U.S. Bancorp - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from (not applicable)

Commission file number 1-6880

U.S. BANCORP

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		41-0255900 (I.R.S. Employer Identification No.)

800 Nicollet Mall

Minneapolis, Minnesota 55402

(Address of principal executive offices, including zip code)

651-466-3000

(Registrant’s telephone number, including area code)

(not applicable)

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (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.

YES X NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES X NO

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES NO X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class Common Stock, $.01 Par Value		Outstanding as of October 31, 2005 1,816,345,880 shares

Table of Contents and Form 10-Q Cross Reference Index


Part I — Financial Information
1) Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
	a) Overview	3
	b) Statement of Income Analysis	4
	c) Balance Sheet Analysis	7
	d) Accounting Changes	24
	e) Critical Accounting Policies	24
	f) Controls and Procedures (Item 4)	25
2) Quantitative and Qualitative Disclosures About Market Risk / Corporate Risk Profile (Item 3)
	a) Overview	8
	b) Credit Risk Management	8
	c) Residual Risk Management	14
	d) Operational Risk Management	14
	e) Interest Rate Risk Management	14
	f) Market Risk Management	16
	g) Liquidity Risk Management	17
	h) Capital Management	18
3) Line of Business Financial Review		18
4) Financial Statements (Item 1)		26
Part II — Other Information
1) Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)		38
2) Exhibits (Item 6)		38
3) Signature		39
4) Exhibits		40

Forward-Looking Statements

This Form 10-Q 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 Securities and Exchange Commission: (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	1


Table 1		Selected Financial Data


		Three Months Ended									Nine Months Ended
		September 30,									September 30,

								Percent									Percent
(Dollars and Shares in Millions, Except Per Share Data)		2005			2004			Change			2005			2004			Change

Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)		$	1,791		$	1,782			.5	%	$	5,303		$	5,340			(.7	)%
Noninterest income			1,575			1,436			9.7			4,556			4,168			9.3
Securities gains (losses), net			1			88			(98.9	)		(57	)		(84	)		32.1

	Total net revenue		3,367			3,306			1.8			9,802			9,424			4.0
Noninterest expense			1,473			1,518			(3.0	)		4,399			4,206			4.6
Provision for credit losses			145			166			(12.7	)		461			605			(23.8	)

	Income before taxes		1,749			1,622			7.8			4,942			4,613			7.1
Taxable-equivalent adjustment			9			7			28.6			23			21			9.5
Applicable income taxes			586			549			6.7			1,573			1,481			6.2

	Net income	$	1,154		$	1,066			8.3		$	3,346		$	3,111			7.6

Per Common Share
Earnings per share		$	.63		$	.57			10.5	%	$	1.82		$	1.64			11.0	%
Diluted earnings per share			.62			.56			10.7			1.80			1.62			11.1
Dividends declared per share			.30			.24			25.0			.90			.72			25.0
Book value per share			10.93			10.48			4.3
Market value per share			28.08			28.90			(2.8	)
Average common shares outstanding			1,823			1,877			(2.9	)		1,836			1,895			(3.1	)
Average diluted common shares outstanding			1,849			1,904			(2.9	)		1,862			1,919			(3.0	)
Financial Ratios
Return on average assets			2.23	%		2.21	%					2.22	%		2.18	%
Return on average equity			22.8			21.9						22.5			21.5
Net interest margin (taxable-equivalent basis)			3.95			4.22						4.00			4.26
Efficiency ratio (b)			43.8			47.2						44.6			44.2
Average Balances
Loans		$	135,283		$	122,906			10.1	%	$	131,432		$	120,966			8.7	%
Loans held for sale			2,038			1,405			45.1			1,723			1,611			7.0
Investment securities			41,782			42,502			(1.7	)		42,308			43,243			(2.2	)
Earning assets			180,452			168,187			7.3			176,851			167,182			5.8
Assets			205,667			191,585			7.4			201,505			190,563			5.7
Noninterest-bearing deposits			29,434			29,791			(1.2	)		29,003			29,807			(2.7	)
Deposits			120,984			115,316			4.9			120,552			116,147			3.8
Short-term borrowings			22,248			15,382			44.6			18,313			14,706			24.5
Long-term debt			35,633			35,199			1.2			36,016			34,254			5.1
Shareholders’ equity			20,106			19,387			3.7			19,911			19,338			3.0

		September 30, 2005			December 31, 2004

Period End Balances
Loans		$	136,627		$	126,315			8.2	%
Allowance for credit losses			2,258			2,269			(.5	)
Investment securities			41,516			41,481			.1
Assets			206,895			195,104			6.0
Deposits			120,795			120,741			—
Long-term debt			36,257			34,739			4.4
Shareholders’ equity			19,864			19,539			1.7
Regulatory capital ratios
	Tangible common equity		6.2	%		6.4	%
	Tier 1 capital		8.4			8.6
	Total risk-based capital		12.8			13.1
	Leverage		7.7			7.9


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


2	U.S. Bancorp

Management’s Discussion and Analysis" -->

Management’s Discussion and Analysis

OVERVIEW" -->

OVERVIEW

Earnings SummaryU.S. Bancorp and its subsidiaries (the “Company”) reported net income of $1,154 million for the third quarter of 2005, compared with $1,066 million for the third quarter of 2004. Net income of $.62 per diluted share in the third quarter of 2005 was higher than the same period of 2004 by $.06 (10.7 percent). Return on average assets and return on average equity were 2.23 percent and 22.8 percent, respectively, for the third quarter of 2005, compared with returns of 2.21 percent and 21.9 percent, respectively, for the third quarter of 2004. The Company’s results for the third quarter of 2005 improved over the same period of 2004, as net income rose by $88 million (8.3 percent), primarily due to growth in fee-based products and services and reduced credit costs. During the third quarter of 2005, the Company recognized $3 million of reparation of its mortgage servicing rights (“MSR”) asset, compared with an $87 million impairment charge in the third quarter of 2004, due to changing longer-term interest rates. The Company had net securities gains of $1 million during the third quarter of 2005, compared with net securities gains of $88 million in the same period of 2004.

Total net revenue, on a taxable-equivalent basis for the third quarter of 2005 was $61 million (1.8 percent) higher than the third quarter of 2004, primarily reflecting 9.7 percent growth in fee-based revenue across the majority of fee categories and expansion in payment processing businesses. This was partially offset by an $87 million unfavorable variance in securities gains (losses) due to gains recognized in the third quarter of 2004.

Total noninterest expense in the third quarter of 2005 was $45 million (3.0 percent) lower than the third quarter of 2004, primarily reflecting a $90 million favorable change in the valuation of MSRs, offset somewhat by incremental costs related to expanding the payment processing businesses and investments in in-store branches, affordable housing projects and other business initiatives. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) improved to 43.8 percent for the third quarter of 2005, compared with 47.2 percent for the third quarter of 2004.

The provision for credit losses for the third quarter of 2005 was $145 million, a decrease of $21 million (12.7 percent) from the third quarter of 2004. The decrease in the provision for credit losses year-over-year reflected a decrease in total net charge-offs. Net charge-offs in the third quarter of 2005 were $156 million, compared with $166 million in the third quarter of 2004. The decline in credit losses from a year ago was primarily the result of lower gross charge-offs and continued high levels of commercial loan recoveries reflecting the declining levels of nonperforming loans and the Company’s ongoing improvement in collection efforts, underwriting and risk management. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

The Company reported net income of $3,346 million for the first nine months of 2005, compared with $3,111 million for the first nine months of 2004. Net income of $1.80 per diluted share in the first nine months of 2005 was higher than the same period of 2004 by $.18 (11.1 percent). Return on average assets and return on average equity were 2.22 percent and 22.5 percent, respectively, for the first nine months of 2005, compared with returns of 2.18 percent and 21.5 percent, respectively, for the first nine months of 2004. The Company’s results for the first nine months of 2005 improved over the same period of 2004, as net income rose by $235 million (7.6 percent), primarily due to growth in fee-based products and services and reduced credit costs. During the first nine months of 2005, the Company recognized $4 million of reparation of its MSR asset, compared with a $25 million impairment charge in the first nine months of 2004. The Company had net securities losses of $57 million during the first nine months of 2005, compared with net securities losses of $84 million in the same period of 2004.

Total net revenue, on a taxable-equivalent basis for the first nine months of 2005 was $378 million (4.0 percent) higher than the first nine months of 2004, primarily reflecting 9.3 percent growth in fee-based revenue across the majority of fee categories, expansion in payment processing businesses and lower securities losses from a year ago.

Total noninterest expense in the first nine months of 2005 was $193 million (4.6 percent) higher than the first nine months of 2004. Expenses reflected incremental costs related to expanding the payment processing businesses and investments in in-store


U.S. Bancorp	3

branches, affordable housing projects, other business initiatives and higher pension costs from a year ago, partially offset by a $29 million favorable change in the valuation of MSRs. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 44.6 percent for the first nine months of 2005, compared with 44.2 percent for the first nine months of 2004.

The provision for credit losses for the first nine months of 2005 was $461 million, a decrease of $144 million (23.8 percent) from the same period of 2004. The decrease in the provision for credit losses year-over-year reflected a decrease in total net charge-offs. Net charge-offs for the first nine months of 2005 were $472 million, compared with $604 million for the first nine months of 2004. The decline in credit losses from a year ago was primarily the result of lower gross charge-offs and continued high levels of commercial loan recoveries reflecting the declining levels of nonperforming loans and the Company’s ongoing improvement in collection efforts, underwriting and risk management. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

STATEMENT OF INCOME ANALYSIS" -->

STATEMENT OF INCOME ANALYSIS

Net Interest Income Net interest income, on a taxable-equivalent basis, was $1,791 million in the third quarter of 2005, compared with $1,782 million in the third quarter of 2004. Net interest income, on a taxable-equivalent basis, was $5,303 million in the first nine months of 2005, compared with $5,340 million in the first nine months of 2004. Average earning assets increased $12.3 billion (7.3 percent) and $9.7 billion (5.8 percent) in the third quarter and first nine months of 2005, respectively, compared with the same periods of 2004. The increase in average earning assets in the third quarter and first nine months of 2005, compared with the same periods of 2004, was primarily driven by increases in residential mortgages, total commercial loans and retail loans. The positive impact to net interest income from the growth in earning assets was offset by lower net interest margin. The net interest margin for the third quarter and first nine months of 2005 was 3.95 percent and 4.00 percent, respectively, compared with 4.22 percent and 4.26 percent for the comparable periods of 2004. The year-over-year decline in the net interest margin for the third quarter and first nine months of 2005 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 the same periods of 2004, credit spreads have tightened by approximately 19 basis points in the third quarter and 17 basis points in the first nine months of 2005 across most lending products due to competitive pricing, growth in noninterest-bearing corporate payment card balances and a change in mix toward fixed-rate credit products. The net interest margin also declined due to funding incremental growth with higher cost wholesale funding and asset/liability decisions designed to minimize the Company’s rate sensitivity position, including a 55 percent reduction in the net receive fixed swap position since September 30, 2004. Increases in the margin benefit of deposits and net free funds helped to partially offset these factors. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tables for further information on net interest income.

Average loans for the third quarter and first nine months of 2005 were higher by $12.4 billion (10.1 percent) and $10.5 billion (8.7 percent), respectively, compared with the same periods of 2004, driven by growth in residential mortgages, total commercial loans and retail loans. Total commercial real estate loans for the third quarter and first nine months of 2005 also increased, relative to the comparable periods of 2004.

Average investment securities in the third quarter and first nine months of 2005 were $720 million (1.7 percent) and $935 million (2.2 percent) lower, respectively, than in the same periods of 2004. The decline principally reflected the net impact of repositioning the investment portfolio as part of asset/liability risk management decisions to acquire variable-rate and shorter-term fixed-rate securities to minimize the Company’s rate sensitivity position. During the third quarter and first nine months of 2005, the Company maintained a mix of approximately 41 percent and 39 percent variable-rate securities, respectively. 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 for the third quarter and first nine months of 2005 were lower by $357 million (1.2 percent) and $804 million (2.7 percent), respectively, compared with the same periods of 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


4	U.S. Bancorp

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 the third quarter and first nine months of 2005, excluding the migration of certain high-value customers to Silver Elite Checking, were higher by approximately $120 million (1.0 percent) and $255 million (2.2 percent), respectively, over the same periods of 2004, as net new checking accounts continue to grow. 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 utilize their excess liquidity to fund their operations.

Average total savings products declined year-over-year by $1.1 billion (1.9 percent) in the third quarter and $1.8 billon (3.0 percent) in the first nine months of 2005, compared with the same periods of 2004, due to reductions in average money market account balances and savings accounts, partially offset by higher interest checking balances. Average branch-based interest checking deposits increased by $2.3 billion (15.2 percent) in the third quarter and $2.4 billion (16.6 percent) in the first nine months of 2005, compared with the same periods of 2004, due to strong new account growth, 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 areas. Average money market account balances declined year-over-year by $3.1 billion (9.8 percent) in the third quarter and $4.0 billon (11.9 percent) in the first nine months of 2005, compared with the same periods of 2004, with the largest declines in the branches. The overall decrease in average money market account balances year-over-year was the result of the Company’s deposit pricing decisions. 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 $6.7 billion (46.3 percent) and $7.0 billion (53.9 percent) in the third quarter and first nine months of 2005, respectively, compared with the same periods of 2004, most notably in corporate banking, as customers migrated balances to higher rate deposits.

