U.S. Bancorp 10Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

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 þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

YES o NO þ

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 July 31, 2006 1,777,189,374 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) Critical Accounting Policies	26
	e) Controls and Procedures (Item 4)	26
2) Quantitative and Qualitative Disclosures About Market Risk/ Corporate Risk Profile (Item 3)
	a) Overview	9
	b) Credit Risk Management	9
	c) Residual Risk Management	16
	d) Operational Risk Management	16
	e) Interest Rate Risk Management	16
	f) Market Risk Management	19
	g) Liquidity Risk Management	19
	h) Capital Management	20
3) Line of Business Financial Review		20
4) Financial Statements (Item 1)		28
Part II — Other Information
1) Risk Factors (Item 1A)		44
2) Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)		44
3) Submission of Matters to a Vote of Security Holders (Item 4)		44
4) Exhibits (Item 6)		44
5) Signature		45
6) Exhibits		46
Computation of Ratio of Earnings to Fixed Charges
Certification of Chief Executive Officer to Rule 13a-14(a)
Certification of Chief Financial Officer to Rule 13a-14(a)
Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.

This Form 10-Q contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of the Company. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including changes in general business and economic conditions, changes in interest rates, legal and regulatory developments, increased competition from both banks and non-banks, changes in customer behavior and preferences, effects of mergers and acquisitions and related integration, and effects of critical accounting policies and judgments. For discussion of these and other risks that may cause actual results to differ from expectations, refer to our Annual Report on Form 10-K for the year ended December 31, 2005, on file with the Securities and Exchange Commission, including the sections entitled “Risk Factors” and “Corporate Risk Profile.” Forward-looking statements speak only as of the date they are made, and the Company 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									Six Months Ended
		June 30,									June 30,

								Percent									Percent
(Dollars and Shares in Millions, Except Per Share Data)		2006			2005			Change			2006			2005			Change

Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)			$1,697			$1,761			(3.6	)%		$3,422			$3,512			(2.6	)%
Noninterest income			1,752			1,540			13.8			3,366			2,981			12.9
Securities gains (losses), net			3			1			*			3			(58	)		*

	Total net revenue		3,452			3,302			4.5			6,791			6,435			5.5
Noninterest expense			1,530			1,595			(4.1	)		3,030			2,926			3.6
Provision for credit losses			125			144			(13.2	)		240			316			(24.1	)

Income before taxes			1,797			1,563			15.0			3,521			3,193			10.3
Taxable-equivalent adjustment			11			7			57.1			21			14			50.0
Applicable income taxes			585			435			34.5			1,146			987			16.1

Net income			$1,201			$1,121			7.1			$2,354			$2,192			7.4

Net income applicable to common equity			$1,184			$1,121			5.6			$2,337			$2,192			6.6

Per Common Share
Earnings per share			$.66			$.61			8.2	%		$1.30			$1.19			9.2	%
Diluted earnings per share			.66			.60			10.0			1.29			1.17			10.3
Dividends declared per share			.33			.30			10.0			.66			.60			10.0
Book value per share			10.89			10.88			.1
Market value per share			30.88			29.20			5.8
Average common shares outstanding			1,781			1,833			(2.8	)		1,791			1,842			(2.8	)
Average diluted common shares outstanding			1,805			1,857			(2.8	)		1,816			1,869			(2.8	)
Financial Ratios
Return on average assets			2.27	%		2.23	%					2.25	%		2.22	%
Return on average common equity			24.3			22.7						23.8			22.3
Net interest margin (taxable-equivalent basis)			3.68			3.99						3.74			4.03
Efficiency ratio (b)			44.4			48.3						44.6			45.1
Average Balances
Loans			$140,863			$131,275			7.3	%		$140,125			$129,474			8.2	%
Loans held for sale			2,062			1,697			21.5			1,866			1,564			19.3
Investment securities			40,087			42,341			(5.3	)		39,885			42,576			(6.3	)
Earning assets			184,890			176,730			4.6			184,000			175,022			5.1
Assets			212,407			201,818			5.2			211,222			199,390			5.9
Noninterest-bearing deposits			28,949			29,148			(.7	)		28,893			28,784			.4
Deposits			121,233			121,232			—			120,701			120,332			.3
Short-term borrowings			22,246			17,013			30.8			23,295			16,313			42.8
Long-term debt			41,225			36,973			11.5			39,735			36,211			9.7
Shareholders’ equity			20,556			19,820			3.7			20,353			19,812			2.7

		June 30, 2006			December 31, 2005

Period End Balances
Loans			$141,382			$137,806			2.6	%
Allowance for credit losses			2,251			2,251			—
Investment securities			38,462			39,768			(3.3	)
Assets			213,405			209,465			1.9
Deposits			122,719			124,709			(1.6	)
Long-term debt			41,952			37,069			13.2
Shareholders’ equity			20,415			20,086			1.6
Regulatory capital ratios
	Tier 1 capital		8.9	%		8.2	%
	Total risk-based capital		13.1			12.5
	Leverage		8.2			7.6
	Tangible common equity		5.6			5.9			��


*		Not meaningful.
(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

OVERVIEW

Earnings SummaryU.S. Bancorp and its subsidiaries (the “Company”) reported net income of $1,201 million for the second quarter of 2006, compared with $1,121 million for the second quarter of 2005. Net income of $.66 per diluted common share in the second quarter of 2006 was higher than the same period of 2005 by $.06 (10.0 percent). Return on average assets and return on average common equity were 2.27 percent and 24.3 percent, respectively, for the second quarter of 2006, compared with returns of 2.23 percent and 22.7 percent, respectively, for the second quarter of 2005. The Company’s results for the second quarter of 2006 improved over the same period of 2005, as net income increased by $80 million (7.1 percent), primarily due to strong growth in a majority of fee-based products.

