.32~~10.38
Offer of Employment ~~Agreement with Edward Grzedzinski.~~to Richard C. Hartnack. Filed as Exhibit ~~10.22~~10.3 to Form ~~10-K~~10-Q for the ~~year~~quarterly period ended ~~December~~March 31, ~~2002.~~2005

⁽²⁾~~10.33~~10.39
Information Regarding the ~~2005~~2006 Compensation of the Non-Employee Members of the Board of Directors of U.S. ~~Bancorp.~~Bancorp

12 Statement re: Computation of Ratio of Earnings to Fixed ~~Charges.~~Charges

21 Subsidiaries of the ~~Registrant.~~Registrant

23.1 Consent of Ernst & Young ~~LLP.~~
~~23.2~~ ~~Consent of PricewaterhouseCoopers LLP.~~LLP

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of ~~1934.~~
1934
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of ~~1934.~~
1934
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002
(1) Exhibit has previously been filed with the Securities and Exchange Commission and is incorporated herein as an exhibit by reference to the prior filing.
(2) Management contracts or compensatory plans or arrangements.
U.S. BANCORP  119
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on ~~February 28, 2005,~~March 7, 2006, on its behalf by the undersigned, thereunto duly authorized.
U.S. Bancorp
By: Jerry A. Grundhofer
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on ~~February 28, 2005,~~March 7, 2006, by the following persons on behalf of the registrant and in the capacities indicated.
Jerry A. Grundhofer
Chairman and Chief Executive Officer
(principal executive officer)
David M. Moffett
Vice Chairman and Chief Financial Officer
(principal financial officer)
Terrance R. Dolan
Executive Vice President and Controller
(principal accounting officer)
~~Linda L. Ahlers~~
~~Director~~
Victoria Buyniski Gluckman
Director
Arthur D. Collins, Jr.
Director
Peter H. Coors
Director
Joel W. Johnson
Director
Jerry W. Levin
Director
David B. O’Maley
Director
O’dell M. Owens, M.D., M.P.H.
Director
~~Thomas E. Petry~~
~~Director~~
Richard G. Reiten
Director
Craig D. Schnuck
Director
Warren R. Staley
Director
Patrick T. Stokes
Director
~~John J. Stollenwerk~~
~~Director~~

120  U.S. BANCORP
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Jerry A. Grundhofer, Chief Executive Officer of U.S. Bancorp, a Delaware corporation, certify that:
(1) I have reviewed this Annual Report on Form 10-K of U.S. Bancorp;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ JERRY A. GRUNDHOFER

Jerry A. Grundhofer
Chief Executive Officer
Dated: ~~February 28, 2005~~March 7, 2006

U.S. BANCORP  121
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, David M. Moffett, Chief Financial Officer of U.S. Bancorp, a Delaware corporation, certify that:
(1) I have reviewed this Annual Report on Form 10-K of U.S. Bancorp;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ DAVID M. MOFFETT

David M. Moffett
Chief Financial Officer
Dated: ~~February 28, 2005~~March 7, 2006

122  U.S. BANCORP
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
    Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Chief Executive Officer and Chief Financial Officer of U.S. Bancorp, a Delaware corporation (the “Company”), do hereby certify that:
(1) The Annual Report on Form 10-K for the fiscal year ended December 31, ~~2004~~2005 (the “Form 10-K”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ JERRY A. GRUNDHOFER /s/ DAVID M. MOFFETT

Jerry A. Grundhofer
Chief Executive Officer David M. Moffett
Chief Financial Officer
Dated: ~~February 28, 2005~~March 7, 2006