Provision for Credit LossesThe provision for credit losses for the third quarter and first nine months of 2005 decreased $21 million (12.7 percent) and $144 million (23.8 percent), respectively, compared with the same periods of 2004. The decrease in the provision for credit losses year-over-year reflected a decrease in total net charge-offs. Net charge-offs for the third quarter and first nine months of 2005 were $156 million and $472 million, respectively, compared with $166 million and $604 million for the third quarter and first nine months of 2004, respectively. Net charge-offs in the third quarter of 2005 included a $12 million leveraged lease charge-off of a single airline entering bankruptcy during the quarter. This airline exposure was specifically considered in the Company’s allowance for credit losses in prior periods and reflects the continuing weakness in the airline and transportation industries. The decline in credit losses from a year ago was primarily the result of lower gross charge-offs and continued high levels of commercial loan recoveries reflecting the declining levels


Table 2		Noninterest Income


		Three Months Ended							Nine Months Ended
		September 30,							September 30,

						Percent									Percent
(Dollars in Millions)		2005		2004		Change			2005			2004			Change

Credit and debit card revenue		$	185	$	164		12.8	%	$	516		$	465			11.0	%
Corporate payment products revenue			135		108		25.0			362			306			18.3
ATM processing services			64		45		42.2			168			132			27.3
Merchant processing services			200		188		6.4			576			494			16.6
Trust and investment management fees			251		240		4.6			751			740			1.5
Deposit service charges			246		208		18.3			690			595			16.0
Treasury management fees			109		118		(7.6	)		333			357			(6.7	)
Commercial products revenue			103		106		(2.8	)		299			324			(7.7	)
Mortgage banking revenue			111		97		14.4			323			301			7.3
Investment products fees and commissions			37		37		—			115			119			(3.4	)
Securities gains (losses), net			1		88		(98.9	)		(57	)		(84	)		32.1
Other			134		125		7.2			423			335			26.3

	Total noninterest income	$	1,576	$	1,524		3.4	%	$	4,499		$	4,084			10.2	%


U.S. Bancorp	5

of nonperforming loans and the Company’s ongoing improvement in collection efforts, underwriting and risk management. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Noninterest IncomeNoninterest income in the third quarter and first nine months of 2005 was $1,576 million and $4,499 million, respectively, compared with $1,524 million and $4,084 million in the same periods of 2004. The $52 million (3.4 percent) increase in the third quarter of 2005 over the third quarter of 2004, was driven by favorable variances in the majority of fee income categories, partially offset by an $87 million reduction in net securities gains (losses). The $415 million (10.2 percent) increase in the first nine months of 2005, compared with the same period in 2004, was driven by favorable variances in the majority of fee income categories, as well as a $27 million favorable variance in net securities gains (losses). The growth in credit and debit card revenue was driven by higher transaction volumes and rate changes. The corporate payment products revenue growth reflected growth in sales, card usage, rate changes and the recent acquisition of a small aviation card business. ATM processing services revenue was higher primarily due to the expansion of the ATM business in May of 2005. Merchant processing services revenue was higher in the third quarter and first nine months of 2005, compared with the same periods of 2004, reflecting an increase in sales volume, new business and higher equipment fees. Deposit service charges were higher in the third quarter and first nine months year-over-year due to account growth and higher transaction-related activities. The growth in mortgage banking revenue was due to higher production volumes and increased servicing income. Other income was higher in the third quarter and first nine months of 2005, primarily due to higher income from equity and other insurance investments relative to the same periods of 2004. Partially offsetting these positive variances year-over-year were decreases in treasury management fees and commercial products revenue. 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 services activity. Commercial products revenue declined due to reductions in loan fees and letter of credit fees.

Noninterest ExpenseNoninterest expense was $1,473 million in the third quarter of 2005, a decrease of $45 million (3.0 percent) from the third quarter of 2004. Noninterest expense was $4,399 million in the first nine months of 2005, an increase of $193 million (4.6 percent) over the first nine months of 2004. The decrease in expense in the third quarter, compared with the same period of 2004, was primarily driven by the $90 million favorable change in the MSR valuation. Compensation expense was higher year-over-year in the third quarter and first nine months of 2005, principally due to business expansion, including in-store branches, the Company’s payment processing businesses and other growth initiatives. Employee benefits increased year-over-year primarily as a result of higher payroll taxes and pension expense. Professional services expense was higher due to increases in legal, and other professional services


Table 3		Noninterest Expense


		Three Months Ended									Nine Months Ended
		September 30,									September 30,

								Percent									Percent
(Dollars in Millions)		2005			2004			Change			2005			2004			Change

Compensation		$	603		$	564			6.9	%	$	1,782		$	1,673			6.5	%
Employee benefits			106			100			6.0			330			291			13.4
Net occupancy and equipment			162			159			1.9			475			468			1.5
Professional services			44			37			18.9			119			104			14.4
Marketing and business development			61			61			—			171			145			17.9
Technology and communications			118			110			7.3			337			314			7.3
Postage, printing and supplies			64			61			4.9			190			183			3.8
Other intangibles			125			210			(40.5	)		377			389			(3.1	)
Debt prepayment			—			5			*			54			42			28.6
Other			190			211			(10.0	)		564			597			(5.5	)

	Total noninterest expense	$	1,473		$	1,518			(3.0	)%	$	4,399		$	4,206			4.6	%

Efficiency ratio (a)			43.8	%		47.2	%					44.6	%		44.2	%


*		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.


6	U.S. Bancorp

related to business initiatives, technology development and the integration of specific payment processing businesses. Marketing and business development was higher in the first nine months of 2005, compared with the same period of 2004, due to marketing initiatives. Technology and communications expense rose in the third quarter and first nine months of 2005, compared with the same periods of 2004, reflecting technology investments that increased software expense, in addition to outside data processing expense. Other expense declined in the third quarter and first nine months of 2005, primarily due to lower merchant charge-back risk, litigation costs and operating losses relative to the same periods of 2004.

Income Tax Expense The provision for income taxes was $586 million (an effective rate of 33.7 percent) for the third quarter and $1,573 million (an effective rate of 32.0 percent) for the first nine months of 2005, compared with $549 million (an effective rate of 34.0 percent) and $1,481 million (an effective rate of 32.3 percent) for the same periods of 2004. For further information on income taxes, refer to Note 7 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS" -->

BALANCE SHEET ANALYSIS

Loans The Company’s total loan portfolio was $136.6 billion at September 30, 2005, compared with $126.3 billion at December 31, 2004, an increase of $10.3 billion (8.2 percent). The increase in total loans was driven by growth in residential mortgages, commercial loans, retail loans and commercial real estate loans. The $3.1 billion (7.6 percent) increase in commercial loans was driven by new customer relationships and increases in corporate card and mortgage banking balances.

Commercial real estate loans increased $.9 billion (3.4 percent) at September 30, 2005, compared with December 31, 2004, primarily due to an increase in construction loans.

Residential mortgages increased $4.1 billion (26.7 percent) at September 30, 2005, compared with December 31, 2004. The increase was primarily the result of asset/liability risk management decisions to retain a greater portion of the Company’s adjustable-rate loan production and an increase in consumer finance originations.

Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, grew $2.2 billion (5.1 percent) at September 30, 2005, compared with December 31, 2004. The growth was primarily due to an increase in installment, automobile, student loans and retail leasing.

Investment SecuritiesInvestment securities, both available-for-sale and held-to-maturity, totaled $41.5 billion at September 30, 2005, and December 31, 2004, reflecting purchases of $10.4 billion of securities, offset by sales, along with maturities and prepayments. During the first nine months of 2005, securities transactions were principally related to asset/liability management decisions reducing the Company’s rate sensitivity position. At September 30, 2005, approximately 41 percent of the investment securities portfolio represented adjustable-rate financial instruments, compared with 39 percent at December 31, 2004. Adjustable-rate financial instruments include variable-rate collateralized mortgage obligations, mortgage-backed securities, agency securities, adjustable-rate money market accounts and asset-backed securities.

Deposits Total deposits were $120.8 billion at September 30, 2005, compared with $120.7 billion at


Table 4		Available-for-Sale Investment Securities


		September 30, 2005									December 31, 2004

						Weighted-									Weighted-
						Average		Weighted-							Average		Weighted-
		Amortized		Fair		Maturity in		Average			Amortized		Fair		Maturity in		Average
(Dollars in Millions)		Cost		Value		Years		Yield (b)			Cost		Value		Years		Yield (b)

U.S. Treasury and agencies		$	547	$	546		1.75		4.90	%	$	684	$	679		.72		3.43	%
Mortgage-backed securities (a)			39,818		39,425		4.82		4.68			39,809		39,537		4.31		4.43
Asset-backed securities (a)			20		20		.83		5.47			64		64		1.31		5.47
Obligations of state and political subdivisions			396		395		9.05		6.52			205		211		1.65		7.32
Other debt securities			952		958		14.40		3.12			593		584		19.16		4.15
Other investments			58		58		—		—			270		279		—		—

	Total available-for-sale investment securities	$	41,791	$	41,402		5.03		4.66	%	$	41,625	$	41,354		4.45		4.43	%


(a)		Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
(b)		Average yields are based on historical cost balances and are presented on a fully-taxable equivalent basis. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity.


U.S. Bancorp	7

December 31, 2004, reflecting increases in time deposits greater than $100,000, time certificates of deposit less than $100,000 and interest checking accounts, offset by declines in money market and money market checking accounts. Time deposits greater than $100,000 increased $2.4 billion (13.3 percent) and time certificates of deposit less than $100,000 increased $.6 billion (4.6 percent) at September 30, 2005, compared with December 31, 2004. Time deposits greater than $100,000 are largely viewed as purchased funds and are managed to levels deemed appropriate given alternative funding sources. The $.4 billion (2.7 percent) increase in interest checking was due primarily to new account growth. The $2.3 billion (7.5 percent) and $1.2 billion (18.6 percent) decreases in money market savings and money market checking account balances reflect the Company’s deposit pricing decisions in selected markets, given excess customer liquidity throughout 2004 and a migration of some customer balances to time deposits greater than $100,000 as rates increased on time deposit products.

Borrowings The Company utilizes both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $23.1 billion at September 30, 2005, compared with $13.1 billion at December 31, 2004. Short-term funding is managed to levels deemed appropriate given alternative funding sources. The increase of $10.0 billion in short-term borrowings reflected wholesale funding associated with the Company’s earning asset growth and asset/liability management activities. Long-term debt was $36.3 billion at September 30, 2005, compared with $34.7 billion at December 31, 2004, reflecting the issuances of $3.5 billion of bank notes, $3.0 billion of medium-term notes, $.9 billion of subordinated debt and $.6 billion of junior subordinated debentures and the addition of $3.0 billion of Federal Home Loan Bank (“FHLB”) advances, offset by long-term debt maturities, repayments and the impact of the tender offer completed in the second quarter of 2005. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

CORPORATE RISK PROFILE" -->

CORPORATE RISK PROFILE

Overview" -->

Overview Managing risks is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit, residual, operational, interest rate, market and liquidity risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Residual risk is the potential reduction in the end-of-term value of leased assets or the residual cash flows related to asset securitization and other off-balance sheet structures. Operational risk includes risks related to fraud, legal and compliance risk, processing errors, technology, breaches of internal controls and business continuation and disaster recovery risk. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Rate movements can affect the repricing of assets and liabilities differently, as well as their market value. Market risk arises from fluctuations in interest rates, foreign exchange rates, and equity prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities that are accounted for on a mark-to-market basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. In addition, corporate strategic decisions, as well as the risks described above, could give rise to reputation risk. Reputation risk is the risk that negative publicity or press, whether true or not, could result in costly litigation or cause a decline in the Company’s stock value, customer base or revenue.

Credit Risk Management" -->

Credit Risk Management The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans experiencing deterioration of credit quality. The credit risk management strategy also includes a credit risk assessment process, independent of business line managers, that performs assessments of compliance with commercial and consumer credit policies, risk ratings, and other critical credit information. The Company strives to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels for probable loan losses inherent in the portfolio.

In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors. Economic conditions during the third quarter and the first nine months of 2005 have improved from the same periods of 2004, as reflected in improved unemployment rates,


8	U.S. Bancorp

favorable trends related to corporate profits and consumer spending for retail goods and services. Current economic conditions are relatively unchanged from December 31, 2004, with higher energy costs and some increasing inflationary trends. Bankruptcy levels have increased as certain individuals and companies accelerate filings prior to the implementation of bankruptcy legislation reform. The Federal Reserve Bank continued its measured approach to increasing short-term interest rates in an effort to prevent an acceleration of inflation and maintain the current rate of economic growth. In addition to these economic factors, the Company has begun implementing higher minimum balance payment requirements for its credit card customers in response to industry guidance issued by the regulatory agencies.

Refer to “Management’s Discussion and Analysis — Credit Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, for further discussion on credit risk management.