Total net revenue, on a taxable-equivalent basis, for the second quarter of 2006, was $150 million (4.5 percent) higher than the second quarter of 2005, primarily reflecting a 13.9 percent increase in noninterest income, partially offset by a 3.6 percent decline in net interest income reflecting the impact of rising interest rates during the past several quarters. Noninterest income growth was driven by organic business growth and recent expansion in trust and payment processing businesses. Noninterest income also included a gain related to the initial public offering of a cardholder association. These favorable changes in noninterest income were partially offset by lower mortgage banking revenue due to the impact of adopting the fair value method of accounting under Statement of Financial Accounting Standards No. 156 “Accounting for Servicing of Financial Assets” (“SFAS 156”) in the first quarter of 2006. Mortgage banking revenue in the second quarter of 2006 included the effect of principal repayments on the valuation of servicing rights that were previously recognized as part of intangible expense.

Total noninterest expense in the second quarter of 2006 was $65 million (4.1 percent) lower than the second quarter of 2005, primarily reflecting lower intangible expense due to the adoption of SFAS 156 and lower debt prepayment expense. This was partially offset by incremental operating and business integration costs principally associated with recent acquisitions, increased pension costs and higher expenses related to investments in tax-advantaged projects from a year ago. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 44.4 percent for the second quarter of 2006, compared with 48.3 percent for the second quarter of 2005.

The provision for credit losses for the second quarter of 2006 decreased $19 million (13.2 percent), compared with the second quarter of 2005. The decrease in the provision for credit losses year-over-year primarily reflected strong credit quality and the near-term favorable impact of changes in bankruptcy law in the fourth quarter of 2005. Net charge-offs in the second quarter of 2006 were $125 million, compared with $144 million in the second quarter of 2005. The decline in credit losses from a year ago was principally due to the impact of changes in bankruptcy legislation that went into effect during the fourth quarter of 2005. 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 $2,354 million for the first six months of 2006, compared with $2,192 million for the first six months of 2005. Net income of $1.29 per diluted common share in the first six months of 2006 was higher than the same period of 2005 by $.12 (10.3 percent). Return on average assets and return on average common equity were 2.25 percent and 23.8 percent, respectively, for the first six months of 2006, compared with returns of 2.22 percent and 22.3 percent, respectively, for the first six months of 2005. The Company’s results for the first six months of 2006 improved over the same period of 2005, as net income rose by $162 million (7.4 percent), primarily due to strong revenue growth infee-based products.

Total net revenue, on a taxable-equivalent basis, for the first six months of 2006, was $356 million (5.5 percent) higher than the first six months of 2005, primarily reflecting a 15.3 percent increase in noninterest income, partially offset by a 2.6 percent decline in net interest income, reflecting the impact of rising interest rates during the past several quarters. Noninterest income growth was driven by organic business growth, recent expansion in trust and payment processing businesses, trading income related to certain derivatives, a favorable settlement during the first quarter of 2006 and the gain from the initial public offering of a cardholder association during the second quarter of 2006. These favorable changes in noninterest


U.S. Bancorp	3

income categories were partially offset by lower mortgage banking revenue due to the impact of adopting SFAS 156 in the first quarter of 2006. In addition, there was a $61 million favorable variance in net securities gains (losses) in the first six months of 2006 as compared with the same period of 2005.

Total noninterest expense in the first six months of 2006 was $104 million (3.6 percent) higher than the first six months of 2005, primarily reflecting incremental operating and business integration costs principally associated with recent acquisitions, increased pension costs and higher expenses related to investments in tax-advantaged projects from a year ago. This was partially offset by lower intangible expense due to the adoption of SFAS 156 and lower debt prepayment expense. The efficiency ratio was 44.6 percent for the first six months of 2006, compared with 45.1 percent for the first six months of 2005.

The provision for credit losses for the first six months of 2006 decreased $76 million (24.1 percent), compared with the first six months of 2005. The decrease in the provision for credit losses year-over-year primarily reflected strong credit quality and the near-term favorable impact of changes in bankruptcy law in the fourth quarter of 2005. Net charge-offs in the first six months of 2006 were $240 million, compared with $316 million in the first six months of 2005. The decline in losses from a year ago was principally due to the impact of changes in bankruptcy legislation that went into effect during the fourth quarter of 2005. 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