U.S. BANCORP  123
~~EXECUTIVE OFFICERS~~Executive Officers
Jerry A. Grundhofer
Mr. Grundhofer is Chairman and Chief Executive Officer of U.S. Bancorp. Mr. Grundhofer, ~~60,~~61, has served as Chief Executive Officer of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001 and as Chairman since December 30, 2002. He also served as President from the time of the merger until October 2004. Prior to the merger, Mr. Grundhofer was President and Chief Executive Officer of Firstar Corporation, having served as Chairman, President and Chief Executive Officer of Star Banc Corporation from 1993 until its merger with Firstar Corporation in 1998.
Jennie P. Carlson
Ms. Carlson is Executive Vice President of U.S. Bancorp. Ms. Carlson, ~~44,~~45, has served as Executive Vice President, Human Resources since January 2002. Until that time, she served as Executive Vice President, Deputy General Counsel and Corporate Secretary of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001. From 1995 until the merger, she was General Counsel and Secretary of Firstar Corporation and Star Banc Corporation, a predecessor company, ~~as well as Senior Vice President from 1994 to 1999~~ and Executive Vice President from 1999 to 2001.
Andrew Cecere
Mr. Cecere is Vice Chairman of U.S. Bancorp. Mr. Cecere, ~~44,~~45, has served as Vice Chairman of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001. He assumed responsibility for Private Client and Trust Services in February 2001 and U.S. Bancorp Asset Management in November 2001. Previously, he had served as Chief Financial Officer of U.S. Bancorp from May 2000 through February 2001. Additionally, he served as Vice Chairman of U.S. Bank with responsibility for Commercial Services from 1999 to 2001, having been a Senior Vice President of Finance since 1992.
William L. Chenevich
Mr. Chenevich is Vice Chairman of U.S. Bancorp. Mr. Chenevich, ~~61,~~62, has served as Vice Chairman of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001, when he assumed responsibility for Technology and Operations Services. Previously, he served as Vice Chairman of Technology and Operations Services of Firstar Corporation from 1999 to 2001. Prior to joining Firstar he was Group Executive Vice President at Visa International from 1994 to 1999.
Richard K. Davis
Mr. Davis is President and Chief Operating Officer of U.S. Bancorp. Mr. Davis, ~~47,~~48, has served in these capacities since October 2004. From the time of the merger of Firstar Corporation and U.S. Bancorp in February 2001 until October 2004, Mr. Davis served as Vice Chairman of U.S. Bancorp. From the time of the merger, Mr. Davis was responsible for Consumer Banking, including Retail Payment Solutions (card services), and he assumed additional responsibility for Commercial Banking in 2003. Previously, he had been Vice Chairman of Consumer Banking of Firstar Corporation from 1998 until 2001 and Executive Vice President, Consumer Banking of Star Banc Corporation from 1993 until its merger with Firstar Corporation in 1998.
Michael J. Doyle
Mr. Doyle is Executive Vice President and Chief Credit Officer of U.S. Bancorp. Mr. Doyle, ~~48,~~49, has served in these positions since January 2003. Until that time, he served as Executive Vice President and Senior Credit Officer of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001. From 1999 until the merger, he was Executive Vice President and Chief Approval Officer of Firstar ~~Corporation, and had served as Senior Vice President of Firstar Corporation and Star Banc Corporation, a predecessor company, since 1994.~~Corporation.
124  U.S. BANCORP
~~Joseph E. Hasten~~Richard C. Hartnack
Mr. ~~Hasten~~Hartnack is Vice Chairman of U.S. Bancorp. Mr. ~~Hasten, 53,~~Hartnack, 60, has served in this position since April 2005, when he joined U.S. Bancorp to assume responsibility for Consumer Banking. Prior to joining U.S. Bancorp, he served as Vice Chairman of ~~U.S. Bancorp since the merger~~Union Bank of ~~Firstar Corporation and U.S. Bancorp in February 2001, when he assumed~~California from 1991 to 2005 with responsibility for ~~Corporate Banking. Mr. Hasten assumed additional responsibility for Corporate Payment Systems in 2003. Previously, he had been Vice Chairman of Wholesale~~Community Banking ~~of Firstar Corporation, after joining Mercantile Bancorporation, a predecessor company, as President of its St. Louis bank~~ and ~~of Corporate Banking in 1995.~~Investment Services.
Richard J. Hidy
Mr. Hidy is Executive Vice President and Chief Risk Officer of U.S. Bancorp. Mr. Hidy, ~~42,~~43, has served in these positions since February 2005. From January 2003 until February 2005, he served as Senior Vice President and Deputy General Counsel of U.S. Bancorp, having served as Senior Vice President and Associate General Counsel of U.S. Bancorp and Firstar Corporation, a predecessor company, since 1999.
Pamela A. Joseph
Ms. Joseph is Vice Chairman of U.S. Bancorp. Ms. Joseph, ~~45,~~46, has served as Vice Chairman of U.S. Bancorp since December 2004. Since November 2004, she has been Chairman, ~~President~~ and Chief Executive Officer of NOVA Information Systems, Inc., which became a wholly owned subsidiary of U.S. Bancorp in connection with the acquisition of NOVA Corporation in July 2001. From November 2004 until July 2005, Ms. Joseph also served as President of NOVA Information Systems, Inc. Prior to that time, she had been President and Chief Operating Officer of NOVA Information Systems, Inc. since February ~~2004.~~2000. She also served as Senior Executive Vice President of Business Development of NOVA Corporation from 2001 to 2004, after serving as its Chief Information Officer from 1997 to 2001.
~~124~~  ~~U.S. BANCORP~~
Lee R. Mitau
Mr. Mitau is Executive Vice President and General Counsel of U.S. Bancorp. Mr. Mitau, ~~56,~~57, has served in these positions since 1995. Mr. Mitau also serves as Corporate Secretary. Prior to 1995 he was a partner at the law firm of Dorsey & Whitney LLP.
David M. Moffett
Mr. Moffett is Vice Chairman and Chief Financial Officer of U.S. Bancorp. Mr. Moffett, ~~53,~~54, has served in these positions since the merger of Firstar Corporation and U.S. Bancorp in February 2001. Prior to the merger, he was Vice Chairman and Chief Financial Officer of Firstar Corporation, and had served as Chief Financial Officer of Star Banc Corporation from 1993 until its merger with Firstar Corporation in 1998.
Joseph M. Otting
Mr. Otting is Vice Chairman of U.S. Bancorp. Mr. Otting, 48, has served in this position since April 2005, when he assumed responsibility for Commercial Banking and Dealer Services. He assumed additional responsibility for Commercial Real Estate in September 2005. Previously, he served as Executive Vice President, East Commercial Banking Group of U.S. Bancorp from June 2003 to April 2005. He served as Market President of U.S. Bank in Oregon from December 2001 until June 2003. Prior to joining U.S. Bancorp in December 2001, he was Executive Vice President and Head of Commercial Banking at Union Bank of California.

~~DIRECTORS~~U.S. BANCORP  125
Directors
Jerry A. Grundhofer^1,6
Chairman and
Chief Executive Officer
U.S. Bancorp
~~Linda L. Ahlers~~^1,2,3
~~Retired President~~
~~Marshall Field’s~~
Minneapolis, Minnesota
Victoria Buyniski Gluckman^4,6
~~Chairman,~~ President and Chief Executive Officer

United Medical Resources, Inc., a wholly owned subsidiary of UnitedHealth Group Incorporated
Cincinnati, Ohio
Arthur D. Collins, Jr.^1,5,6
Chairman and Chief Executive Officer
Medtronic, Inc.
Minneapolis, Minnesota
Peter H. Coors^2,4
Vice Chairman

Molson Coors Brewing Company
Golden, Colorado
Joel W. Johnson^4,53,5
Chairman ~~and Chief Executive Officer~~
Hormel Foods Corporation
Austin, Minnesota
Jerry W. Levin^5,62,5
~~Retired~~ Chairman and
Chief Executive Officer
~~American Household, Inc.~~JW Levin Partners LLC
~~Boca Raton, Florida~~New York, New York
David B. O’Maley^1,2,5
Chairman, President and
Chief Executive Officer