Table 5		Nonperforming Assets (a)


				September 30,			December 31,
(Dollars in Millions)				2005			2004

Commercial
	Commercial			$	265		$	289
	Lease financing				35			91

		Total commercial			300			380
Commercial real estate
	Commercial mortgages				144			175
	Construction and development				16			25

		Total commercial real estate			160			200
Residential mortgages					44			43
Retail
	Retail leasing				—			—
	Other retail				12			17

		Total retail			12			17

			Total nonperforming loans		516			640
Other real estate					68			72
Other assets					29			36

			Total nonperforming assets	$	613		$	748

Restructured loans accruing interest (b)				$	1		$	10
Accruing loans 90 days or more past due				$	265		$	294
Nonperforming loans to total loans					.38	%		.51	%
Nonperforming assets to total loans plus other real estate					.45	%		.59	%

Changes in Nonperforming Assets


					Commercial and			Retail and
					Commercial			Residential
(Dollars in Millions)					Real Estate			Mortgages (d)			Total

Balance December 31, 2004					$	619		$	129		$	748
	Additions to nonperforming assets
		New nonaccrual loans and foreclosed properties				302			32			334
		Advances on loans				33			—			33

			Total additions			335			32			367
	Reductions in nonperforming assets
		Paydowns, payoffs				(216	)		(27	)		(243	)
		Net sales				(44	)		—			(44	)
		Return to performing status				(52	)		(9	)		(61	)
		Charge-offs (c)				(152	)		(2	)		(154	)

			Total reductions			(464	)		(38	)		(502	)

				Net reductions in nonperforming assets		(129	)		(6	)		(135	)

Balance September 30, 2005					$	490		$	123		$	613


(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	9

Analysis of Nonperforming AssetsThe level of nonperforming assets represents an indicator, among other considerations, of the potential for future credit losses. Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms, other real estate and other nonperforming assets owned by the Company. Interest payments collected from assets on nonaccrual status are typically applied against the principal balance and not recorded as income. At September 30, 2005, total nonperforming assets were $613 million, compared with $748 million at December 31, 2004. The ratio of total nonperforming assets to total loans and other real estate decreased to ..45 percent at September 30, 2005, compared with ..59 percent at December 31, 2004.

The Company had restructured loans of $41 million at September 30, 2005, compared with $68 million at December 31, 2004. Commitments to lend additional funds under restructured loans were $9 million as of September 30, 2005, compared with $12 million as of December 31, 2004. Restructured loans performing under the restructured terms beyond a specific timeframe are reported as accruing. Of the Company’s total restructured loans at September 30, 2005, $1 million were reported as accruing.

Accruing loans 90 days or more past due totaled $265 million at September 30, 2005, compared with $294 million at December 31, 2004. 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 was ..19 percent at September 30, 2005, compared with ..23 percent at December 31, 2004.

To monitor credit risk associated with retail loans, the Company monitors delinquency ratios in the various stages of collection including nonperforming status. In general, delinquency ratios for retail loans continued to improve relative to December 31, 2004, reflecting the Company’s ongoing improvement in collection efforts, underwriting and risk management. The Company does not believe that the higher level of bankruptcies or required minimum balance payments will have a significant impact to delinquency ratios.


Table 6		Delinquent Loan Ratios as a Percent of Ending Loan Balances


				September 30,			December 31,
90 days or more past due excluding nonperforming loans				2005			2004

Commercial
	Commercial				.05	%		.05	%
	Lease financing				—			.02

		Total commercial			.04			.05
Commercial real estate
	Commercial mortgages				.01			—
	Construction and development				—			—

		Total commercial real estate			.01			—
Residential mortgages					.30			.46
Retail
	Credit card				1.73			1.74
	Retail leasing				.04			.08
	Other retail				.21			.29

		Total retail			.41			.47

			Total loans		.19	%		.23	%


		September 30,			December 31,
90 days or more past due including nonperforming loans		2005			2004

Commercial			.74	%		.99	%
Commercial real estate			.57			.73
Residential mortgages (a)			.53			.74
Retail			.43			.51

	Total loans		.57	%		.74	%


(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 3.56 percent at September 30, 2005, and 5.19 percent at December 31, 2004.


10	U.S. Bancorp

The following table provides summary delinquency information for residential mortgages and retail loans:


								As a Percent of Ending
				Amount				Loan Balances

				September 30,		December 31,		September 30,			December 31,
(Dollars in Millions)				2005		2004		2005			2004

Residential mortgages
		30-89 days			$108		$108		.55	%		.70	%
		90 days or more			59		70		.30			.46
		Nonperforming			44		43		.23			.28

			Total		$211		$221		1.08	%		1.44	%

Retail
	Credit card
		30-89 days			$164		$142		2.47	%		2.15	%
		90 days or more			115		115		1.73			1.74
		Nonperforming			—		—		—			—

			Total		$279		$257		4.20	%		3.89	%
	Retail leasing
		30-89 days			$ 43		$ 59		.58	%		.83	%
		90 days or more			3		6		.04			.08
		Nonperforming			—		—		—			—

			Total		$ 46		$ 65		.62	%		.91	%
	Other retail
		30-89 days			$197		$224		.63	%		.76	%
		90 days or more			67		84		.21			.29
		Nonperforming			12		17		.04			.05

			Total		$276		$325		.88	%		1.10	%

Analysis of Loan Net Charge-OffsTotal loan net charge-offs were $156 million and $472 million during the third quarter and first nine months of 2005, respectively, compared with net charge-offs of $166 million and $604 million, respectively, for the same periods of 2004. The ratio of total loan net charge-offs to average loans in the third quarter and first nine months of 2005 was .46 percent and ..48 percent, respectively, compared with .54 percent and .67 percent, respectively, for the same periods of 2004.

Commercial and commercial real estate loan net charge-offs for the third quarter of 2005 were $23 million (.13 percent of average loans outstanding), compared with $27 million (.16 percent of average loans outstanding) in the third quarter of 2004. Commercial and commercial real estate loan net charge-offs for the first nine months of 2005 were $69 million (.13 percent of average loans outstanding), compared with $168 million (.34 percent of average loans outstanding) in the first nine months of 2004. Net charge-offs for the third quarter and first nine months of 2005, reflected improving credit quality and continued high levels of commercial loan recoveries, offset somewhat by a $12 million leveraged lease charge-off on a single airline entering bankruptcy during the third quarter of 2005. 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.

Retail loan net charge-offs for the third quarter of 2005 were $124 million (1.09 percent of average loans outstanding), compared with $132 million (1.26 percent of average loans outstanding) for the third quarter of 2004. Retail loan net charge-offs for the first nine months of 2005 were $377 million (1.14 percent of average loans outstanding), compared with $415 million (1.36 percent of average loans outstanding) for the first nine months of 2004. Lower levels of retail loan net charge-offs principally reflected the Company’s ongoing improvement in collection efforts, underwriting and risk management.

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.


U.S. Bancorp	11

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:


	Three Months Ended September 30,									Nine Months Ended September 30,

	Average Loan			Percent of						Average Loan				Percent of
	Amount			Average Loans						Amount				Average Loans

(Dollars in Millions)		2005	2004	2005			2004			2005		2004		2005			2004

Consumer Finance (a)
Residential mortgages		$ 6,292	$ 4,708		.50	%		.42	%	$	5,734	$	4,432		.51	%		.42	%
Home equity and second mortgages		2,363	2,527		1.68			1.89			2,523		2,322		1.64			2.19
Other retail		400	426		4.96			4.67			390		414		4.80			4.84
Traditional Branch
Residential mortgages		$12,449	$ 9,861		.03	%		.08	%	$	11,532	$	9,647		.05	%		.10	%
Home equity and second mortgages		12,621	11,761		.13			.20			12,421		11,493		.17			.23
Other retail		15,563	14,125		.94			.99			14,935		13,946		.95			1.16
Total Company
Residential mortgages		$18,741	$14,569		.19	%		.19	%	$	17,266	$	14,079		.20	%		.20	%
Home equity and second mortgages		14,984	14,288		.37			.50			14,944		13,815		.42			.56
Other retail		15,963	14,551		1.04			1.09			15,325		14,360		1.05			1.27


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

Analysis and Determination of the Allowance for Credit Losses The allowance for loan losses provides coverage for probable and estimable losses inherent in the Company’s loan and lease portfolio. Management evaluates the allowance each quarter to determine that it is adequate to cover these inherent losses. The evaluation of each element and the overall allowance is based on a continuing assessment of problem loans, recent loss experience and other factors, including regulatory guidance and economic conditions. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments, which is included in other liabilities in the Consolidated Balance Sheet. Both the allowance for loan losses and the liability for unfunded credit commitments are included in the Company’s analysis of the allowance for credit losses.

At September 30, 2005, the allowance for credit losses was $2,258 million (1.65 percent of loans), compared with an allowance of $2,269 million (1.80 percent of loans) at December 31, 2004. The ratio of the allowance for credit losses to nonperforming loans was 438 percent at September 30, 2005, compared with 355 percent at December 31, 2004. The ratio of the allowance for credit losses to annualized loan net charge-offs was 365 percent at September 30, 2005, compared with 296 percent at December 31, 2004.


Table 7		Net Charge-offs as a Percent of Average Loans Outstanding


				Three Months Ended						Nine Months Ended
				September 30,						September 30,

				2005			2004			2005			2004

Commercial
	Commercial				.07	%		.02	%		.11	%		.36	%
	Lease financing				1.29			1.56			.95			1.62

		Total commercial			.21			.21			.21			.52
Commercial real estate
	Commercial mortgages				.04			.06			.05			.06
	Construction and development				(.10	)		.17			(.05	)		.16

		Total commercial real estate			—			.09			.02			.08
Residential mortgages					.19			.19			.20			.20
Retail
	Credit card				3.74			4.21			3.92			4.25
	Retail leasing				.27			.52			.33			.62
	Home equity and second mortgages				.37			.50			.42			.56
	Other retail				1.04			1.09			1.05			1.27

		Total retail			1.09			1.26			1.14			1.36

			Total loans		.46	%		.54	%		.48	%		.67	%


12	U.S. Bancorp


Table 8		Summary of Allowance for Credit Losses


					Three Months Ended						Nine Months Ended
					September 30,						September 30,

(Dollars in Millions)					2005			2004			2005			2004

Balance at beginning of period					$	2,269		$	2,370		$	2,269		$	2,369
Charge-offs
	Commercial
		Commercial				37			55			111			204
		Lease financing				24			30			62			90

			Total commercial			61			85			173			294
	Commercial real estate
		Commercial mortgages				5			5			15			19
		Construction and development				—			4			3			10

			Total commercial real estate			5			9			18			29
	Residential mortgages					10			8			28			24
	Retail
		Credit card				71			72			217			213
		Retail leasing				8			12			27			37
		Home equity and second mortgages				19			22			59			68
		Other retail				55			52			160			174

			Total retail			153			158			463			492

				Total charge-offs		229			260			682			839
Recoveries
	Commercial
		Commercial				30			53			81			112
		Lease financing				8			11			27			31

			Total commercial			38			64			108			143
	Commercial real estate
		Commercial mortgages				3			2			8			10
		Construction and development				2			1			6			2

			Total commercial real estate			5			3			14			12
	Residential mortgages					1			1			2			3
	Retail
		Credit card				8			7			25			22
		Retail leasing				3			3			9			7
		Home equity and second mortgages				5			4			12			10
		Other retail				13			12			40			38

			Total retail			29			26			86			77

				Total recoveries		73			94			210			235
Net Charge-offs
	Commercial
		Commercial				7			2			30			92
		Lease financing				16			19			35			59

			Total commercial			23			21			65			151
	Commercial real estate
		Commercial mortgages				2			3			7			9
		Construction and development				(2	)		3			(3	)		8

			Total commercial real estate			—			6			4			17
	Residential mortgages					9			7			26			21
	Retail
		Credit card				63			65			192			191
		Retail leasing				5			9			18			30
		Home equity and second mortgages				14			18			47			58
		Other retail				42			40			120			136

			Total retail			124			132			377			415

				Total net charge-offs		156			166			472			604

Provision for credit losses						145			166			461			605

Balance at end of period					$	2,258		$	2,370		$	2,258		$	2,370

Components
	Allowance for loan losses				$	2,055		$	2,184
	Liability for unfunded credit commitments					203			186

		Total allowance for credit losses			$	2,258		$	2,370

Allowance for credit losses as a percentage of
	Period-end loans					1.65	%		1.90	%
	Nonperforming loans					438			337
	Nonperforming assets					368			294
	Annualized net charge-offs					365			359


U.S. Bancorp	13

Several factors were taken into consideration in evaluating the allowance for credit losses at September 30, 2005, including the risk profile of the portfolios and loan net charge-offs during the period, the level of nonperforming assets, the accruing loans 90 days or more past due, and delinquency ratios compared with December 31, 2004. Management also considered the uncertainty related to certain industry sectors, including the airline industry, and the extent of credit exposure to highly leveraged enterprise-value borrowers within the portfolio. In addition, concentration risks associated with commercial real estate and the mix of loans, including credit cards, loans originated through the consumer finance division and residential mortgages balances, and their relative credit risk were evaluated compared with other banks. Finally, the Company considered current economic conditions that might impact the portfolio.