Net Interest IncomeNet interest income, on a taxable-equivalent basis, was $1,697 million in the second quarter of 2006, compared with $1,761 million in the second quarter of 2005. Net interest income, on a taxable-equivalent basis, was $3,422 million in the first six months of 2006, compared with $3,512 million in the first six months of 2005. Average earning assets increased $8.2 billion (4.6 percent) and $9.0 billion (5.1 percent) in the second quarter and first six months of 2006, respectively, compared with the same periods of 2005. The increases were primarily driven by growth in residential mortgages, commercial loans, retail loans and commercial real estate loans, partially offset by a decrease in investment securities. The positive impact to net interest income from the growth in earning assets was more than offset by a lower net interest margin. The net interest margin for the second quarter and first six months of 2006 was 3.68 percent and 3.74 percent, respectively, compared with 3.99 percent and 4.03 percent, respectively, for the same periods of 2005. The year-over-year decline in the net interest margin for the second quarter and first six months of 2006 reflected the competitive lending environment during 2005 and the first half of 2006, asset/liability management decisions and the impact of changes in the yield curve from a year ago. Compared with the same periods of 2005, credit spreads have tightened by approximately 23 basis points in the second quarter and 21 basis points in the first six months of 2006 across most lending products due to competitive pricing and a change in mix due to growth in lower-spread, fixed-rate credit products. The net interest margin also declined due to funding incremental asset growth with higher cost wholesale funding, share repurchases and asset/liability decisions designed to reduce the Company’s interest rate sensitivity position. An increase in the margin benefit of net free funds and loan fees partially offset these factors. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” table for further information on net interest income.

Average loans for the second quarter and first six months of 2006 were higher by $9.6 billion (7.3 percent) and $10.7 billion (8.2 percent), respectively, compared with the same periods of 2005, reflecting growth in the majority of loan categories. During the first quarter of 2006, the Company began selling an increased proportion of its residential mortgage loan production and anticipates that residential mortgage loan balances will remain essentially flat in future periods.

Average investment securities in the second quarter and first six months of 2006 were $2.3 billion (5.3 percent) and $2.7 billion (6.3 percent) lower, respectively, than the same periods of 2005. The change in the balance of the investment securities portfolio from a year ago principally reflected asset/liability management decisions to reduce the focus on residential mortgage assets given the changing interest rate environment and mix of loan growth. Additionally, the Company reclassified approximately $460 million of principal-only securities to its trading account effective January 1, 2006, in connection with the adoption of SFAS 156. During the second quarter and first six months of 2006, the Company maintained a mix of approximately 40 percent variable-rate securities. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of net interest income to changes in interest rates.


4	U.S. Bancorp

Average noninterest-bearing deposits for the second quarter and first six months of 2006 remained relatively flat compared with the same periods of the prior year. The average balances for the second quarter and first six months of 2006 decreased $199 million (.7 percent) and increased $109 million (.4 percent), respectively, compared with the same periods of 2005, despite a reduction of excess liquidity in the markets.

Average total savings products declined year-over-year by $2.4 billion (4.2 percent) in the second quarter and $2.8 billion (4.8 percent) in the first six months of 2006, compared with the same periods of 2005, due to reductions in average money market savings and other savings account balances. Average money market savings balances declined year-over-year primarily due to a decline in balances within the branches. This decrease was partially offset by increases in broker dealer and corporate trust balances. The overall decrease in average money market savings balances year-over-year was primarily the result of the Company’s deposit pricing decisions for money market products in relation tofixed-rate deposit products offered. As a result, a portion of branch-based money market savings accounts have migrated to fixed-rate time certificates, while larger customer money market savings accounts have migrated to time deposits greater than $100,000 as rates increased on the time deposit products.

Average time certificates of deposit less than $100,000 were higher by $537 million (4.1 percent) and $532 million (4.1 percent) in the second quarter and first six months of 2006, respectively, compared with the same periods of 2005. Average time deposits greater than $100,000 grew $2.1 billion (10.3 percent) and $2.5 billion (12.9 percent) in the second quarter and first six months of 2006, respectively, compared with the same periods of 2005. This growth was broad-based across most areas of the Company including: corporate, commercial, branch banking, private client and corporate trust, as customers migrated balances to higher rate deposits.

Provision for Credit LossesThe provision for credit losses for the second quarter and first six months of 2006 decreased $19 million (13.2 percent) and $76 million (24.1 percent), respectively, compared with the same periods of 2005. The decrease in the provision for credit losses year-over-year primarily reflected stronger credit quality and the near-term favorable impact of changes in bankruptcy law in the fourth quarter of 2005. Net charge-offs in the second quarter and first six months of 2006 were $125 million and $240 million, respectively, compared with $144 million and $316 million in the second quarter and first six months of 2005, respectively. The decline in losses from a year ago was principally due to the impact of changes in bankruptcy legislation that went into effect during the fourth quarter of 2005. 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 second quarter and first six months of 2006 was $1,755 million and $3,369 million, respectively, compared with $1,541 million and $2,923 million in the same periods of 2005. The $214 million (13.9 percent) increase during the second quarter and $446 million (15.3 percent) increase during the first six months of 2006, compared with the same periods in


Table 2		Noninterest Income


		Three Months Ended							Six Months Ended
		June 30,							June 30,

						Percent								Percent
(Dollars in Millions)		2006		2005		Change			2006		2005			Change