Ohio National Financial Services, Inc.
Cincinnati, Ohio
O’dell M. Owens, M.D., M.P.H.^4,63,4

Independent Consultant and
Hamilton County Coroner
Cincinnati, Ohio

~~Thomas E. Petry~~Richard G. Reiten^1,2,53,6

Retired Chairman and
Chief Executive Officer

~~Eagle-Picher Industries, Inc.~~
~~Cincinnati, Ohio~~

~~Richard G. Reiten~~^1,3,6

~~Retired Chairman and~~
~~Chief Executive Officer~~
Northwest Natural Gas Company
Portland, Oregon

Craig D. Schnuck^3,4

Chairman ~~and Chief Executive Officer~~

Schnuck Markets, Inc.
St. Louis, Missouri

Warren R. Staley^1,3,6

Chairman and Chief Executive Officer

Cargill, Incorporated
Minneapolis, Minnesota

Patrick T. Stokes^1,2,5

President and Chief Executive Officer

Anheuser-Busch Companies, Inc.
St. Louis, Missouri

~~John J. Stollenwerk~~^2,3

~~President and Chief Executive Officer~~
~~Allen-Edmonds Shoe Corporation~~
~~Port Washington, Wisconsin~~

1. Executive Committee
2. Compensation Committee
3. Audit Committee
4. Community Outreach and Fair Lending Committee
5. Governance Committee
6. Credit and Finance Committee

126 U.S. BANCORP ~~125~~

CORPORATE INFORMATION:


*~~CORPORATE INFORMATION~~*

Executive Offices

U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402

Common Stock Transfer Agent and Registrar

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:

Mellon Investor Services
P.O. Box 3315
South Hackensack, NJ 07606-1915
Phone: 888-778-1311 or ~~201-329-8660~~201-680-4000
Internet: melloninvestor.com

For Registered or Certified Mail:
Mellon Investor Services
~~85 Challenger Road~~480 Washington Boulevard
~~Ridgefield Park,~~Jersey City, NJ ~~07660-2104~~

07310

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 Mellon’s internet site by clicking on For Investors and then 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 ~~prior~~ approval by our Board of Directors. U.S. Bancorp shareholders 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, Mellon Investor Services. See above.

Investor Relations Contacts


~~Howell D. McCullough~~	~~Judith T. Murphy~~
~~Senior Vice President,~~	~~Vice President,~~
~~Investor Relations~~	~~Investor Relations~~
~~howell.mccullough@usbank.com~~	~~judith.murphy@usbank.com~~
~~Phone: 612-303-0786~~	~~Phone:~~	~~612-303-0783 or~~
		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: 612-303-0799 or 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 corporation 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.



		U.S. Bancorp 800 Nicollet Mall Minneapolis, MN 55402

		usbank.com

          ~~U.S. Bancorp~~
          ~~800 Nicollet Mall~~
          ~~Minneapolis, MN 55402~~

          ~~usbank.com~~


~~At year-end 2004~~
*~~U.S. BANCORP AT A GLANCE~~*
~~Ranking~~		~~6th largest financial holding company~~

~~Asset size~~		~~$195 billion~~

~~Deposits~~		~~$121 billion~~

~~Total loans~~		~~$126 billion~~

~~Earnings per share (diluted)~~		~~$2.18~~

~~Return on average assets~~		~~2.17%~~

~~Return on average equity~~		~~21.4%~~

~~Tangible common equity~~		~~6.4%~~

~~Efficiency ratio~~		~~45.3%~~

~~Customers~~		~~13.1 million~~

~~Primary banking region~~		~~24 states~~

~~Bank branches~~		~~2,370~~

~~ATMs~~		~~4,620~~

~~NYSE symbol~~		~~USB~~

		2
~~Financial Summary~~ Ranking		3	6th largest U.S. financial holding company
~~Letter to Shareholders~~ Asset size	$209 billion
4Deposits	$125 billion
Loans	$138 billion
Earnings per share (diluted)	$2.42
Return on average assets	2.21%
Return on average equity	22.5%
Efficiency ratio	44.3%
Tangible efficiency ratio	40.8%
Customers	13.4 million
Primary banking region	24 states
Bank branches	2,419
ATMs	5,003
NYSE symbol	USB


Selected Financial Highlights
~~FEATURES~~ 2

Financial Summary		3

Letter to Shareholders		4

Five Star Service ~~in Action~~ ~~U.S. Bancorp employees deliver on our promise to provide the outstanding service our customers expect and deserve.~~ Up Close		6

F I N A N C I A L S :	~~Advantageous~~ ~~Business Mix~~ ~~We help our customers achieve their financial goals by offering an extensive scope of strategic services through specialized lines of business.~~		10

	~~Initiatives for Success~~ ~~We are increasing our ability to provide the highest quality service~~Management’s Discussion and ~~the most innova- tive products through new investments and initiatives for future growth and service.~~Analysis		1418


~~Selected Financial Highlights~~FIVE STAR SERVICE:UP CLOSE


~~FINANCIALS~~ Consolidated Financial Statements		62

Notes to Consolidated Financial Statements		66

~~Management’s Discussion and Analysis~~	18
~~Consolidated Financial Statements~~	64
~~Notes to Consolidated Financial Statements~~	68
Reports of Management and Independent Accountants	~~105~~	101

Five-Year Consolidated Financial Statements	~~108~~	104

Quarterly Consolidated Financial Data	~~110~~	106

Supplemental Financial Data	~~111~~	107

Annual Report on Form 10-K	~~114~~	110

CEO and CFO Certifications		121

Executive Officers		124
~~Directors~~	~~125~~
Directors		126

Corporate Information	inside back cover
~~Information Re: 2005 Compensation~~
~~Statement Re: Computation of Ratio of Earnings to Fixed Charges~~
~~Subsidiaries of the Registrant~~
~~Consent of Ernst & Young LLP~~
~~Consent of PricewaterhouseCoopers LLP~~
~~Certification of CEO Pursuant to Rule 13a-14(a)~~
~~Certification of CFO Pursuant to Rule 13a-14(a)~~
~~Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350~~


(a)		~~Dividends per share have not been restated for the 2001 Firstar/USBM merger.~~
~~(b)~~		Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.