Residual Risk Management" -->

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 lease, diversification of its leased assets, regular asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of September 30, 2005, no significant change in the amount of residuals or concentration of the portfolios has occurred since December 31, 2004. Refer to “Management’s Discussion and Analysis — Residual Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, for further discussion on residual risk management.

Operational Risk Management" -->

Operational Risk ManagementThe Company manages operational risk through a risk management framework and its internal control processes. Within this framework, the Corporate Risk Committee (“Risk Committee”), comprised of key executives, 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 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. Refer to “Management’s Discussion and Analysis — Operational Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, for further discussion on operational risk management.

The Company currently processes card transactions for various airlines in the United States and Europe. In the event of liquidation of these airlines, the Company could become financially liable for refunding tickets purchased through the credit card associations under the charge-back provisions. Charge-back risk related to an airline is evaluated in a manner similar to credit risk assessments and, as such, merchant processing contracts consider the potential risk of default. Under certain situations, the Company may obtain various forms of collateral to minimize the risk of charge-backs. At September 30, 2005, the value of airline tickets purchased to be delivered at a future date was $2.2 billion, and the Company held collateral of $1.6 billion in escrow deposits, letters of credit and liens on various assets.

Interest Rate Risk Management" -->

Interest Rate Risk ManagementIn the banking industry, changes in interest rates is a significant risk that can impact earnings, market valuations and safety and soundness of the 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. Through these simulations, management estimates the impact on interest rate sensitive income of a 300 basis point upward or downward gradual change of market interest rates over a one-year period. The simulations also estimate the effect of immediate and sustained parallel shifts in the yield curve of 50 basis points as well as the effect of immediate and sustained flattening or steepening of the yield curve. 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.

Refer to “Management’s Discussion and Analysis — Net Interest Income Simulation Analysis” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, for further discussion on net interest income simulation analysis.


14	U.S. Bancorp

Sensitivity of Net Interest Income and Rate Sensitive Income:


	September 30, 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		.62	%		(.43	)%		(.16	)%		(2.52	)%		(.49)	%		.04	%		*%		(.19	)%
Rate sensitive income		.69	%		(.59	)%		(.07	)%		(2.98	)%		(.40)	%		(.13	)%		*%		(.69	)%


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

The table above summarizes the interest rate risk of net interest income and rate sensitive income based on forecasts over the succeeding 12 months. At September 30, 2005, the Company’s overall interest rate risk position was liability sensitive to changes in interest rates. The Company manages the overall interest rate risk profile within policy limits. At September 30, 2005, and December 31, 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 September 30, 2005. The up 200 basis point scenario resulted in a 6.4 percent decrease in the market value of equity at September 30, 2005, compared with a 2.7 percent decrease at December 31, 2004. The down 200 basis point scenario resulted in a 3.4 percent decrease in the market value of equity at September 30, 2005, compared with a 4.2 percent decrease at December 31, 2004. At September 30, 2005, and December 31, 2004, the Company was within its 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 1.59 years at September 30, 2005, compared with 1.63 years at December 31, 2004. The duration of liabilities was 1.53 years at September 30, 2005, compared with 1.89 years at December 31, 2004. At September 30, 2005, the duration of equity was 1.91 years, compared with .12 years at December 31, 2004. The increased duration of equity measure shows that sensitivity of the market value of equity of the Company was liability sensitive to changes in interest rates. Refer to “Management’s Discussion and Analysis — Market Value of Equity Modeling” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, for further discussion on market value of equity modeling.

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”). Refer to “Management’s Discussion and Analysis — Use of Derivatives to Manage Interest Rate Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, for further discussion on the use of derivatives to manage interest rate risk.

By their nature, derivative instruments are subject to market risk. The Company does not utilize derivative instruments for speculative purposes. Of the Company’s $35.1 billion of total notional amount of asset and liability management derivative positions at September 30, 2005, $31.1 billion was designated as either fair value or cash flow hedges. The cash flow hedge 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 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. Related to its mortgage banking operations, the Company held $1.8 billion of forward commitments to sell mortgage loans and $1.8 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 9.

At September 30, 2005, the Company had $12 million in accumulated other comprehensive income related to unrealized gains on derivatives classified as cash flow hedges. The unrealized gains 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 remainder of 2005 and the next 12 months is $12 million and $54 million, respectively.


U.S. Bancorp	15


Table 9		Derivative Positions


				September 30, 2005							December 31, 2004

									Weighted-							Weighted-
									Average							Average
									Remaining							Remaining
				Notional		Fair			Maturity		Notional		Fair			Maturity
(Dollars in Millions)				Amount		Value			In Years		Amount		Value			In Years


Asset and Liability Management Positions

	Interest rate contracts
		Receive fixed/pay floating swaps		$	16,945	$	40			6.42	$	20,070	$	379			5.25
		Pay fixed/receive floating swaps			12,325		131			1.17		10,775		56			1.42
		Cross-currency swaps			387		11			9.87		—		—			—
		Futures and forwards			3,255		17			.08		2,262		(4	)		.12
		Options
			Written		1,787		(9	)		.09		1,059		1			.15
	Foreign exchange forward contracts				250		6			.05		314		(12	)		.04
	Other forward sale agreements				75		—			.49		—		—			—
	Equity contracts				45		(2	)		3.54		53		4			4.29

Customer-related Positions

	Interest rate contracts
		Receive fixed/pay floating swaps		$	9,124	$	(38	)		4.92	$	6,708	$	76			4.67
		Pay fixed/receive floating swaps			9,080		84			5.00		6,682		(40	)		4.67
		Options
			Purchased		1,282		7			2.34		1,099		7			3.00
			Written		1,282		(7	)		2.34		1,099		(7	)		3.00
	Risk participation agreements (a)
		Purchased			108		—			8.04		137		—			7.13
		Written			168		—			4.21		84		—			2.93
	Foreign exchange rate contracts
		Forwards, spots and swaps
			Buy		2,488		96			.39		2,047		80			.31
			Sell		2,437		(91	)		.40		2,015		(76	)		.33
		Options
			Purchased		75		1			.37		77		1			.59
			Written		75		(1	)		.37		77		(1	)		.59


(a)		At September 30, 2005, the credit equivalent amount was $1 million and $18 million, compared with $1 million and $7 million at December 31, 2004, for purchased and written risk participation agreements, respectively.

Gains or losses on customer-related derivative positions were not material for the third quarter and first nine months of 2005. The change in fair value of forward commitments attributed to hedge ineffectiveness recorded in noninterest income was a decrease of $4 million and $5 million for the third quarter and first nine months of 2005, respectively. The change in the fair value of all other asset and liability management derivative positions attributed to hedge ineffectiveness recorded in noninterest income was a decrease of $2 million and an increase of $1 million for the third quarter and first nine months of 2005, respectively.

The Company enters into derivatives to protect its net investment in certain foreign operations. The Company uses forward commitments to sell specified amounts of certain foreign currencies to hedge its capital volatility risk associated with fluctuations in foreign currency exchange rates. The net amount of gains or losses included in the cumulative translation adjustment for the third quarter and first nine months of 2005 was not material.

Market Risk Management" -->

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


16	U.S. Bancorp

inherent in its customer-based derivative trading, mortgage banking pipeline and foreign exchange, as estimated by the VaR analysis, was not material at September 30, 2005, or December 31, 2004. Refer to “Management’s Discussion and Analysis — Market Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, for further discussion on market risk management.

Liquidity Risk Management" -->

Liquidity Risk Management ALPC establishes policies, as well as analyzes and manages liquidity, to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-effective manner. 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. Refer to “Management’s Discussion and Analysis — Liquidity Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, for further discussion on liquidity risk management.

At September 30, 2005, parent company long-term debt outstanding was $8.7 billion, compared with $6.9 billion at December 31, 2004. The $1.8 billion increase was primarily due to issuances of medium-term notes of $3.0 billion and junior subordinated debentures of $.6 billion, offset by long-term debt maturities and repayments during the first nine months of 2005. Total parent company debt scheduled to mature in the remainder of 2005 is $.2 billion. These debt obligations may be met through medium-term note 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 $1.1 billion at September 30, 2005.

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

In the ordinary course of business, the Company enters into an array of commitments to extend credit, letters of credit and various forms of guarantees that may be considered off-balance sheet arrangements. The extent of these arrangements is provided in Note 8 of the Notes to Consolidated Financial Statements.

Asset securitization and conduits represent a source of funding for the Company through off-balance sheet structures. The Company sponsors an off-balance sheet conduit to which it transferred high-grade investment securities, funded by the issuance of commercial paper. The conduit held assets and related commercial paper liabilities of $4.3 billion at September 30, 2005, and $5.7 billion at December 31, 2004. The Company provides a liquidity facility to the conduit. 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 and was $23 million at September 30, 2005, and $32 million at December 31, 2004. In addition, the Company recorded at fair value its retained residual interest in the investment securities conduit of $31 million at September 30, 2005, and $57 million at December 31, 2004.

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 $303 million at September 30, 2005, of which the Company retained $82 million of subordinated securities and a residual interest-only strip of $14 million. This compared with $375 million in assets at December 31, 2004, of which the Company retained $85 million of subordinated securities and a residual interest-only strip of $36 million. From this securitization, the Company recognized income from subordinated securities, an interest-only strip and servicing fees, net of impairment of $12 million and $19 million during the third quarter and first nine months of 2005, respectively, compared with $9 million and $24 million, respectively, during the same periods of 2004. The unsecured small business credit securitization held average assets of $316 million and $423 million in the third quarter of 2005 and 2004, respectively.

The Company does not rely significantly on off-balance sheet arrangements for liquidity or capital resources. Refer to “Management’s Discussion and Analysis — Off-Balance Sheet Arrangements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, for further discussion on off-balance sheet arrangements.


U.S. Bancorp	17


Table 10		Capital Ratios


		September 30,			December 31,
(Dollars in Millions)		2005			2004

Tangible common equity		$	12,275		$	11,950
	As a percent of tangible assets		6.2	%		6.4	%
Tier 1 capital		$	15,180		$	14,720
	As a percent of risk-weighted assets		8.4	%		8.6	%
	As a percent of adjusted quarterly average assets (leverage ratio)		7.7	%		7.9	%
Total risk-based capital		$	23,283		$	22,352
	As a percent of risk-weighted assets		12.8	%		13.1	%

Capital Management" -->

Capital Management The Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. The Company has targeted returning 80 percent of earnings to our shareholders through a combination of dividends and share repurchases. In keeping with this target, the Company returned 87 percent and 95 percent of earnings in the third quarter and first nine months of 2005, respectively. 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 $19.9 billion at September 30, 2005, compared with $19.5 billion at December 31, 2004. The increase was the result of corporate earnings offset by share repurchases and dividends.

Tangible common equity to assets was 6.2 percent at September 30, 2005, compared with 6.4 percent at December 31, 2004. The Tier 1 capital ratio was 8.4 percent at September 30, 2005, compared with 8.6 percent at December 31, 2004. The total risk-based capital ratio was 12.8 percent at September 30, 2005, compared with 13.1 percent at December 31, 2004. The leverage ratio was 7.7 percent at September 30, 2005, compared with 7.9 percent at December 31, 2004. Tier 1 capital at September 30, 2005 was affected by the issuance of $575 million of trust preferred securities, $300 million of which occurred in the third quarter of 2005, and the prepayment of $443 million of trust preferred securities in the second quarter of 2005. All regulatory ratios continue to be in excess of stated “well-capitalized” requirements.

On December 21, 2004, the Board of Directors approved an authorization to repurchase 150 million shares of common stock during the next 24 months.

The following table provides a detailed analysis of all shares repurchased under this authorization during the third quarter of 2005:


	Number		Average		Remaining Shares
	of Shares		Price Paid		Available to be
Time Period	Purchased (a)		Per Share		Purchased

July		4,072,024	$	29.84		103,388,903
August		7,888,479		29.86		95,500,424
September		3,384,882		29.48		92,115,542

Total		15,345,385	$	29.77		92,115,542


(a)		All shares purchased during the third quarter of 2005 were purchased under the publicly announced December 21, 2004, repurchase authorization.

LINE OF BUSINESS FINANCIAL REVIEW" -->

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 Presentation Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. Refer to “Management’s Discussion and Analysis — Line of Business Financial Review Basis for Financial Presentation” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, for further discussion on the business lines’ basis for financial presentation.


18	U.S. Bancorp

Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to our diverse customer base. During 2005, certain organization and methodology changes were made and, accordingly, 2004 results were restated and presented on a comparable basis.

Wholesale Banking offers lending, depository, treasury management and other financial services to middle market, large corporate and public sector clients. Wholesale Banking contributed $259 million of the Company’s net income in the third quarter and $781 million in the first nine months of 2005, or increases of $10 million and $65 million, respectively, compared with the same periods of 2004. The increases were primarily driven by higher total net revenue.