Credit and debit card revenue			$202		$177		14.1	%		$384		$331			16.0	%
Corporate payment products revenue			139		120		15.8			266		227			17.2
ATM processing services			61		57		7.0			120		104			15.4
Merchant processing services			253		198		27.8			466		376			23.9
Trust and investment management fees			314		253		24.1			611		500			22.2
Deposit service charges			264		234		12.8			496		444			11.7
Treasury management fees			116		117		(.9	)		223		224			(.4	)
Commercial products revenue			107		100		7.0			211		196			7.7
Mortgage banking revenue			75		110		(31.8	)		99		212			(53.3	)
Investment products fees and commissions			42		39		7.7			80		78			2.6
Securities gains (losses), net			3		1		*			3		(58	)		*
Other			179		135		32.6			410		289			41.9

	Total noninterest income	$	1,755	$	1,541		13.9	%	$	3,369	$	2,923			15.3	%


*		Not meaningful


U.S. Bancorp	5

2005, were driven by favorable variances in the majority of fee income categories and a $35 million gain from the initial public offering of a cardholder association included in other income. The increase in noninterest income for the first six months of 2006 also reflected the impact of additional trading income related to certain derivatives recorded in the current year and a favorable variance in securities gains (losses) of $61 million related to net securities losses recorded in the prior year. This strong growth in revenue was partially offset by the accounting impact of SFAS 156 on mortgage banking revenue.

The growth in credit and debit card revenue was primarily driven by higher customer transaction volumes. The corporate payment products revenue growth reflected organic growth in sales volumes and card usage. ATM processing services revenue for the first six months of 2006 was higher due to the acquisition of an ATM business in May of 2005. Merchant processing services revenue growth reflects an increase in sales volume driven by acquisitions, higher same store sales and equipment fees. Trust and investment management fees increased in the second quarter and first six months year-over-year, primarily due to improved equity market conditions, incremental account growth and customer balances and the acquisition of the corporate and institutional trust business of a large national bank. Deposit service charges grew year-over-year due to increased transaction-related fees and growth in net checking accounts. Other income for the second quarter and first six months of 2006 was higher than the same periods of 2005 due to a $35 million gain from the initial public offering of a cardholder association. In addition, other income for the first six months of 2006 was higher due to a $44 million gain on certain interest rate swaps,end-of-term lease residual value improvement, higher student loan sales gains and the receipt of a favorable settlement within the merchant processing business. These favorable changes in fee-based revenue were partially offset by the decline in mortgage banking revenue, principally driven by the adoption of the fair value method of accounting for mortgage servicing rights (“MSR”) under SFAS 156.

Noninterest ExpenseNoninterest expense was $1,530 million and $3,030 million, respectively, in the second quarter and first six months of 2006, a decrease of $65 million (4.1 percent) and an increase of $104 million (3.6 percent), respectively, from the same periods of 2005. The decrease in expense in the second quarter of 2006, compared with the second quarter of 2005, reflected the impact of adopting SFAS 156 on other intangible expense and lower debt prepayment expense. The increase in expense in the first six months of 2006, compared with the same period of the prior year, reflected the impact of business acquisitions and related integration costs, partially offset by lower other intangible and debt prepayment expense. Compensation expense was higher year-over-year in the second quarter and first six months of 2006, primarily due to business expansion, including the Company’s payment processing businesses, the acquisition of a large national bank’s corporate and institutional trust business and other growth initiatives. Employee benefits increased year-over-year primarily as a result of higher pension costs. Net occupancy and equipment expense increased in the first six months of 2006 from the same period of 2005 primarily due to business expansion. Technology and communications expense rose due to increased software expense and higher outside data processing expense principally associated with expanding a prepaid gift card program and the acquisition of a large national


Table 3		Noninterest Expense


		Three Months Ended									Six Months Ended
		June 30,									June 30,

								Percent									Percent
(Dollars in Millions)		2006			2005			Change			2006			2005			Change

Compensation			$627			$612			2.5	%		$1,260			$1,179			6.9	%
Employee benefits			123			108			13.9			256			224			14.3
Net occupancy and equipment			161			159			1.3			326			313			4.2
Professional services			41			39			5.1			76			75			1.3
Marketing and business development			58			67			(13.4	)		98			110			(10.9)
Technology and communications			127			113			12.4			244			219			11.4
Postage, printing and supplies			66			63			4.8			132			126			4.8
Other intangibles			89			181			(50.8	)		174			252			(31.0)
Debt prepayment			11			54			(79.6	)		11			54			(79.6)
Other			227			199			14.1			453			374			21.1

	Total noninterest expense		$1,530			$1,595			(4.1	)%		$3,030			$2,926			3.6	%

Efficiency ratio (a)			44.4	%		48.3	%					44.6	%		45.1	%


(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

bank’s corporate and institutional trust business. Other expense increased in the second quarter and first six months of 2006 from the same periods of 2005, primarily due to the increased investments in tax-advantaged projects relative to a year ago and business integration costs. These expense increases were offset by a year-over-year decline in other intangibles expense, reflecting the elimination of MSR amortization and impairment due to the adoption of SFAS 156, and lower debt prepayment expense.