Year Ended December 31										2004			2003			��										2005			2004
(Dollars and Shares in Millions, Except Per Share Data)	2004			2003			2002			v 2003			v 2002				2005			2004			2003			v 2004			v 2003

Total net revenue (taxable-equivalent basis)	$	12,659.1		$	12,530.5		$	12,057.9			1.0	%		3.9	%		$	13,133		$	12,659		$	12,530			3.7	%		1.0	%
Noninterest expense		5,784.5			5,596.9			5,740.5			3.4			(2.5	)			5,863			5,785			5,597			1.3			3.4
Provision for credit losses		669.6			1,254.0			1,349.0										666			669			1,254
Income taxes and taxable-equivalent adjustments		2,038.2			1,969.5			1,740.4										2,115			2,038			1,969

Income from continuing operations		4,166.8			3,710.1			3,228.0			12.3			14.9				4,489			4,167			3,710			7.7			12.3
Discontinued operations (after-tax)		—			22.5			(22.7	)									—			—			23
Cumulative effect of accounting change (after-tax)		—			—			(37.2	)

Net income	$	4,166.8		$	3,732.6		$	3,168.1			11.6			17.8			$	4,489		$	4,167		$	3,733			7.7			11.6


Per Common Share
Earnings per share from continuing operations	$	2.21		$	1.93		$	1.68			14.5	%		14.9	%		$	2.45		$	2.21		$	1.93			10.9	%		14.5	%
Diluted earnings per share from continuing operations		2.18			1.92			1.68			13.5			14.3				2.42			2.18			1.92			11.0			13.5
Earnings per share		2.21			1.94			1.65			13.9			17.6				2.45			2.21			1.94			10.9			13.9
Diluted earnings per share		2.18			1.93			1.65			13.0			17.0				2.42			2.18			1.93			11.0			13.0
Dividends declared per share		1.020			.855			.780			19.3			9.6				1.230			1.020			.855			20.6			19.3
Book value per share		10.52			10.01			9.62			5.1			4.1				11.07			10.52			10.01			5.2			5.1
Market value per share		31.32			29.78			21.22			5.2			40.3				29.89			31.32			29.78			(4.6	)		5.2
Average common shares outstanding		1,887.1			1,923.7			1,916.0			(1.9	)		.4				1,831			1,887			1,924			(3.0	)		(1.9	)
Average diluted common shares outstanding		1,912.9			1,936.2			1,924.8			(1.2	)		.6				1,857			1,913			1,936			(2.9	)		(1.2	)

Financial Ratios
Return on average assets		2.17	%		1.99	%		1.84	%									2.21	%		2.17	%		1.99	%
Return on average equity		21.4			19.2			18.3										22.5			21.4			19.2
Net interest margin (taxable-equivalent basis)		4.25			4.49			4.65										3.97			4.25			4.49
Efficiency ratio		45.3			45.6			48.8										44.3			45.3			45.6

Average Balances
Loans	$	122,141		$	118,362		$	114,453			3.2	%		3.4	%		$	133,105		$	122,141		$	118,362			9.0	%		3.2	%
Investment securities		43,009			37,248			28,829			15.5			29.2				42,103			43,009			37,248			(2.1	)		15.5
Earning assets		168,123			160,808			147,410			4.5			9.1				178,425			168,123			160,808			6.1			4.5
Assets		191,593			187,630			171,948			2.1			9.1				203,198			191,593			187,630			6.1			2.1
Deposits		116,222			116,553			105,124			(.3	)		10.9				121,001			116,222			116,553			4.1			(.3	)
Shareholders’ equity		19,459			19,393			17,273			.3			12.3
Total shareholders’ equity																		19,953			19,459			19,393			2.5			.3

Period End Balances
Loans	$	126,315		$	118,235		$	116,251			6.8	%		1.7	%		$	137,806		$	126,315		$	118,235			9.1	%		6.8	%
Allowance for credit losses		2,269			2,369			2,422			(4.2	)		(2.2	)			2,251			2,269			2,369			(.8	)		(4.2	)
Investment securities		41,481			43,334			28,488			(4.3	)		52.1				39,768			41,481			43,334			(4.1	)		(4.3	)
Assets		195,104			189,471			180,027			3.0			5.2				209,465			195,104			189,471			7.4			3.0
Deposits		120,741			119,052			115,534			1.4			3.0				124,709			120,741			119,052			3.3			1.4
Shareholders’ equity		19,539			19,242			18,436			1.5			4.4				20,086			19,539			19,242			2.8			1.5
Regulatory capital ratios
Tangible common equity		6.4	%		6.5	%		5.7	%									5.9	%		6.4	%		6.5	%
Tier 1 capital		8.6			9.1			8.0										8.2			8.6			9.1
Total risk-based capital		13.1			13.6			12.4										12.5			13.1			13.6
Leverage		7.9			8.0			7.7										7.6			7.9			8.0


Table 1	~~Selected Financial Data~~SELECTED FINANCIAL DATA


(a)	Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b)	~~Dividends per share have not been restated for the 2001 Firstar/ former U.S. Bancorp of Minneapolis merger.~~
~~(c)~~	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.