Total net revenue increased $19 million (3.2 percent) in the third quarter and $56 million (3.2 percent) in the first nine months of 2005, compared with the same periods of 2004. Net interest income, on a taxable-equivalent basis, increased $23 million (5.9 percent) in the third quarter and $48 million (4.1 percent) in the first nine months of 2005, compared with the same periods of 2004. The increases in net interest income were driven by growth in average loan balances and wider spreads on total deposits due to the funding benefit associated with the impact of rising interest rates, partially offset by reduced loan spreads due to competitive pricing. The increase in average loans was driven by stronger commercial loan demand in late 2004 and the first nine months of 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 for the first nine months of 2005 were also lower than the same period of 2004. Noninterest income in the third quarter of 2005 declined $4 million compared to the third quarter of 2004, as declines in treasury management-related fees were partially offset by higher revenue from equity investments. The $8 million increase in noninterest income in the first nine months of 2005, compared with the same period of 2004, was due to higher revenue from equity investments, partially offset by reductions in treasury management-related fees, equipment leasing and other commercial loan fees. Treasury management-related fees were lower due to higher earnings credits on customers’ compensating balances, partially offset by growth in treasury management-related services activity. Equipment leasing revenue declined primarily due to lower operating lease rents resulting from lower operating lease balances.

Noninterest expense decreased $4 million (1.9 percent) in the third quarter of 2005, compared with the same period of 2004, due to lower net shared services and other noninterest expense, offset by higher personnel expenses. Noninterest expense increased $3 million (.5 percent) in the first nine months of 2005 compared to the same period in 2004, due to higher personnel expenses and net shared services expenses.

The provision for credit losses increased $8 million in the third quarter and decreased $47 million in the first nine months of 2005, compared with the same periods of 2004. The increase in provision for credit losses in the third quarter of 2005, compared with the third quarter of 2004, was due to a reduction in net recoveries. Net recoveries in the third quarter of 2005 were .04 percent of average loans outstanding, compared with .11 percent of average loans outstanding in the third quarter of 2004. Net recoveries in the third quarter of 2005 included a $12 million leveraged lease charge-off of a single airline entering bankruptcy during the quarter. The favorable change in provision for credit losses during first nine months of 2005 was due to improving net charge-offs resulting in net recoveries of $17 million in the first nine months of 2005 compared to net charge-offs of $30 million in the same period in 2004. Nonperforming assets within Wholesale Banking were $282 million at September 30, 2005, $274 million at June 30, 2005, and $430 million at September 30, 2004. Nonperforming assets as a percentage of end-of-period loans were ..63 percent at September 30, 2005, .62 percent at June 30, 2005, and 1.01 percent at September 30, 2004. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.

Consumer Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail and ATMs. It encompasses community banking, metropolitan banking, in-store banking, small business banking, including lending guaranteed by the Small Business Administration, small-ticket leasing, consumer lending, mortgage banking, consumer finance, workplace banking, student banking, 24-hour banking and investment product and insurance sales. Consumer Banking contributed $473 million of the Company’s net income in the third quarter and $1,333 million in the first nine months of 2005, or increases of $89 million and $248 million, respectively, compared with the same periods of 2004. While the retail banking business grew net income 22.7 percent in the third quarter and 25.5 percent in the first nine months of 2005, the contribution of the mortgage banking business increased 29.6 percent and declined 4.1 percent, respectively, compared with the same periods of 2004.


U.S. Bancorp	19


Table 11		Line of Business Financial Performance


		Wholesale									Consumer
		Banking									Banking

								Percent							Percent
Three Months Ended September 30 (Dollars in Millions)		2005			2004			Change			2005		2004		Change

Condensed Income Statement
Net interest income (taxable-equivalent basis)		$	415		$	392			5.9	%	$	1,020	$	929		9.8	%
Noninterest income			191			194			(1.5	)		545		489		11.5
Securities gains (losses), net			—			1			*			—		—		—

	Total net revenue		606			587			3.2			1,565		1,418		10.4
Noninterest expense			199			203			(2.0	)		686		665		3.2
Other intangibles			4			4			—			63		62		1.6

	Total noninterest expense		203			207			(1.9	)		749		727		3.0

Income before provision and income taxes			403			380			6.1			816		691		18.1
Provision for credit losses			(4	)		(12	)		66.7			72		88		(18.2	)

Income before income taxes			407			392			3.8			744		603		23.4
Income taxes and taxable-equivalent adjustment			148			143			3.5			271		219		23.7

Net income		$	259		$	249			4.0		$	473	$	384		23.2


Average Balance Sheet Data
Commercial		$	29,049		$	26,226			10.8	%	$	8,834	$	8,190		7.9	%
Commercial real estate			15,848			15,412			2.8			11,640		11,036		5.5
Residential mortgages			68			73			(6.8	)		18,263		14,141		29.1
Retail			30			51			(41.2	)		34,699		31,842		9.0

	Total loans		44,995			41,762			7.7			73,436		65,209		12.6
Goodwill			1,225			1,225			—			2,243		2,243		—
Other intangible assets			68			85			(20.0	)		1,194		1,143		4.5
Assets			50,683			47,986			5.6			82,399		73,040		12.8
Noninterest-bearing deposits			12,182			12,340			(1.3	)		13,418		14,470		(7.3	)
Interest checking			2,838			3,086			(8.0	)		17,326		15,037		15.2
Savings products			5,166			5,114			1.0			23,849		26,935		(11.5	)
Time deposits			13,826			8,258			67.4			17,548		15,946		10.0

	Total deposits		34,012			28,798			18.1			72,141		72,388		(.3	)
Shareholders’ equity			5,101			4,959			2.9			6,615		6,201		6.7


		Wholesale								Consumer
		Banking								Banking

							Percent							Percent
Nine Months Ended September 30 (Dollars in Millions)		2005			2004		Change			2005		2004		Change

Condensed Income Statement
Net interest income (taxable-equivalent basis)		$	1,220		$	1,172		4.1	%	$	2,978	$	2,707		10.0	%
Noninterest income			608			594		2.4			1,533		1,420		8.0
Securities gains (losses), net			(4	)		2		*			—		—		—

	Total net revenue		1,824			1,768		3.2			4,511		4,127		9.3
Noninterest expense			602			597		.8			2,005		1,946		3.0
Other intangibles			12			14		(14.3	)		190		186		2.2

	Total noninterest expense		614			611		.5			2,195		2,132		3.0

Income before provision and income taxes			1,210			1,157		4.6			2,316		1,995		16.1
Provision for credit losses			(17	)		30		*			220		289		(23.9	)

Income before income taxes			1,227			1,127		8.9			2,096		1,706		22.9
Income taxes and taxable-equivalent adjustment			446			411		8.5			763		621		22.9

Net income		$	781		$	716		9.1		$	1,333	$	1,085		22.9


Average Balance Sheet Data
Commercial		$	28,534		$	26,067		9.5	%	$	8,546	$	8,182		4.4	%
Commercial real estate			15,570			15,483		.6			11,474		10,896		5.3
Residential mortgages			62			67		(7.5	)		16,808		13,693		22.7
Retail			34			50		(32.0	)		33,849		30,912		9.5

	Total loans		44,200			41,667		6.1			70,677		63,683		11.0
Goodwill			1,225			1,225		—			2,243		2,243		—
Other intangible assets			72			90		(20.0	)		1,160		1,063		9.1
Assets			50,142			48,068		4.3			79,072		71,574		10.5
Noninterest-bearing deposits			12,134			12,588		(3.6	)		13,155		14,216		(7.5	)
Interest checking			3,204			3,432		(6.6	)		17,229		14,780		16.6
Savings products			5,278			6,453		(18.2	)		24,642		27,431		(10.2	)
Time deposits			12,381			6,625		86.9			17,031		16,131		5.6

	Total deposits		32,997			29,098		13.4			72,057		72,558		(.7	)
Shareholders’ equity			5,078			5,000		1.6			6,495		6,227		4.3


*		Not meaningful


20	U.S. Bancorp


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


$	116	$	93		24.7	%	$	148	$	135		9.6	%	$	92		$	233			(60.5	)%	$	1,791	$	1,782		.5	%
	260		243		7.0			579		498		16.3			—			12			*			1,575		1,436		9.7
	—		—		—			—		—		—			1			87			(98.9	)		1		88		(98.9	)

	376		336		11.9			727		633		14.8			93			332			(72.0	)		3,367		3,306		1.8
	168		169		(.6	)		269		243		10.7			26			28			(7.1	)		1,348		1,308		3.1
	15		16		(6.3	)		45		40		12.5			(2	)		88			*			125		210		(40.5	)

	183		185		(1.1	)		314		283		11.0			24			116			(79.3	)		1,473		1,518		(3.0	)

	193		151		27.8			413		350		18.0			69			216			(68.1	)		1,894		1,788		5.9
	—		—		—			88		90		(2.2	)		(11	)		—			*			145		166		(12.7	)

	193		151		27.8			325		260		25.0			80			216			(63.0	)		1,749		1,622		7.8
	70		55		27.3			118		95		24.2			(12	)		44			*			595		556		7.0

$	123	$	96		28.1		$	207	$	165		25.5		$	92		$	172			(46.5	)	$	1,154	$	1,066		8.3


$	1,596	$	1,597		(.1	)%	$	3,606	$	3,093		16.6	%	$	166		$	211			(21.3	)%	$	43,251	$	39,317		10.0	%
	618		617		.2			—		—		—			87			129			(32.6	)		28,193		27,194		3.7
	405		346		17.1			—		—		—			5			9			(44.4	)		18,741		14,569		28.6
	2,327		2,285		1.8			7,993		7,590		5.3			49			58			(15.5	)		45,098		41,826		7.8

	4,946		4,845		2.1			11,599		10,683		8.6			307			407			(24.6	)		135,283		122,906		10.1
	843		845		(.2	)		2,061		1,915		7.6			—			—			—			6,372		6,228		2.3
	301		362		(16.9	)		1,002		855		17.2			2			7			(71.4	)		2,567		2,452		4.7
	6,683		6,603		1.2			15,531		14,088		10.2			50,371			49,868			1.0			205,667		191,585		7.4
	3,654		3,141		16.3			163		106		53.8			17			(266	)		*			29,434		29,791		(1.2	)
	2,343		2,276		2.9			—		—		—			1			14			(92.9	)		22,508		20,413		10.3
	5,466		5,632		(2.9	)		17		12		41.7			19			15			26.7			34,517		37,708		(8.5	)
	1,676		568		*			7		—		*			1,468			2,632			(44.2	)		34,525		27,404		26.0

	13,139		11,617		13.1			187		118		58.5			1,505			2,395			(37.2	)		120,984		115,316		4.9
	2,111		2,125		(.7	)		3,666		3,320		10.4			2,613			2,782			(6.1	)		20,106		19,387		3.7


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


$	331	$	262		26.3	%	$	419	$	420		(.2	)%	$	355		$	779			(54.4	)%	$	5,303		$	5,340			(.7	)%
	772		753		2.5			1,612		1,379		16.9			31			22			40.9			4,556			4,168			9.3
	—		—		—			—		—		—			(53	)		(86	)		38.4			(57	)		(84	)		32.1

	1,103		1,015		8.7			2,031		1,799		12.9			333			715			(53.4	)		9,802			9,424			4.0
	503		500		.6			762		661		15.3			150			113			32.7			4,022			3,817			5.4
	45		46		(2.2	)		129		114		13.2			1			29			(96.6	)		377			389			(3.1	)

	548		546		.4			891		775		15.0			151			142			6.3			4,399			4,206			4.6

	555		469		18.3			1,140		1,024		11.3			182			573			(68.2	)		5,403			5,218			3.5
	2		10		(80.0	)		269		278		(3.2	)		(13	)		(2	)		*			461			605			(23.8	)

	553		459		20.5			871		746		16.8			195			575			(66.1	)		4,942			4,613			7.1
	201		167		20.4			317		271		17.0			(131	)		32			*			1,596			1,502			6.3

$	352	$	292		20.5		$	554	$	475		16.6		$	326		$	543			(40.0	)	$	3,346		$	3,111			7.6


$	1,593	$	1,643		(3.0	)%	$	3,429	$	2,993		14.6	%	$	161		$	175			(8.0	)%	$	42,263		$	39,060			8.2	%
	627		614		2.1			—		—		—			91			147			(38.1	)		27,762			27,140			2.3
	389		308		26.3			—		—		—			7			11			(36.4	)		17,266			14,079			22.6
	2,314		2,202		5.1			7,895		7,473		5.6			49			50			(2.0	)		44,141			40,687			8.5

	4,923		4,767		3.3			11,324		10,466		8.2			308			383			(19.6	)		131,432			120,966			8.7
	843		809		4.2			2,011		1,851		8.6			—			—			—			6,322			6,128			3.2
	316		354		(10.7	)		960		755		27.2			6			8			(25.0	)		2,514			2,270			10.7
	6,681		6,513		2.6			15,085		13,530		11.5			50,525			50,878			(.7	)		201,505			190,563			5.7
	3,524		3,136		12.4			146		104		40.4			44			(237	)		*			29,003			29,807			(2.7	)
	2,452		2,482		(1.2	)		—		—		—			6			5			20.0			22,891			20,699			10.6
	5,441		5,478		(.7	)		15		11		36.4			17			15			13.3			35,393			39,388			(10.1	)
	1,253		536		*			3		—		*			2,597			2,961			(12.3	)		33,265			26,253			26.7