Income Tax ExpenseThe provision for income taxes was $585 million (an effective rate of 32.8 percent) for the second quarter and $1,146 million (an effective rate of 32.7 percent) for the first six months of 2006, compared with $435 million (an effective rate of 28.0 percent) and $987 million (an effective rate of 31.0 percent) for the same periods of 2005. The second quarter of 2005 included a $94 million reduction in income tax expense related to the resolution of federal income tax examinations covering substantially all of the Company’s legal entities for the years 2000 through 2002. For further information on income taxes, refer to Note 9 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS

LoansThe Company’s total loan portfolio was $141.4 billion at June 30, 2006, compared with $137.8 billion at December 31, 2005, an increase of $3.6 billion (2.6 percent). The increase in total loans was driven primarily by growth in commercial loans, residential mortgages and retail loans. The $2.4 billion (5.7 percent) increase in commercial loans was primarily driven by new customer relationships, utilization under lines of credit, growth in commercial leasing and corporate payment card balances.

Commercial real estate loans were $28.6 billion at June 30, 2006, an increase of $.1 billion (.3 percent) compared with December 31, 2005. The increase was driven by growth in construction loans, partially offset by a decrease in commercial mortgage balances.

Residential mortgages held in the loan portfolio were $21.1 billion at June 30, 2006, an increase of $.3 billion (1.6 percent) compared with December 31, 2005. The growth was the result of an increase in consumer finance originations, partially offset by the Company selling an increased proportion of its residential mortgage loan production in 2006.

Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, increased $.7 billion (1.6 percent) at June 30, 2006, compared with December 31, 2005. The increase was primarily driven by growth in installment, credit card and home equity loans, partially offset by decreases in retail leasing, home equity lines and student loan balances.

Investment SecuritiesInvestment securities, both available-for-sale andheld-to-maturity, totaled $38.5 billion at June 30, 2006, compared with $39.8 billion at December 31, 2005, reflecting purchases of $3.7 billion of securities, which were more than offset by maturities and prepayments and the reclassification of $.5 billion of principal-only securities to the trading account effective January 1, 2006, in connection with the adoption of SFAS 156. As of June 30, 2006, approximately 40 percent of the investment securities portfolio represented adjustable-rate financial instruments, compared with 41 percent at December 31, 2005. Adjustable-rate financial instruments include variable-rate collateralized mortgage obligations, mortgage-backed securities, agency securities, adjustable-rate money market accounts and asset-backed securities.


U.S. Bancorp	7


Table 4		Investment Securities


			Available-for-Sale									Held-to-Maturity

							Weighted-									Weighted-
							Average		Weighted-							Average		Weighted-
			Amortized		Fair		Maturity in		Average			Amortized		Fair		Maturity in		Average
June 30, 2006 (Dollars in Millions)			Cost		Value		Years		Yield (d)			Cost		Value		Years		Yield (d)

U.S. Treasury and agencies
	Maturing in one year or less			$119		$119		.3		4.70	%		$—		$—		—		—	%
	Maturing after one year through five years			37		37		2.4		6.39			—		—		—		—
	Maturing after five years through ten years			14		14		6.9		7.10			—		—		—		—
	Maturing after ten years			338		324		14.1		5.97			—		—		—		—

		Total		$508		$494		9.8		5.73	%		$—		$—		—		—	%

Mortgage-backed securities (a)
	Maturing in one year or less			$140		$138		.6		5.18	%		$—		$—		—		—	%
	Maturing after one year through five years			17,298		16,463		3.8		4.53			8		8		3.1		5.75
	Maturing after five years through ten years			12,622		11,847		7.5		5.08			—		—		—		—
	Maturing after ten years			5,793		5,715		15.1		6.36			—		—		—		—

		Total		$35,853		$34,163		7.0		5.02	%		$8		$8		3.1		5.75	%

Asset-backed securities (a)
	Maturing in one year or less			$8		$8		.3		5.33	%		$—		$—		—		—	%
	Maturing after one year through five years			—		—		—		—			—		—		—		—
	Maturing after five years through ten years			—		—		—		—			—		—		—		—
	Maturing after ten years			—		—		—		—			—		—		—		—

		Total		$8		$8		.3		5.33	%		$—		$—		—		—	%

Obligations of state and political subdivisions (b)
	Maturing in one year or less			$52		$52		.4		7.00	%		$2		$2		.5		6.04	%
	Maturing after one year through five years			40		41		2.3		7.01			20		21		3.2		6.31
	Maturing after five years through ten years			1,967		1,925		9.2		6.83			14		15		7.9		7.22
	Maturing after ten years			742		720		14.3		6.44			37		38		15.8		6.54

		Total		$2,801		$2,738		10.3		6.73	%		$73		$76		10.4		6.59	%

Other debt securities
	Maturing in one year or less			$256		$256		.1		4.57	%		$5		$5		.4		6.44	%
	Maturing after one year through five years			9		9		1.5		4.52			11		11		3.0		5.44
	Maturing after five years through ten years			15		15		10.0		6.25			1		1		5.8		5.15
	Maturing after ten years			627		625		21.2		6.06			—		—		—		—

		Total		$907		$905		14.8		5.63	%		$17		$17		2.3		5.74	%

Other investments				$54		$56		—		—	%		$—		$—		—		—	%

Total investment securities (c)				$40,131		$38,364		7.4		5.17	%		$98		$101		8.4		6.37	%


(a)	Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.