											2005			2004
(Dollars in Millions)		2005			2004			2003			v 2004			v 2003

Components of net interest income
	Income on earning assets (taxable-equivalent basis) (a)	$	10,584		$	9,215		$	9,286		$	1,369		$	(71	)
	Expense on interest-bearing liabilities		3,496			2,075			2,069			1,421			6

Net interest income (taxable-equivalent basis)		$	7,088		$	7,140		$	7,217		$	(52	)	$	(77	)

Net interest income, as reported		$	7,055		$	7,111		$	7,189		$	(56	)	$	(78	)

Average yields and rates paid
	Earning assets yield (taxable-equivalent basis)		5.93	%		5.48	%		5.77	%		.45	%		(.29	)%
	Rate paid on interest-bearing liabilities		2.37			1.53			1.60			.84			(.07	)

Gross interest margin (taxable-equivalent basis)			3.56	%		3.95	%		4.17	%		(.39	)%		(.22	)%

Net interest margin (taxable-equivalent basis)			3.97	%		4.25	%		4.49	%		(.28	)%		(.24	)%

Average balances
	Investment securities	$	42,103		$	43,009		$	37,248		$	(906	)	$	5,761
	Loans		133,105			122,141			118,362			10,964			3,779
	Earning assets		178,425			168,123			160,808			10,302			7,315
	Interest-bearing liabilities		147,295			136,055			129,004			11,240			7,051
	Net free funds (b)		31,130			32,068			31,804			(938	)		264


~~(a)~~	~~Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.~~
~~(b)~~	~~Represents noninterest-bearing deposits, allowance for loan losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity.~~


~~Table 3~~	~~Net Interest Income — Changes Due to Rate and Volume (a)~~



			2004 v 2003									2003 v 2002


(Dollars in Millions)			Volume			Yield/Rate			Total			Volume			Yield/Rate			Total


Increase (decrease) in
Interest income
	Investment securities		$	254.3		$	(115.5	)	$	138.8		$	428.4		$	(235.2	)	$	193.2
	Loans held for sale			(112.2	)		1.5			(110.7	)		62.7			(31.1	)		31.6
	Commercial loans			(110.8	)		8.3			(102.5	)		(149.0	)		(157.8	)		(306.8	)
	Commercial real estate			7.3			(48.6	)		(41.3	)		90.2			(141.9	)		(51.7	)
	Residential mortgage			160.2			(61.5	)		98.7			232.5			(114.4	)		118.1
	Retail loans			210.4			(264.5	)		(54.1	)		134.9			(363.9	)		(229.0	)

		Total loans		267.1			(366.3	)		(99.2	)		308.6			(778.0	)		(469.4	)
	Other earning assets			(13.7	)		13.7			—			6.4			(2.4	)		4.0

		Total		395.5			(466.6	)		(71.1	)		806.1			(1,046.7	)		(240.6	)
Interest expense
	Interest checking			8.0			(21.5	)		(13.5	)		22.6			(40.6	)		(18.0	)
	Money market accounts			5.3			(87.8	)		(82.5	)		87.7			(82.8	)		4.9
	Savings accounts			1.0			(6.8	)		(5.8	)		3.5			(7.4	)		(3.9	)
	Time certificates of deposit less than $100,000			(70.4	)		(39.2	)		(109.6	)		(146.3	)		(146.2	)		(292.5	)
	Time deposits greater than $100,000			24.6			(5.5	)		19.1			26.3			(105.5	)		(79.2	)

		Total interest-bearing deposits		(31.5	)		(160.8	)		(192.3	)		(6.2	)		(382.5	)		(388.7	)
	Short-term borrowings			64.1			31.8			95.9			8.5			(64.6	)		(56.1	)
	Long-term debt			34.7			68.2			102.9			45.0			(211.1	)		(166.1	)

		Total		67.3			(60.8	)		6.5			47.3			(658.2	)		(610.9	)

	Increase (decrease) in net interest income		$	328.2		$	(405.8	)	$	(77.6	)	$	758.8		$	(388.5	)	$	370.3


Table 3	NET INTEREST INCOME — CHANGES DUE TO RATE AND VOLUME (a)



			2005 v 2004									2004 v 2003


(Dollars in Millions)			Volume			Yield/Rate			Total			Volume			Yield/Rate			Total


Increase (decrease) in
Interest income
	Investment securities		$	(39	)	$	165		$	126		$	263		$	(124	)	$	139
	Loans held for sale			11			4			15			(112	)		1			(111	)
	Commercial loans			185			103			288			(111	)		9			(102	)
	Commercial real estate			39			222			261			7			(49	)		(42	)
	Residential mortgages			211			(22	)		189			160			(61	)		99
	Retail loans			207			273			480			210			(264	)		(54	)

		Total loans		642			576			1,218			266			(365	)		(99	)
	Other earning assets			4			6			10			(14	)		14			—

		Total		618			751			1,369			403			(474	)		(71	)
Interest expense
	Interest checking			6			58			64			8			(21	)		(13	)
	Money market accounts			(25	)		148			123			5			(88	)		(83	)
	Savings accounts			—			—			—			1			(7	)		(6	)
	Time certificates of deposit less than $100,000			3			45			48			(70	)		(40	)		(110	)
	Time deposits greater than $100,000			123			297			420			25			(6	)		19

		Total interest-bearing deposits		107			548			655			(31	)		(162	)		(193	)
	Short-term borrowings			88			339			427			64			32			96
	Long-term debt			27			312			339			35			68			103

		Total		222			1,199			1,421			68			(62	)		6

	Increase (decrease) in net interest income		$	396		$	(448	)	$	(52	)	$	335		$	(412	)	$	(77	)


(a)	Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.
*	Not meaningful


~~(a)~~	~~Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.~~
*	~~Not meaningful~~


							Base															Base
LTROR	6.9%			7.9%			8.9%			9.9%			10.9%			6.9%			7.9%			8.9%			9.9%			10.9%


Incremental benefit (cost)	$	(43.8	)	$	(21.9	)	$	—		$	21.9		$	43.7		$	(43	)	$	(22	)	$	—		$	22		$	43
Percent of 2004 net income		(.65	)%		(.33	)%		—	%		.33	%		.65	%
Percent of 2005 net income																	(.59	)%		(.30	)%		—	%		.30	%		.59	%


							Base															Base
Discount rate	4.0%			5.0%			6.0%			7.0%			8.0%			3.7%			4.7%			5.7%			6.7%			7.7%