	12,670		11,632		8.9			164		115		42.6			2,664			2,744			(2.9	)		120,552			116,147			3.8
	2,119		2,085		1.6			3,564		3,152		13.1			2,655			2,874			(7.6	)		19,911			19,338			3.0


U.S. Bancorp	21

Total net revenue increased $147 million (10.4 percent) in the third quarter and $384 million (9.3 percent) in the first nine months of 2005, compared with the same periods of 2004. Net interest income, on a taxable-equivalent basis, increased $91 million in the third quarter and $271 million in the first nine months of 2005, compared with the same periods of 2004. The year-over-year increases in net interest income were due to strong growth in average loans and the funding benefit of total deposits due to rising interest rates. Partially offsetting these increases were reduced spreads on commercial and retail loans due to competitive pricing and a reduction in noninterest-bearing deposits. The increase in average loan balances reflected growth in retail loans and residential mortgages. Included within the retail loan category are second-lien home equity loans, installment loans and retail leases which had a growth rate of 5.1 percent, 12.1 percent and 9.1 percent, respectively, in the third quarter and 8.3 percent, 8.3 percent and 12.6 percent, respectively, in the first nine months of 2005, compared with the same periods of 2004. Residential mortgages, which includes traditional residential mortgages, grew 29.1 percent in the third quarter and 22.7 percent in the first nine months of 2005, compared with the same periods of 2004, reflecting the Company’s decision to retain adjustable-rate residential mortgages. The year-over-year decreases in average deposits were due to a reduction in noninterest-bearing deposits and savings products, offset by growth in interest checking and time deposits. The decline in noninterest-bearing deposits in the third quarter and first nine months of 2005, compared with the same periods of 2004, was due to the Company’s decision to migrate $1.3 billion of certain high-value customer accounts to interest checking as an enhancement to its Silver Elite Checking product. The year-over-year increases in interest checking balances reflect 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 the third quarter of 2005, compared with the third quarter of 2004, driven by 5.9 percent growth in net new checking accounts. Offsetting this growth was a reduction in average savings balances of $3.1 billion (11.5 percent) from third quarter of 2004, principally related to money market accounts. Average time deposit balances grew $1.6 billion (10.0 percent) in the third quarter of 2005, compared with the third quarter of 2004, as a portion of money market balances migrated to time deposit products.

Fee-based noninterest income increased $56 million in the third quarter and $113 million in the first nine months of 2005, compared with the same periods of 2004. The year-over-year growth in fee-based revenue was driven by strong deposit service charges and mortgage banking revenue, partially offset by lower treasury management-related fees.

Noninterest expense increased $22 million (3.0 percent) in the third quarter and $63 million (3.0 percent) in the first nine months of 2005, compared with the same periods of 2004. The increases were primarily attributable to compensation expense and net shared services, reflecting the impact of the net addition of 38 in-store and 12 traditional branches at September 30, 2005, compared with September 30, 2004. These increases were partially offset by reductions in occupancy and equipment expense.

The provision for credit losses decreased $16 million and $69 million in the third quarter and first nine months of 2005, respectively, compared with the same periods of 2004. The improvement was primarily attributable to lower net charge-offs. As a percentage of average loans outstanding, net charge-offs declined to .39 percent in the third quarter of 2005, compared with .54 percent in the third quarter of 2004. The decline in net charge-offs included the commercial and retail loan portfolios. The $10 million improvement in commercial loan net charge-offs in the third quarter of 2005, compared with the third quarter of 2004, was broad-based across most industry and geographical regions. Retail loan net charge-offs declined by $7 million in the third quarter of 2005, compared to the third quarter of 2004, primarily resulting from ongoing collection efforts and risk management activities. Nonperforming assets within Consumer Banking were $324 million at September 30, 2005, $328 million at June 30, 2005, and $368 million at September 30, 2004. Nonperforming assets as a percentage of end-of-period loans were ..46 percent at September 30, 2005, .48 percent at June 30, 2005, and .59 percent at September 30, 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. Private Client, Trust and Asset Management contributed $123 million of the Company’s net income in the third quarter and $352 million in the first nine months of 2005, or increases of $27 million and $60 million, respectively,


22	U.S. Bancorp

compared with the same periods of 2004. The growth was primarily attributable to higher total net revenue.

Total net revenue increased $40 million (11.9 percent) in the third quarter and $88 million (8.7 percent) in the first nine months of 2005, compared with the same periods of 2004. Net interest income, on a taxable-equivalent basis, increased $23 million in the third quarter and $69 million in the first nine months of 2005, compared with the same periods of 2004. The increases in net interest income were due to growth in total average deposits and the favorable impact of rising interest rates on the funding benefit of customer deposits, partially offset by a decline in loan spreads. The increases in total deposits were attributable to growth in noninterest-bearing deposits and time deposits across most areas, principally Corporate Trust. Noninterest income increased $17 million in the third quarter and $19 million in the first nine months of 2005, compared with the same periods of 2004, driven by favorable equity market valuations and core account growth, partially offset by customers’ migration from paying for services with fees to paying with compensating balances.

Noninterest expense decreased $2 million (1.1 percent) in the third quarter and increased $2 million (.4 percent) in the first nine months of 2005, compared with the same periods of 2004. The increase in noninterest expense in the first nine months of 2005 was primarily attributable to an increase in personnel-related costs and legal expenses, partially offset by decreases in occupancy and net shared services expenses.

The provision for credit losses was flat in the third quarter and decreased $8 million in the first nine months of 2005, compared with the same periods of 2004. The decrease in the provision for credit losses in the first nine months of 2005 was due to a reduction in net charge-offs. Net charge-offs as a percentage of average loans outstanding were .05 percent in the first nine months of 2005, compared with .28 percent in the first nine months of 2004.

Payment Services includes consumer and business credit cards, debit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. Payment Services contributed $207 million of the Company’s net income in the third quarter and $554 million in the first nine months of 2005, or increases of $42 million and $79 million, respectively, compared with the same periods of 2004. The increases were due to growth in total net revenue driven by higher transaction volumes and lower provision for loan losses, partially offset by an increase in total noninterest expense.

Total net revenue increased $94 million (14.8 percent) in the third quarter and $232 million (12.9 percent) in the first nine months of 2005, compared with the same periods of 2004. Net interest income increased $13 million in the third quarter and decreased slightly in the first nine months of 2005, compared with the same periods of 2004. The increase in the third quarter of 2005, compared with the same period of 2004, was primarily due to increases in retail credit card balances and customer late fees, partially offset by corporate card rebates and higher corporate card noninterest-bearing balances. Noninterest income increased $81 million in the third quarter and $233 million in the first nine months of 2005, compared with the same periods of 2004. The increases in fee-based revenue were driven by strong growth in credit card and debit card revenue, corporate payment products revenue, ATM processing services revenue and merchant processing revenue. Credit and debit card revenue increased primarily due to higher sales volume. Corporate payment products revenue increased primarily due to increases in sales volume. ATM processing services revenue increased primarily due to the expansion of the business. Merchant processing revenue increased due to increases in sales volume, new business and higher equipment fees.

Noninterest expense increased $31 million (11.0 percent) in the third quarter and $116 million (15.0 percent) in the first nine months of 2005, compared with the same periods of 2004. The increases in noninterest expense were primarily attributable to higher compensation and employee benefit costs for processing associated with increased credit and debit card transaction volumes, higher corporate payment products and merchant processing sales volumes, higher ATM processing services volumes due to the expansion of the ATM business and higher merchant acquiring costs resulting from the expansion of the merchant acquiring business in Europe.

The provision for credit losses decreased $2 million in the third quarter and $9 million in the first nine months of 2005, compared with the same periods of 2004, due to lower net charge-offs. As a percentage of average loans outstanding, net charge-offs were 3.01 percent in the third quarter of 2005, compared with 3.35 percent in the third quarter of 2004. The favorable change in credit losses was due to improvements in ongoing collection efforts, underwriting and risk management activities, as well as improvements in economic conditions from a year ago.


U.S. Bancorp	23

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 corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $92 million in the third quarter and $326 million in the first nine months of 2005, or decreases of $80 million and $217 million, respectively, compared with the same periods of 2004.

Total net revenue decreased $239 million (72.0 percent) in the third quarter and $382 million (53.4 percent) in the first nine months of 2005, compared with the same periods of 2004. The year-over-year decrease in total net revenue was primarily due to unfavorable variances in net interest income and securities gains (losses) in the third quarter 2005 and lower net interest income in the first nine months of 2005, compared with the same periods of 2004. The decreases in net interest income were primarily due to the impact of higher borrowing costs in the current interest rate environment. The change also reflects the residual effect of transfer pricing caused by changes in the mix of the balance sheet and the yield curve from a year ago.

Noninterest expense decreased $92 million in the third quarter and increased $9 million in the first nine months of 2005, compared with the same periods of 2004. The decrease in noninterest expense in the third quarter of 2005 was principally driven by MSR valuations and debt prepayment expense. The third quarter of 2005 reflected an MSR reparation of $3 million, compared with MSR impairment of $87 million in the third quarter of 2004, a net decrease of $90 million year-over-year. The increase in noninterest expense in the first nine months of 2005, reflected higher compensation, employee benefits and debt prepayment expense, partially offset by a favorable change in MSR valuations. Noninterest expense in the first nine months of 2005 included an MSR reparation of $4 million, compared with MSR impairment of $25 million in the first nine months of 2004. The change in MSR valuations was driven by interest rates and prepayment speeds which were flat in the first nine months of 2005, compared with the declining interest rates and rising prepayment speeds in the same period of 2004.

The provision for credit losses for this business unit represents the residual aggregate of the net credit losses allocated to the reportable business units and the Company’s recorded provision determined in accordance with accounting principles generally accepted in the United States. The provision for credit losses was a net recovery of $11 million in the third quarter and $13 million in first nine months of 2005, compared with no expense and a net recovery of $2 million in the same periods of 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 tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.

ACCOUNTING CHANGES" -->

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.

CRITICAL ACCOUNTING POLICIES" -->

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. Those policies considered to be critical accounting policies relate to the allowance for credit losses, MSRs, goodwill and other intangibles and income taxes. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee. These accounting policies are discussed in detail in


24	U.S. Bancorp

“Management’s Discussion and Analysis — Critical Accounting Policies” and the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

CONTROLS AND PROCEDURES" -->

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.

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.


U.S. Bancorp	25

U.S. Bancorp" -->

U.S. Bancorp

Consolidated Balance Sheet" -->

Consolidated Balance Sheet


				September 30,			December 31,
(Dollars in Millions)				2005			2004

				(Unaudited)
Assets
Cash and due from banks				$	6,918		$	6,336
Investment securities
	Held-to-maturity (fair value $118 and $132, respectively)				114			127
	Available-for-sale				41,402			41,354
Loans held for sale					1,695			1,439
Loans
	Commercial				43,237			40,173
	Commercial real estate				28,521			27,585
	Residential mortgages				19,469			15,367
	Retail				45,400			43,190

		Total loans			136,627			126,315
			Less allowance for loan losses		(2,055	)		(2,080	)

			Net loans		134,572			124,235
Premises and equipment					1,850			1,890
Customers’ liability on acceptances					85			95
Goodwill					6,372			6,241
Other intangible assets					2,586			2,387
Other assets					11,301			11,000

		Total assets		$	206,895		$	195,104

Liabilities and Shareholders’ Equity
Deposits
	Noninterest-bearing			$	30,871		$	30,756
	Interest-bearing				69,478			71,936
	Time deposits greater than $100,000				20,446			18,049

		Total deposits			120,795			120,741
Short-term borrowings					23,061			13,084
Long-term debt					36,257			34,739
Acceptances outstanding					85			95
Other liabilities					6,833			6,906

		Total liabilities			187,031			175,565
Shareholders’ equity
	Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares issued: 9/30/05 and 12/31/04 — 1,972,643,007 shares				20			20
	Capital surplus				5,913			5,902
	Retained earnings				18,457			16,758
	Less cost of common stock in treasury: 9/30/05 — 154,894,949 shares; 12/31/04 — 115,020,064 shares				(4,318	)		(3,125	)
	Other comprehensive income				(208	)		(16	)

		Total shareholders’ equity			19,864			19,539

		Total liabilities and shareholders’ equity		$	206,895		$	195,104

See Notes to Consolidated Financial Statements.