(b)	Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if purchased at par or a discount.
(c)	The weighted-average maturity of the available for sale investment securities was 6.1 years at December 31, 2005, with a corresponding weighted-average yield of 4.89 percent. The weighted-average maturity of theheld-to-maturity investment securities was 7.2 years at December 31, 2005, with a corresponding weighted-average yield of 6.44 percent.
(d)	Average yields are presented on a fully-taxable equivalent basis under a tax rate of 35 percent. Yields on available-for-sale andheld-to-maturity securities are computed based on historical cost balances. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity.


		June 30, 2006					December 31, 2005

		Amortized		Percent			Amortized		Percent
(Dollars in Millions)		Cost		of Total			Cost		of Total

U.S. Treasury and agencies			$508		1.3	%		$496		1.2	%
Mortgage-backed securities			35,861		89.1			38,169		94.4
Asset-backed securities			8		—			12		.1
Obligations of state and political subdivisions			2,874		7.1			724		1.8
Other debt securities and investments			978		2.5			1,029		2.5

	Total investment securities		$40,229		100.0	%		$40,430		100.0	%


8	U.S. Bancorp

DepositsTotal deposits were $122.7 billion at June 30, 2006, compared with $124.7 billion at December 31, 2005, a decrease of $2.0 billion (1.6 percent). The decrease in total deposits was primarily the result of decreases in noninterest-bearing deposits and money market savings accounts, partially offset by increases in interest checking, time certificates of deposits less than $100,000 and time deposits greater than $100,000. The $1.5 billion (4.6 percent) decrease in noninterest-bearing deposits reflected lower balances in most business lines, partially offset by an increase in corporate trust balances due to seasonality. The $1.3 billion (4.7 percent) decrease in money market savings account balances reflected the Company’s deposit pricing decisions for money market products in relation to other fixed-rate deposit products offered. A portion of branch-based money market savings accounts have migrated to fixed-rate time certificates, while larger customer money market savings accounts have migrated to time deposits greater than $100,000 as rates increased on the time deposit products. Time deposits greater than $100,000 increased $.2 billion (1.0 percent) and time certificates of deposit less than $100,000 increased $.3 billion (2.1 percent) at June 30, 2006, compared with December 31, 2005. Interest checking accounts increased $.2 billion (1.0 percent) due to an increase in trust and custody balances, partially offset by decreases in consumer and private banking balances.

BorrowingsThe Company utilizes both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, commercial paper, securities sold under agreements to repurchase and other short-term borrowings, were $20.6 billion at June 30, 2006, compared with $20.2 billion at December 31, 2005. Short-term funding is managed within approved liquidity policies. The increase of $.4 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 $42.0 billion at June 30, 2006, compared with $37.1 billion at December 31, 2005, reflecting the issuances of $2.0 billion of bank notes, $1.5 billion of medium-term notes and $1.8 billion of junior subordinated debentures and the addition of $2.2 billion of Federal Home Loan Bank (“FHLB”) advances, partially offset by $1.6 billion of medium-term note maturities and $.7 billion of junior subordinated debentures repayments. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

CORPORATE RISK PROFILE

OverviewManaging risks is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit, residual, operational, interest rate, market and liquidity risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Residual risk is the potential reduction in theend-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 amark-to-market basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. In addition, corporate strategic decisions, as well as the risks described above, could give rise to reputation risk. Reputation risk is the risk that negative publicity or press, whether true or not, could result in costly litigation or cause a decline in the Company’s stock value, customer base or revenue.

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

In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and


U.S. Bancorp	9


Table 5		Delinquent Loan Ratios as a Percent of Ending Loan Balances


				June 30,			December 31,
90 days or more past dueexcludingnonperforming loans				2006			2005

Commercial
	Commercial				.06	%		.06	%
	Lease financing				—			—

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

		Total commercial real estate			—			—
Residential mortgages					.30			.32
Retail
	Credit card				1.56			1.26
	Retail leasing				.03			.04
	Other retail				.18			.22

		Total retail			.38			.36

			Total loans		.19	%		.18	%


		June 30,			December 31,
90 days or more past dueincludingnonperforming loans		2006			2005

Commercial			.58	%		.69	%
Commercial real estate			.40			.55
Residential mortgages (a)			.49			.55
Retail			.50			.50

	Total loans		.51	%		.58	%


(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 3.06 percent at June 30, 2006, and 4.35 percent at December 31, 2005.

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 second quarter and first six months of 2006 have improved from the same periods of 2005, as reflected in strong expansion of the gross domestic product index, lower unemployment rates, favorable trends related to corporate profits and consumer spending for retail goods and services. Current economic conditions are relatively unchanged from December 31, 2005. The Federal Reserve Bank continued increasing short-term interest rates in an effort to prevent an acceleration of inflation and maintain the current rate of economic growth.

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, 2005, for a more detailed discussion on credit risk management processes.