Incremental benefit (cost)	$	(57.0	)	$	(30.9	)	$	—		$	35.4		$	73.5		$	(91	)	$	(45	)	$	—		$	40		$	75
Percent of 2004 net income		(.85	)%		(.46	)%		—	%		.53	%		1.09	%
Percent of 2005 net income																	(1.26	)%		(.62	)%		—	%		.55	%		1.04	%


~~Table 7~~ 2005.	~~Commercial Loans by Industry Group and Geography~~



		December 31, 2004					December 31, 2003


Industry Group (Dollars in Millions)		Loans		Percent			Loans		Percent

Consumer products and services		$	8,073		20.1	%	$	6,858		17.8	%
Financial services			4,784		11.9			4,469		11.6
Commercial services and supplies			3,870		9.6			3,785		9.8
Capital goods			3,825		9.5			4,598		11.9
Agriculture			2,601		6.5			2,907		7.6
Property management and development			2,334		5.8			1,653		4.3
Paper and forestry products, mining and basic materials			1,905		4.7			1,415		3.7
Consumer staples			1,887		4.7			1,817		4.7
Health care			1,826		4.6			1,532		4.0
Private investors			1,630		4.1			1,629		4.2
Transportation			1,592		4.0			1,758		4.6
Energy			730		1.8			708		1.8
Information technology			644		1.6			729		1.9
Other			4,472		11.1			4,668		12.1

	Total	$	40,173		100.0	%	$	38,526		100.0	%

Geography

California		$	3,786		9.4	%	$	4,091		10.6	%
Colorado			2,064		5.1			1,820		4.7
Illinois			2,549		6.3			2,121		5.5
Minnesota			6,649		16.6			6,527		16.9
Missouri			2,525		6.3			2,742		7.1
Ohio			2,528		6.3			2,361		6.1
Oregon			1,441		3.6			1,500		3.9
Washington			2,695		6.7			2,767		7.2
Wisconsin			2,604		6.5			2,874		7.5
Iowa, Kansas, Nebraska, North Dakota, South Dakota			3,455		8.6			3,760		9.8
Arkansas, Indiana, Kentucky, Tennessee			1,747		4.3			1,549		4.0
Idaho, Montana, Wyoming			830		2.1			744		1.9
Arizona, Nevada, Utah			926		2.3			829		2.2

	Total banking region		33,799		84.1			33,685		87.4
Outside the Company’s banking region			6,374		15.9			4,841		12.6

	Total	$	40,173		100.0	%	$	38,526		100.0	%


				Over One
		One Year		Through		Over Five
December 31, 2004 (Dollars in Millions)		or Less		Five Years		Years		Total

Commercial		$	19,283	$	18,141	$	2,749	$	40,173
Commercial real estate			7,378		14,280		5,927		27,585
Residential mortgages			974		2,698		11,695		15,367
Retail			13,312		19,619		10,259		43,190

	Total loans	$	40,947	$	54,738	$	30,630	$	126,315
Total of loans due after one year with
	Predetermined interest rates							$	40,042
	Floating interest rates							$	45,326



		December 31, 2005					December 31, 2004


Industry Group (Dollars in Millions)		Loans		Percent			Loans		Percent

Consumer products and services		$	8,723		20.3	%	$	8,073		20.1	%
Financial services			5,416		12.6			4,784		11.9
Commercial services and supplies			4,326		10.1			3,870		9.6
Capital goods			3,881		9.0			3,825		9.5
Property management and development			3,182		7.4			2,334		5.8
Agriculture			2,693		6.3			2,601		6.5
Healthcare			2,064		4.8			1,826		4.6
Paper and forestry products, mining and basic materials			1,990		4.6			1,905		4.7
Consumer staples			1,785		4.2			1,887		4.7
Transportation			1,565		3.7			1,592		4.0
Private investors			1,477		3.4			1,630		4.1
Energy			842		2.0			730		1.8
Information technology			700		1.6			644		1.6
Other			4,298		10.0			4,472		11.1

	Total	$	42,942		100.0	%	$	40,173		100.0	%

Geography

California		$	3,561		8.3	%	$	3,786		9.4	%
Colorado			2,578		6.0			2,064		5.1
Illinois			2,919		6.8			2,549		6.3
Minnesota			6,806		15.8			6,649		16.6
Missouri			2,056		4.8			2,525		6.3
Ohio			2,640		6.2			2,528		6.3
Oregon			1,649		3.8			1,441		3.6
Washington			2,404		5.6			2,695		6.7
Wisconsin			2,421		5.6			2,604		6.5
Iowa, Kansas, Nebraska, North Dakota, South Dakota			3,721		8.7			3,455		8.6
Arkansas, Indiana, Kentucky, Tennessee			2,214		5.2			1,747		4.3
Idaho, Montana, Wyoming			825		1.9			830		2.1
Arizona, Nevada, Utah			1,163		2.7			926		2.3

	Total banking region		34,957		81.4			33,799		84.1
Outside the Company’s banking region			7,985		18.6			6,374		15.9

	Total	$	42,942		100.0	%	$	40,173		100.0	%


Table 8	COMMERCIAL REAL ESTATE BY PROPERTY TYPE AND GEOGRAPHY



		�� December 31, 2005					December 31, 2004


Property Type (Dollars in Millions)		Loans		Percent			Loans		Percent

Business owner occupied		$	9,221		32.4	%	$	8,551		31.0	%
Multi-family			3,843		13.5			3,903		14.1
Commercial property
	Industrial		1,025		3.6			1,103		4.0
	Office		2,306		8.1			2,676		9.7
	Retail		3,558		12.5			3,586		13.0
	Other		2,704		9.5			2,359		8.6
Homebuilders			3,899		13.7			2,952		10.7
Hotel/motel			1,423		5.0			1,848		6.7
Health care facilities			484		1.7			607		2.2