26	U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Income" -->

Consolidated Statement of Income


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
(Dollars and Shares in Millions, Except Per Share Data)
(Unaudited)		2005		2004		2005			2004

Interest Income
Loans		$	2,167	$	1,803	$	6,105		$	5,290
Loans held for sale			30		21		75			68
Investment securities			492		453		1,454			1,366
Other interest income			29		26		84			73

	Total interest income		2,718		2,303		7,718			6,797
Interest Expense
Deposits			414		222		1,083			654
Short-term borrowings			205		74		460			183
Long-term debt			317		232		895			641

	Total interest expense		936		528		2,438			1,478

Net interest income			1,782		1,775		5,280			5,319
Provision for credit losses			145		166		461			605

Net interest income after provision for credit losses			1,637		1,609		4,819			4,714
Noninterest Income
Credit and debit card revenue			185		164		516			465
Corporate payment products revenue			135		108		362			306
ATM processing services			64		45		168			132
Merchant processing services			200		188		576			494
Trust and investment management fees			251		240		751			740
Deposit service charges			246		208		690			595
Treasury management fees			109		118		333			357
Commercial products revenue			103		106		299			324
Mortgage banking revenue			111		97		323			301
Investment products fees and commissions			37		37		115			119
Securities gains (losses), net			1		88		(57	)		(84	)
Other			134		125		423			335

	Total noninterest income		1,576		1,524		4,499			4,084
Noninterest Expense
Compensation			603		564		1,782			1,673
Employee benefits			106		100		330			291
Net occupancy and equipment			162		159		475			468
Professional services			44		37		119			104
Marketing and business development			61		61		171			145
Technology and communications			118		110		337			314
Postage, printing and supplies			64		61		190			183
Other intangibles			125		210		377			389
Debt prepayment			—		5		54			42
Other			190		211		564			597

	Total noninterest expense		1,473		1,518		4,399			4,206

Income before income taxes			1,740		1,615		4,919			4,592
Applicable income taxes			586		549		1,573			1,481

Net income		$	1,154	$	1,066	$	3,346		$	3,111

Earnings per share		$	.63	$	.57	$	1.82		$	1.64
Diluted earnings per share		$	.62	$	.56	$	1.80		$	1.62
Dividends declared per share		$	.30	$	.24	$	.90		$	.72
Average common shares outstanding			1,823		1,877		1,836			1,895
Average diluted common shares outstanding			1,849		1,904		1,862			1,919

See Notes to Consolidated Financial Statements.


U.S. Bancorp	27

U.S. Bancorp

Consolidated Statement of Shareholders’ Equity" -->

Consolidated Statement of Shareholders’ Equity


																Other			Total
(Dollars in Millions)		Common Shares			Common		Capital			Retained			Treasury			Comprehensive			Shareholders’
(Unaudited)		Outstanding			Stock		Surplus			Earnings			Stock			Income			Equity

Balance December 31, 2003			1,922,920,151		$	20	$	5,851		$	14,508		$	(1,205	)	$	68		$	19,242
Net income											3,111									3,111
Unrealized gain on securities available for sale																	82			82
Unrealized gain on derivatives																	32			32
Foreign currency translation adjustment																	(14	)		(14	)
Realized gain on derivatives																	17			17
Reclassification adjustment for losses realized in net income																	35			35
Income taxes																	(58	)		(58	)

	Total comprehensive income																			3,205
Cash dividends declared on common stock											(1,359	)								(1,359	)
Issuance of common and treasury stock			22,812,988					(73	)					583						510
Purchase of treasury stock			(74,067,318	)										(2,066	)					(2,066	)
Stock option and restricted stock grants								73												73
Shares reserved to meet deferred compensation obligations			(824,274	)				17						(22	)					(5	)

Balance September 30, 2004			1,870,841,547		$	20	$	5,868		$	16,260		$	(2,710	)	$	162		$	19,600

Balance December 31, 2004			1,857,622,943		$	20	$	5,902		$	16,758		$	(3,125	)	$	(16	)	$	19,539
Net income											3,346									3,346
Unrealized loss on securities available for sale																	(211	)		(211	)
Unrealized loss on derivatives																	(30	)		(30	)
Foreign currency translation adjustment																	8			8
Realized loss on derivatives																	(197	)		(197	)
Reclassification adjustment for losses realized in net income																	120			120
Income taxes																	118			118

	Total comprehensive income																			3,154
Cash dividends declared on common stock											(1,647	)								(1,647	)
Issuance of common and treasury stock			13,096,209					(62	)					360						298
Purchase of treasury stock			(52,844,246	)										(1,549	)					(1,549	)
Stock option and restricted stock grants								72												72
Shares reserved to meet deferred compensation obligations			(126,848	)				1						(4	)					(3	)

Balance September 30, 2005			1,817,748,058		$	20	$	5,913		$	18,457		$	(4,318	)	$	(208	)	$	19,864

See Notes to Consolidated Financial Statements.


28	U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Cash Flows" -->

Consolidated Statement of Cash Flows


		Nine Months Ended
		September 30,

(Dollars in Millions)
(Unaudited)		2005			2004

Operating Activities
	Net cash provided by (used in) operating activities		$2,899			$4,257
Investing Activities
Proceeds from sales of available-for-sale investment securities			3,065			5,559
Proceeds from maturities of investment securities			8,072			9,323
Purchases of investment securities			(10,430	)		(12,497	)
Net (increase) decrease in loans outstanding			(8,940	)		(6,545	)
Proceeds from sales of loans			1,150			1,284
Purchases of loans			(2,581	)		(1,800	)
Proceeds from sales of premises and equipment			9			43
Purchases of premises and equipment			(134	)		(129	)
Other, net			(1,370	)		(633	)

	Net cash provided by (used in) investing activities		(11,159	)		(5,395	)
Financing Activities
Net increase (decrease) in deposits			54			(3,485	)
Net increase (decrease) in short-term borrowings			9,977			1,798
Principal payments on long-term debt			(9,248	)		(7,458	)
Proceeds from issuance of long-term debt			11,002			11,674
Proceeds from issuance of common stock			246			443
Repurchase of common stock			(1,605	)		(2,115	)
Cash dividends paid			(1,660	)		(1,371	)

	Net cash provided by (used in) financing activities		8,766			(514	)

	Change in cash and cash equivalents		506			(1,652	)
Cash and cash equivalents at beginning of period			6,537			8,782

	Cash and cash equivalents at end of period		$7,043			$7,130

See Notes to Consolidated Financial Statements.


U.S. Bancorp	29

Notes to Consolidated Financial Statements" -->

Notes to Consolidated Financial Statements

(Unaudited)


Note 1		Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States. In the opinion of management of U.S. Bancorp (the “Company”), all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Certain amounts in prior periods have been reclassified to conform to the current presentation.

Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. Table 11 “Line of Business Financial Performance” provides details of segment results. This information is incorporated by reference into these Notes to Consolidated Financial Statements.


Note 2		Accounting Changes

Stock-Based Compensation In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment”, a revision of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” SFAS 123R requires companies to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award. This statement eliminates the use of the alternative intrinsic value method of accounting that was allowed when SFAS 123 was originally issued. The provisions of this statement are effective for the Company on January 1, 2006. Because the Company retroactively adopted the fair value method in 2003, the revised statement will not have a significant impact on the Company’s financial statements.


30	U.S. Bancorp


Note 3		Loans

The composition of the loan portfolio was as follows:


				September 30, 2005					December 31, 2004

						Percent					Percent
(Dollars in Millions)				Amount		of Total			Amount		of Total

Commercial
	Commercial			$	38,319		28.0	%	$	35,210		27.9	%
	Lease financing				4,918		3.6			4,963		3.9

		Total commercial			43,237		31.6			40,173		31.8
Commercial real estate
	Commercial mortgages				20,467		15.0			20,315		16.1
	Construction and development				8,054		5.9			7,270		5.7

		Total commercial real estate			28,521		20.9			27,585		21.8
Residential mortgages
	Residential mortgages				13,586		9.9			9,722		7.7
	Home equity loans, first liens				5,883		4.3			5,645		4.5

		Total residential mortgages			19,469		14.2			15,367		12.2
Retail
	Credit card				6,638		4.9			6,603		5.2
	Retail leasing				7,468		5.5			7,166		5.7
	Home equity and second mortgages				14,920		10.9			14,851		11.8
	Other retail
		Revolving credit			2,523		1.8			2,541		2.0
		Installment			3,498		2.6			2,767		2.2
		Automobile			8,146		6.0			7,419		5.9
		Student			2,207		1.6			1,843		1.4

			Total other retail		16,374		12.0			14,570		11.5

		Total retail			45,400		33.3			43,190		34.2

			Total loans	$	136,627		100.0	%	$	126,315		100.0	%

Loans are presented net of unearned interest and deferred fees and costs, which amounted to $1.3 billion and $1.4 billion at September 30, 2005, and December 31, 2004, respectively.


Note 4		Mortgage Servicing Rights

The Company’s portfolio of residential mortgages serviced for others was $67.2 billion and $63.2 billion at September 30, 2005, and December 31, 2004, respectively.

Changes in the valuation allowance for capitalized mortgage servicing rights are summarized as follows:


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

(Dollars in Millions)		2005			2004			2005			2004

Balance at beginning of period		$	149		$	91		$	172		$	160
	Additions charged (reductions credited) to operations		(3	)		87			(4	)		25
	Direct write-downs charged against the allowance		(17	)		(22	)		(39	)		(29	)

Balance at end of period		$	129		$	156		$	129		$	156


U.S. Bancorp	31

Changes in net carrying value of capitalized mortgage servicing rights are summarized as follows:


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

(Dollars in Millions)		2005			2004			2005			2004

Balance at beginning of period		$	952		$	863		$	866		$	670
	Rights purchased		10			67			25			143
	Rights capitalized		107			69			276			217
	Amortization		(49	)		(47	)		(148	)		(140	)
	Rights sold		—			—			—			—
	Reparation (impairment)		3			(87	)		4			(25	)

Balance at end of period			1,023			865			1,023			865
	Impairment valuation allowance		129			156			129			156

Initial carrying value, net of amortization		$	1,152		$	1,021		$	1,152		$	1,021

The key economic assumptions used to estimate the value of the mortgage servicing rights portfolio were as follows:


	September 30,		September 30,
(Dollars in Millions)	2005		2004

Fair value	$	1,027	$	869
Expected weighted-average life (in years)		6.2		5.7
Discount rate		10.1%		9.5%

The estimated sensitivity of the fair value of the mortgage servicing rights portfolio to changes in interest rates at September 30, 2005, was as follows:


	Down Scenario						Up Scenario

(Dollars in Millions)	50 bps			25 bps			25 bps		50 bps

Fair value	$	(169	)	$	(86	)	$	57	$	108

The fair value of mortgage servicing rights and its sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. The Company’s servicing portfolio consists of the distinct portfolios of Mortgage Revenue Bond Programs (“MRBP”), government-insured mortgages and conventional mortgages. The MRBP division specializes in servicing loans made under state and local housing authority programs. These programs provide mortgages to low- and moderate-income borrowers and are generally government-insured programs with a favorable rate subsidy, down payment and/or closing cost assistance. Mortgage loans originated as part of government agency and state loan programs tend to experience slower prepayment speeds and better cash flows than conventional mortgage loans. The servicing portfolios are predominantly comprised of fixed-rate agency loans (FNMA, FHLMC, GNMA, FHLB and various housing agencies) with limited adjustable-rate or jumbo mortgage loans.

A summary of the Company’s mortgage servicing rights and related characteristics by portfolio as of September 30, 2005, was as follows:


(Dollars in Millions)	MRBP			Government			Conventional			Total

Servicing portfolio	$	7,138		$	9,289		$	50,739		$	67,166
Fair market value	$	120		$	149		$	758		$	1,027
Value (bps)		168			160			149			153
Weighted-average servicing fees (bps)		43			45			35			37
Multiple (value/servicing fees)		3.91			3.56			4.26			4.14
Weighted-average note rate		6.10	%		6.02	%		5.70	%		5.79	%
Age (in years)		3.8			2.6			2.0			2.3
Expected life (in years)		6.0			5.9			6.3			6.2
Discount rate		10.1	%		10.8	%		10.0	%		10.1	%


32	U.S. Bancorp


Note 5		Earnings Per Share

The components of earnings per share were:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

(Dollars and Shares in Millions, Except Per Share Data)	2005		2004		2005		2004

Net income	$	1,154	$	1,066	$	3,346	$	3,111

Average common shares outstanding		1,823		1,877		1,836		1,895
Net effect of the assumed purchase of stock based on the treasury stock method for options and stock plans		26		27		26		24

Average diluted common shares outstanding		1,849		1,904		1,862		1,919

Earnings per share	$	.63	$	.57	$	1.82	$	1.64
Diluted earnings per share	$	.62	$	.56	$	1.80	$	1.62

Options to purchase shares outstanding not included in the computation of diluted earnings per share because they were antidilutive, totaled 15 million and 29 million shares for the three months ended September 30, 2005 and 2004, respectively, and 16 million and 38 millions shares for the nine months ended September 30, 2005 and 2004, respectively.