Loan DelinquenciesTrends in delinquency ratios represent an indicator, among other considerations, of credit risk within the Company’s loan portfolios. The entire balance of the account is considered delinquent if the minimum payment contractually required to be made is not received by the specified date on the billing statement. The Company measures delinquencies, both including and excluding nonperforming loans, to enable comparability with other companies. Accruing loans 90 days or more past due totaled $264 million at June 30, 2006, compared with $253 million at December 31, 2005. These loans are 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 June 30, 2006, and .18 percent at December 31, 2005.

To monitor credit risk associated with retail loans, the Company monitors delinquency ratios in the various stages of collection including nonperforming status.


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

		June 30,		December 31,		June 30,			December 31,
(Dollars in Millions)		2006		2005		2006			2005

Residential mortgages
30-89 days			$105		$112		.50	%		.55	%
90 days or more			64		67		.30			.32
Nonperforming			39		48		.19			.23

	Total		$208		$227		.99	%		1.10	%

Retail
Credit card
30-89 days			$153		$147		2.06	%		2.06	%
90 days or more			116		90		1.56			1.26
Nonperforming			41		49		.55			.69

	Total		$310		$286		4.17	%		4.01	%
Retail leasing
30-89 days			$26		$43		.36	%		.59	%
90 days or more			2		3		.03			.04
Nonperforming			—		—		—			—

	Total		$28		$46		.39	%		.63	%
Other retail
30-89 days			$162		$206		.51	%		.66	%
90 days or more			58		70		.18			.22
Nonperforming			16		17		.05			.06

	Total		$236		$293		.74	%		.94	%

Nonperforming AssetsThe level of nonperforming assets represents another indicator 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 June 30, 2006, total nonperforming assets were $550 million, compared with $644 million at December 31, 2005. The ratio of total nonperforming assets to total loans and other real estate decreased to ..39 percent at June 30, 2006, compared with ..47 percent at December 31, 2005.

Included in nonperforming loans were restructured loans of $50 million at June 30, 2006, compared with $75 million at December 31, 2005. At June 30, 2006, the Company had no commitments to lend additional funds under restructured loans, compared to commitments of $9 million at December 31, 2005.


U.S. Bancorp	11


Table 6		Nonperforming Assets (a)


				June 30,			December 31,
(Dollars in Millions)				2006			2005

Commercial
	Commercial				$203			$231
	Lease financing				38			42

		Total commercial			241			273
Commercial real estate
	Commercial mortgages				88			134
	Construction and development				25			23

		Total commercial real estate			113			157
Residential mortgages					39			48
Retail
	Credit card				41			49
	Retail leasing				—			—
	Other retail				16			17

		Total retail			57			66

			Total nonperforming loans		450			544
Other real estate (b)					77			71
Other assets					23			29

			Total nonperforming assets		$550			$644

Accruing loans 90 days or more past due					$264			$253
Nonperforming loans to total loans					.32	%		.39	%
Nonperforming assets to total loans plus other real estate (b)					.39	%		.47	%

Changes in Nonperforming Assets


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

Balance December 31, 2005						$457			$187			$644
	Additions to nonperforming assets
		New nonaccrual loans and foreclosed properties				139			34			173
		Advances on loans				18			—			18

			Total additions			157			34			191
	Reductions in nonperforming assets
	��	Paydowns, payoffs				(125	)		(36	)		(161	)
		Net sales				(21	)		—			(21	)
		Return to performing status				(30	)		(4	)		(34	)
		Charge-offs (c)				(61	)		(8	)		(69	)

			Total reductions			(237	)		(48	)		(285	)

				Net additions to (reductions in) nonperforming assets		(80	)		(14	)		(94	)

Balance June 30, 2006						$377			$173			$550


(a)		Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b)		Excludes $87 million of foreclosed GNMA loans which continue to accrue 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.

Restructured Loans Accruing InterestOn a case-by-case basis, management determines whether an account that experiences financial difficulties should be modified as to its interest rate or repayment terms to maximize the Company’s collection of its balance.

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


12	U.S. Bancorp

The following table provides a summary of restructured loans that continue to accrue interest:


					As a Percent of Ending
	Amount				Loan Balances

	June 30,		December 31,		June 30,			December 31,
(Dollars in Millions)	2006		2005		2006			2005

Commercial		$ 16		$ 5		.04	%		.01	%
Commercial real estate		1		1		—			—
Residential mortgages		65		59		.31			.28
Credit card		252		218		3.39			3.05
Other retail		36		32		.09			.08

Total		$370		$315		.26	%		.23	%

Restructured loans that continue to accrue interest were higher at June 30, 2006, compared with December 31, 2005, reflecting the impact of the Company implementing higher minimum balance payment requirements for credit card customers in response to industry guidance issued by the banking regulatory agencies.

Analysis of Loan Net Charge-OffsTotal loan net charge-offs were $125 million and $240 million during the second quarter and first six months of 2006, respectively, compared with net charge-offs of $144 million and $316 million, respectively, for the same periods of 2005. The ratio of total loan net charge-offs to average loans in the second quarter and first six months of 2006 was .36 percent and ..35 percent, respectively, compared with .44 percent and .49 percent, respectively, for the same periods of 2005.