	Total	$	28,463		100.0	%	$	27,585		100.0	%

Geography

California		$	5,806		20.4	%	$	5,252		19.0	%
Colorado			1,366		4.8			1,181		4.3
Illinois			1,025		3.6			996		3.6
Minnesota			1,765		6.2			1,721		6.2
Missouri			1,452		5.1			1,525		5.5
Ohio			1,537		5.4			1,975		7.2
Oregon			1,736		6.1			1,730		6.3
Washington			2,846		10.0			2,855		10.3
Wisconsin			1,679		5.9			1,768		6.4
Iowa, Kansas, Nebraska, North Dakota, South Dakota			1,935		6.8			2,003		7.3
Arkansas, Indiana, Kentucky, Tennessee			1,565		5.5			1,710		6.2
Idaho, Montana, Wyoming			1,110		3.9			880		3.2
Arizona, Nevada, Utah			2,362		8.3			1,948		7.1

	Total banking region		26,184		92.0			25,544		92.6
Outside the Company’s banking region			2,279		8.0			2,041		7.4

	Total	$	28,463		100.0	%	$	27,585		100.0	%


~~Table 9~~	~~Commercial Real Estate by Property Type and Geography~~


Table 9	RESIDENTIAL MORTGAGES AND RETAIL LOANS BY GEOGRAPHY



		Residential Mortgages					Retail Loans

At December 31, 2005 (Dollars in Millions)		Loans		Percent			Loans		Percent

California		$	1,351		6.5	%	$	5,292		11.6	%
Colorado			1,406		6.8			2,381		5.2
Illinois			1,402		6.8			2,354		5.2
Minnesota			2,350		11.3			5,026		11.1
Missouri			1,549		7.4			2,517		5.5
Ohio			1,487		7.2			3,335		7.3
Oregon			964		4.6			1,986		4.3
Washington			1,245		6.0			2,217		4.9
Wisconsin			1,136		5.5			2,532		5.5
Iowa, Kansas, Nebraska, North Dakota, South Dakota			1,536		7.4			3,125		6.8
Arkansas, Indiana, Kentucky, Tennessee			1,570		7.6			3,421		7.5
Idaho, Montana, Wyoming			489		2.4			1,293		2.8
Arizona, Nevada, Utah			1,161		5.6			1,833		4.0

	Total banking region		17,646		85.1			37,312		81.7
Outside the Company’s banking region			3,084		14.9			8,359		18.3

	Total	$	20,730		100.0	%	$	45,671		100.0	%


Table 1011	~~Investment Securities~~INVESTMENT SECURITIES



			Available-for-Sale									Held-to-Maturity											Available-for-Sale									Held-to-Maturity


							Weighted-									Weighted-											Weighted-									Weighted-
							Average		Weighted-							Average		Weighted-									Average		Weighted-							Average		Weighted-
			Amortized		Fair		Maturity in		Average			Amortized		Fair		Maturity in		Average					Amortized		Fair		Maturity in		Average			Amortized		Fair		Maturity in		Average
December 31, 2004 (Dollars in Millions)			Cost		Value		Years		Yield (d)			Cost		Value		Years		Yield (d)
December 31, 2005 (Dollars in Millions)																					December 31, 2005 (Dollars in Millions)		Cost		Value		Years		Yield (c)			Cost		Value		Years		Yield (c)

U.S. Treasury and agencies	U.S. Treasury and agencies																				U.S. Treasury and agencies
	Maturing in one year or less (a)		$	601	$	593		.19		3.24	%	$	—	$	—		—		—	%	Maturing in one year or less		$	101	$	101		.72		4.63	%	$	—	$	—		—		—	%
	Maturing after one year through five years			56		58		3.09		4.98			—		—		—		—		Maturing after one year through five years			41		41		2.67		5.96			—		—		—		—
	Maturing after five years through ten years			27		28		7.52		4.47			—		—		—		—		Maturing after five years through ten years			29		30		7.34		5.65			—		—		—		—
	Maturing after ten years (a)			—		—		—		—			—		—		—		—		Maturing after ten years			325		317		14.58		5.71			—		—		—		—

		Total	$	684	$	679		.72		3.43	%	$	—	$	—		—		—	%		Total	$	496	$	489		10.36		5.51	%	$	—	$	—		—		—	%

Mortgage-backed securities (b)

Mortgage-backed securities (a)																					Mortgage-backed securities (a)
	Maturing in one year or less		$	1,716	$	1,721		.57		4.01	%	$	—	$	—		—		—	%	Maturing in one year or less		$	379	$	381		.70		5.70	%	$	—	$	—		—		—	%
	Maturing after one year through five years			24,849		24,724		3.25		4.34			11		11		3.07		5.30		Maturing after one year through five years			20,606		20,208		3.61		4.65			8		8		3.05		5.08
	Maturing after five years through ten years			12,742		12,588		6.51		4.70			—		—		—		—		Maturing after five years through ten years			13,629		13,342		7.19		4.93			—		—		—		—
	Maturing after ten years			502		504		14.06		3.85			—		—		—		—		Maturing after ten years			3,547		3,583		13.38		5.69			—		—		—		—

		Total	$	39,809	$	39,537		4.31		4.43	%	$	11	$	11		3.07		5.30	%		Total	$	38,161	$	37,514		5.77		4.86	%	$	8	$	8		3.05		5.08	%

Asset-backed securities (b)

Asset-backed securities (a)																					Asset-backed securities (a)
	Maturing in one year or less		$	39	$	39		.65		5.61	%	$	—	$	—		—		—	%	Maturing in one year or less		$	12	$	12		.74		5.40	%	$	—	$	—		—		—	%
	Maturing after one year through five years			25		25		2.36		5.26			—		—		—		—		Maturing after one year through five years			—		—		—		—			—		—		—		—
	Maturing after five years through ten years			—		—		—		—			—		—		—		—		Maturing after five years through ten years			—		—		—		—			—		—		—		—
	Maturing after ten years			—		—		—		—			—		—		—		—		Maturing after ten years			—		—		—		—			—		—		—		—