Note 6		Employee Benefits

The components of net periodic benefit cost (income) for the Company’s retirement plans were:


		Three Months Ended										Nine Months Ended
		September 30,										September 30,

								Post Retirement										Post Retirement
		Pension Plans						Medical Plans				Pension Plans						Medical Plans

(Dollars in Millions)		2005			2004			2005		2004		2005			2004			2005			2004

Components of net periodic benefit cost (income)
	Service cost	$	16		$	15		$	1	$	1	$	48		$	44		$	3		$	3
	Interest cost		28			28			4		4		84			81			12			14
	Expected return on plan assets		(49	)		(51	)		—		—		(146	)		(152	)		(1	)		(1	)
	Net amortization and deferral		(2	)		(2	)		—		—		(5	)		(5	)		—			—
	Recognized actuarial loss		15			18			—		—		44			33			1			2

Net periodic benefit cost (income)		$	8		$	8		$	5	$	5	$	25		$	1		$	15		$	18


Note 7		Income Taxes

The components of income tax expense were:


		Three Months Ended				Nine Months Ended
		September 30,				September 30,

(Dollars in Millions)		2005		2004		2005		2004

Federal
Current		$	455	$	431	$	1,199	$	1,127
Deferred			61		63		189		196

	Federal income tax		516		494		1,388		1,323
State
Current			65		43		169		121
Deferred			5		12		16		37

	State income tax		70		55		185		158

	Total income tax provision	$	586	$	549	$	1,573	$	1,481


U.S. Bancorp	33

A reconciliation of expected income tax expense at the federal statutory rate of 35% to the Company’s applicable income tax expense follows:


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

(Dollars in Millions)		2005			2004			2005			2004

Tax at statutory rate (35%)		$	609		$	565		$	1,722		$	1,607
State income tax, at statutory rates, net of federal tax benefit			45			36			120			103
Tax effect of
	Resolution of federal income tax examinations		—			—			(94	)		(90	)
	Tax credits		(48	)		(36	)		(131	)		(99	)
	Tax-exempt interest, net		(6	)		(5	)		(16	)		(16	)
	Other items		(14	)		(11	)		(28	)		(24	)

Applicable income taxes		$	586		$	549		$	1,573		$	1,481

Included in the second quarter of 2005 was a 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, the first quarter of 2004 included a 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 1995 through 1999. The resolution of these cycles was the result of negotiations held between the Company and representatives of the Internal Revenue Service throughout the examinations. The resolution of these matters and the taxing authorities’ acceptance of submitted claims and tax return adjustments resulted in the reduction of estimated income tax liabilities.

The Company’s net deferred tax liability was $1,962 million at September 30, 2005, and $1,899 million at December 31, 2004.


Note 8		Guarantees and Contingent Liabilities

The following table is a summary of the guarantees and contingent liabilities of the Company at September 30, 2005:


			Maximum
			Potential
	Carrying		Future
(Dollars in Millions)	Amount		Payments

Standby letters of credit	$	78	$	10,475
Third-party borrowing arrangements		3		470
Securities lending indemnifications		—		12,624
Asset sales (a)		7		829
Merchant processing		62		52,719
Other guarantees		23		4,300
Other contingent liabilities		13		1,743


(a)		The maximum potential future payments does not include loans sales where the Company provides standard representations and warranties to the buyer against losses related to loan underwriting documentation. For these types of loans sales, the maximum potential future payments are not readily determinable because the Company’s obligation under these agreements depends upon the occurrence of future events.

The Company, through its subsidiaries, 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.


34	U.S. Bancorp

date was $2.2 billion, and the Company held collateral of $1.6 billion in escrow deposits, letters of credit and liens on various assets.

The Company is subject to various 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.

For information on the nature of the Company’s guarantees and contingent liabilities, please refer to Note 24 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.


U.S. Bancorp	35

U.S. Bancorp

Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)" -->

Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)


			For the Three Months Ended September 30,
			2005								2004

								Yields								Yields			% Change
(Dollars in Millions)			Average					and			Average					and			Average
(Unaudited)			Balances			Interest		Rates			Balances			Interest		Rates			Balances

Assets
Investment securities			$	41,782		$	494		4.73	%	$	42,502		$	455		4.28	%		(1.7	)%
Loans held for sale				2,038			30		5.80			1,405			21		6.00			45.1
Loans (b)
	Commercial			43,251			642		5.89			39,317			557		5.64			10.0
	Commercial real estate			28,193			463		6.52			27,194			387		5.66			3.7
	Residential mortgages			18,741			261		5.54			14,569			204		5.60			28.6
	Retail			45,098			808		7.11			41,826			660		6.28			7.8

		Total loans		135,283			2,174		6.38			122,906			1,808		5.86			10.1
Other earning assets				1,349			29		8.56			1,374			26		7.45			(1.8	)

		Total earning assets		180,452			2,727		6.01			168,187			2,310		5.47			7.3
Allowance for loan losses				(2,109	)							(2,287	)							7.8
Unrealized gain (loss) on available-for-sale securities				(258	)							(492	)							47.6
Other assets				27,582								26,177								5.4

		Total assets	$	205,667							$	191,585								7.4

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits			$	29,434							$	29,791								(1.2	)
Interest-bearing deposits
	Interest checking			22,508			34		.61			20,413			16		.31			10.3
	Money market accounts			28,740			94		1.30			31,854			54		.67			(9.8	)
	Savings accounts			5,777			4		.24			5,854			4		.25			(1.3	)
	Time certificates of deposit less than $100,000			13,263			101		3.01			12,869			83		2.57			3.1
	Time deposits greater than $100,000			21,262			181		3.37			14,535			65		1.79			46.3

		Total interest-bearing deposits		91,550			414		1.79			85,525			222		1.03			7.0
Short-term borrowings				22,248			205		3.66			15,382			74		1.93			44.6
Long-term debt				35,633			317		3.54			35,199			232		2.63			1.2

		Total interest-bearing liabilities		149,431			936		2.49			136,106			528		1.55			9.8
Other liabilities				6,696								6,301								6.3
Shareholders’ equity				20,106								19,387								3.7

		Total liabilities and shareholders’ equity	$	205,667							$	191,585								7.4	%

Net interest income						$	1,791							$	1,782

Gross interest margin									3.52	%							3.92	%

Gross interest margin without taxable-equivalent increments									3.50								3.90

Percent of Earning Assets
Interest income									6.01	%							5.47	%
Interest expense									2.06								1.25

Net interest margin									3.95	%							4.22	%

Net interest margin without taxable-equivalent increments									3.93	%							4.20	%


(a)		Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b)		Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.


36	U.S. Bancorp

Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)" -->

U.S. Bancorp

Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)


			For the Nine Months Ended September 30,
			2005								2004

								Yields								Yields			% Change
(Dollars in Millions)			Average					and			Average					and			Average
(Unaudited)			Balances			Interest		Rates			Balances			Interest		Rates			Balances

Assets
Investment securities			$	42,308		$	1,459		4.60	%	$	43,243		$	1,373		4.23	%		(2.2	)%
Loans held for sale				1,723			75		5.77			1,611			68		5.65			7.0
Loans (b)
	Commercial			42,263			1,833		5.79			39,060			1,644		5.62			8.2
	Commercial real estate			27,762			1,313		6.33			27,140			1,134		5.58			2.3
	Residential mortgages			17,266			718		5.55			14,079			601		5.70			22.6
	Retail			44,141			2,259		6.84			40,687			1,925		6.32			8.5

		Total loans		131,432			6,123		6.23			120,966			5,304		5.86			8.7
Other earning assets				1,388			84		8.12			1,362			73		7.18			1.9

		Total earning assets		176,851			7,741		5.85			167,182			6,818		5.44			5.8
Allowance for loan losses				(2,116	)							(2,335	)							9.4
Unrealized gain (loss) on available-for-sale securities				(247	)							(412	)							40.0
Other assets				27,017								26,128								3.4

		Total assets	$	201,505							$	190,563								5.7

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits			$	29,003							$	29,807								(2.7	)
Interest-bearing deposits
	Interest checking			22,891			98		.58			20,699			49		.32			10.6
	Money market accounts			29,517			243		1.10			33,492			178		.71			(11.9	)
	Savings accounts			5,876			12		.27			5,896			12		.26			(.3	)
	Time certificates of deposit less than $100,000			13,132			281		2.86			13,168			257		2.61			(.3	)
	Time deposits greater than $100,000			20,133			449		2.98			13,085			158		1.61			53.9

		Total interest-bearing deposits		91,549			1,083		1.58			86,340			654		1.01			6.0
Short-term borrowings				18,313			460		3.36			14,706			183		1.67			24.5
Long-term debt				36,016			895		3.32			34,254			641		2.50			5.1

		Total interest-bearing liabilities		145,878			2,438		2.23			135,300			1,478		1.46			7.8
Other liabilities				6,713								6,118								9.7
Shareholders’ equity				19,911								19,338								3.0

		Total liabilities and shareholders’ equity	$	201,505							$	190,563								5.7	%

Net interest income						$	5,303							$	5,340

Gross interest margin									3.62	%							3.98	%

Gross interest margin without taxable-equivalent increments									3.60								3.96

Percent of Earning Assets
Interest income									5.85	%							5.44	%
Interest expense									1.85								1.18

Net interest margin									4.00	%							4.26	%

Net interest margin without taxable-equivalent increments									3.98	%							4.24	%


(a)		Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b)		Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.


U.S. Bancorp	37

Part II -- Other Information" -->

Part II — Other Information

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" -->

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds — Refer to the “Capital Management” section within Management’s Discussion and Analysis in Part I for information regarding shares repurchased by the Company during the third quarter of 2005.

On August 17, 2005, the Company issued $2.5 billion of its Floating Rate Convertible Senior Debentures due August 21, 2035 (the “Debentures”) in a private placement pursuant to Section 4(2) of the Securities Act of 1933, as amended, to Lehman Brothers Inc. as initial purchaser (the “Initial Purchaser”). The Initial Purchaser received aggregate purchase discounts or commissions of approximately $19 million. The Debentures were resold by the Initial Purchaser to “qualified institutional buyers” in accordance with Rule 144A under the Securities Act of 1933, as amended.

The Debentures bear interest at an annual rate equal to three-month LIBOR, reset quarterly, minus 1.68 percent; provided that such rate will never be less than 0 percent per annum. Interest on the Debentures is payable quarterly in arrears beginning on November 21, 2005. After August 21, 2026, interest will cease to be paid and holders will instead receive the accreted principal amount of a Debenture, which will be equal to the original principal amount of $1,000 per Debenture, increased daily by a variable yield beginning on August 21, 2026.

A portion of the Debentures may be convertible into shares of the Company’s common stock at any time on or prior to August 21, 2035. If converted, holders of the Debentures will receive cash up to the principal amount of a Debenture 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 Company common stock per Debenture as determined pursuant to a specific formula, subject to the Company’s option to cash settle all or some of its delivery obligations. The initial conversion rate of 27.7316 is based upon a market price of the Company’s common stock of $36.06 representing a premium of approximately 20 percent over the market price at the time of issuance. Accordingly, unless and until the market price of the Company’s common stock exceeds $36.06, holders of the Debentures will not be entitled to receive any shares of the Company’s common stock upon conversion.

Item 6. Exhibits" -->

Item 6. Exhibits


12		Computation of Ratio of Earnings to Fixed Charges.
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
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.


38	U.S. Bancorp

SIGNATURE" -->

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	U.S. BANCORP

	By:		/s/ Terrance R. Dolan

			Terrance R. Dolan
			Executive Vice President and Controller
			(Chief Accounting Officer and Duly Authorized Officer)

DATE: November 9, 2005


U.S. Bancorp	39

EXHIBIT 12" -->

EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges


			Three Months Ended		Nine Months Ended
(Dollars in Millions)			September 30, 2005		September 30, 2005

Earnings
1.	Net income		$	1,154	$	3,346
2.	Applicable income taxes			586		1,573

3.	Net income before taxes (1 + 2)		$	1,740	$	4,919

4.	Fixed charges:
	a.	Interest expense excluding interest on deposits	$	522	$	1,355
	b.	Portion of rents representative of interest and amortization of debt expense		17		52

	c.	Fixed charges excluding interest on deposits (4a + 4b)		539		1,407
	d.	Interest on deposits		414		1,083

	e.	Fixed charges including interest on deposits (4c + 4d)	$	953	$	2,490

5.	Amortization of interest capitalized		$	—	$	—
6.	Earnings excluding interest on deposits (3 + 4c + 5)			2,279		6,326
7.	Earnings including interest on deposits (3 + 4e + 5)			2,693		7,409
8.	Fixed charges excluding interest on deposits (4c)			539		1,407
9.	Fixed charges including interest on deposits (4e)			953		2,490

Ratio of Earnings to Fixed Charges
10.	Excluding interest on deposits (line 6/line 8)			4.23		4.50
11.	Including interest on deposits (line 7/line 9)			2.83		2.98


40	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 Quarterly Report on Form 10-Q 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: November 9, 2005


U.S. Bancorp	41

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 Quarterly Report on Form 10-Q 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: November 9, 2005


42	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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (the “Form 10-Q”) 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-Q 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		David M. Moffett
Chief Executive Officer		Chief Financial Officer

Dated: November 9, 2005


U.S. Bancorp	43



	First Class
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	Minneapolis, MN

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 investor services program 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

Internet: melloninvestor.com

For Registered or Certified Mail:

Mellon Investor Services

85 Challenger Road

Ridgefield Park, NJ 07660

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 the “Investor ServiceDirect^sm” link.

Independent Auditors

Ernst & Young LLP serves as the independent auditors of U.S. Bancorp.

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 an investor services program 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.

Investment Community Contacts

Judith T. Murphy

Senior Vice President, Investor Relations

judith.murphy@usbank.com

Phone: 612-303-0783 or 866-775-9668

Financial Information

U.S. Bancorp news and financial results are available through our web site and by mail.

Web site. 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 and click on 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, Minnesota 55402

corporaterelations@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, skills and abilities, rather than 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

Member FDIC

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