		Total	$	64	$	64		1.31		5.47	%	$	—	$	—		—		—	%		Total	$	12	$	12		.74		5.40	%	$	—	$	—		—		—	%

Obligations of state and political subdivisions	Obligations of state and political subdivisions																				Obligations of state and political subdivisions
																					Maturing in one year or less		$	67	$	67		.31		7.28	%	$	12	$	12		.33		6.37	%
	Maturing in one year or less		$	101	$	102		.39		7.38	%	$	10	$	10		.25		6.44	%	Maturing after one year through five years			59		61		2.31		7.24			23		24		3.30		6.65
	Maturing after one year through five years			97		101		2.49		7.24			35		37		2.66		6.55		Maturing after five years through ten years			231		231		9.40		6.42			15		17		7.92		7.68
	Maturing after five years through ten years			6		7		6.38		7.82			19		20		6.90		6.57		Maturing after ten years			283		278		15.49		6.25			34		35		15.15		6.57
	Maturing after ten years			1		1		16.77		5.33			34		36		13.66		6.68
																						Total	$	640	$	637		10.49		6.51	%	$	84	$	88		8.51		6.76	%
		Total	$	205	$	211		1.65		7.32	%	$	98	$	103		7.09		6.59	%

Other debt securities	Other debt securities																				Other debt securities
	Maturing in one year or less		$	8	$	8		1.11		3.10	%	$	—	$	—		—		—	%	Maturing in one year or less		$	301	$	301		.08		3.65	%	$	5	$	5		.57		6.16	%
	Maturing after one year through five years			86		86		2.35		11.00			18		18		3.23		5.20		Maturing after one year through five years			12		12		1.28		3.82			11		11		3.46		5.23
	Maturing after five years through ten years			—		—		—		—			—		—		—		—		Maturing after five years through ten years			15		15		10.00		5.30			1		1		6.25		4.15
	Maturing after ten years			499		490		22.35		2.98			—		—		—		—		Maturing after ten years			626		621		21.69		5.15			—		—		—		—

		Total	$	593	$	584		19.16		4.15	%	$	18	$	18		3.23		5.20	%		Total	$	954	$	949		14.44		4.66	%	$	17	$	17		2.73		5.45	%

Other investments	Other investments		$	270	$	279		—		—	%	$	—	$	—		—		—	%	Other investments		$	58	$	58		—		—	%	$	—	$	—		—		—	%

Total investment securities (c)			$	41,625	$	41,354		4.45		4.43	%	$	127	$	132		6.19		6.28	%
Total investment securities (b)																					Total investment securities (b)		$	40,321	$	39,659		6.10		4.89	%	$	109	$	113		7.21		6.44	%


(a)	In January 2005, approximately $450 million of floating-rate agency notes with an original maturity of June 2023 were called by the issuer. These notes are classified in the table as maturing in one year or less.
~~(b)~~	Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
~~(c)~~(b)	The weighted-average maturity of the ~~available-for-sale~~available for sale investment securities was ~~5.12~~4.45 years at December 31, ~~2003~~2004, with a corresponding weighted-average yield of ~~4.27%.~~4.43 percent. The ~~weighted- average~~weighted-average maturity of the held-to-maturity investment securities was ~~6.16~~6.19 years at December 31, ~~2003~~2004, with a corresponding weighted-average yield of ~~6.05%.~~6.28 percent.
~~(d)~~(c)	Average yields are presented on a fully-taxable equivalent ~~basis.~~basis under a tax rate of 35 percent. Yields on available-for-sale and held-to-maturity securities are computed based on historical cost balances. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity.


		Time Certificates of		Time Deposits
December 31, 2005 (Dollars in Millions)		Deposit Less Than $100,000		Greater Than $100,000		Total

Three months or less		$	2,560	$	17,115	$	19,675
Three months through six months			2,705		2,234		4,939
Six months through one year			3,478		1,509		4,987
2007			2,914		983		3,897
2008			801		254		1,055
2009			535		230		765
2010			212		133		345
Thereafter			9		13		22

	Total	$	13,214	$	22,471	$	35,685


At December 31, (Dollars in Millions)				2004			2003			2002			2001			2000


Commercial
	Commercial			$	289.5		$	623.5		$	760.4		$	526.6		$	470.4
	Lease financing				90.6			113.3			166.7			180.8			70.5

		Total commercial			380.1			736.8			927.1			707.4			540.9

Commercial real estate
	Commercial mortgages				174.6			177.6			174.6			131.3			105.5
	Construction and development				25.3			39.9			57.5			35.9			38.2

		Total commercial real estate			199.9			217.5			232.1			167.2			143.7
Residential mortgages					43.3			40.5			52.0			79.1			56.9

Retail
	Credit card				—			—			—			—			8.8
	Retail leasing				—			.4			1.0			6.5			—
	Other retail				17.2			24.8			25.1			41.1			15.0

		Total retail			17.2			25.2			26.1			47.6			23.8

			Total nonperforming loans		640.5			1,020.0			1,237.3			1,001.3			765.3
Other real estate					72.2			72.6			59.5			43.8			61.1
Other assets					35.7			55.5			76.7			74.9			40.6

			Total nonperforming assets	$	748.4		$	1,148.1		$	1,373.5		$	1,120.0		$	867.0

Restructured loans accruing interest (b)				$	10.2		$	18.0		$	1.4		$	—		$	—
Accruing loans 90 days or more past due				$	294.0		$	329.4		$	426.4		$	462.9		$	385.2
Nonperforming loans to total loans					.51	%		.86	%		1.06	%		.88	%		.63	%
Nonperforming assets to total loans plus other real estate					.59	%		.97	%		1.18	%		.98	%		.71	%
Net interest lost on nonperforming loans				$	42.1		$	67.4		$	65.4		$	63.0		$	50.8