Commercial and commercial real estate loan net charge-offs for the second quarter of 2006 were $20 million (.11 percent of average loans outstanding), compared with $13 million (.07 percent of average loans outstanding) in the second quarter of 2005. The increase in net charge-offs reflected lower gross charge-offs, more than offset by a lower level of recoveries as compared with the same quarter of the prior year. Commercial and commercial real estate loan net charge-offs for the first six months of 2006 were $34 million (.09 percent of average loans outstanding), compared with $46 million (.13 percent of average loans outstanding) in the first six months of 2005.

Retail loan net charge-offs for the second quarter of 2006 were $94 million (.82 percent of average loans outstanding), compared with $123 million (1.12 percent of average loans outstanding) for the second quarter of 2005. Retail loan net charge-offs for the first six months of 2006 were $188 million (.82 percent of average loans outstanding), compared with $253 million (1.17 percent of average loans outstanding) for the first six months of 2005. The decrease in retail loan net charge-offs reflected the impact of the bankruptcy legislation change that occurred in the fourth quarter of 2005. The Company anticipates that bankruptcy charge-offs will return to more normalized levels in future quarters.

The Company’s retail lending business utilizes several distinct business processes and channels to originate retail credit including traditional branch lending, 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


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


				Three Months Ended						Six Months Ended
				June 30,						June 30,

				2006			2005			2006			2005

Commercial
	Commercial				.13	%		.10	%		.09	%		.13	%
	Lease financing				.54			.49			.55			.78

		Total commercial			.18			.14			.15			.20
Commercial real estate
	Commercial mortgages				(.02	)		.02			.01			.05
	Construction and development				.05			(.16	)		.02			(.03	)

		Total commercial real estate			—			(.03	)		.01			.03
Residential mortgages					.21			.19			.17			.21
Retail
	Credit card				2.72			3.93			2.67			4.02
	Retail leasing				.11			.27			.17			.36
	Home equity and second mortgages				.35			.43			.34			.45
	Other retail				.70			1.01			.74			1.05

		Total retail			.82			1.12			.82			1.17

			Total loans		.36	%		.44	%		.35	%		.49	%


U.S. Bancorp	13

substantially all facets of the Company’s consumer lending activities. USBCF specializes in serving channel-specific and alternative lending markets in residential mortgages, home equity and installment loan financing. USBCF manages loans originated through a broker network, correspondent relationships and U.S. Bank branch offices. Generally, loans managed by the Company’s consumer finance division exhibit higher credit risk characteristics, but are priced commensurate with the differing risk profile.

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


	Three Months Ended June 30										Six Months Ended June 30

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

(Dollars in Millions)	2006		2005		2006			2005			2006		2005		2006			2005

Consumer Finance (a)
Residential mortgages		$7,295		$5,788		.49	%		.49	%		$7,055		$5,455		.46	%		.52	%
Home equity and second mortgages		1,984		2,548		1.62			1.57			2,021		2,603		1.50			1.63
Other retail		402		387		3.99			4.15			403		385		4.50			4.71
Traditional Branch
Residential mortgages		$13,573		$11,410		.06	%		.04	%		$13,872		$11,062		.03	%		.05	%
Home equity and second mortgages		13,051		12,455		.15			.19			12,964		12,321		.16			.20
Other retail		16,218		14,747		.62			.92			16,180		14,616		.65			.95
Total Company
Residential mortgages		$20,868		$17,198		.21	%		.19	%		$20,927		$16,517		.17	%		.21	%
Home equity and second mortgages		15,035		15,003		.35			.43			14,985		14,924		.34			.45
Other retail		16,620		15,134		.70			1.01			16,583		15,001		.74			1.05


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

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

At June 30, 2006, the allowance for credit losses was $2,251 million (1.59 percent of loans), compared with an allowance of $2,251 million (1.63 percent of loans) at December 31, 2005. The ratio of the allowance for credit losses to nonperforming loans was 500 percent at June 30, 2006, compared with 414 percent at December 31, 2005. The ratio of the allowance for credit losses to annualized loan net charge-offs was 449 percent at June 30, 2006, compared with 329 percent at December 31, 2005.


14	U.S. Bancorp


Table 8		Summary of Allowance for Credit Losses


					Three Months Ended						Six Months Ended
					June 30,						June 30,

(Dollars in Millions)					2006			2005			2006		2005

Balance at beginning of period						$2,251			$2,269			$2,251		$2,269
Charge-offs
	Commercial
		Commercial				24			42			52		74
		Lease financing				13			15			25		38

			Total commercial			37			57			77		112
	Commercial real estate
		Commercial mortgages				3			4			6		10
		Construction and development				1			1			1		3

			Total commercial real estate			4			5			7		13
	Residential mortgages					11			8			19		18
	Retail
		Credit card				59			73			113		146
		Retail leasing				6			8			13		19
		Home equity and second mortgages				16			19			32		40
		Other retail				43			52			90		105

			Total retail			124			152			248		310

				Total charge-offs		176			222			351		453
Recoveries
	Commercial
		Commercial				11			33			34		51
		Lease financing				6			9			11		19

			Total commercial			17			42			45		70
	Commercial real estate
		Commercial mortgages				4			3			5		5
		Construction and development				—			4			—		4

			Total commercial real estate			4			7			5		9
	Residential mortgages					—			—			1		1
	Retail
		Credit card				9			9			17		17
		Retail leasing				4			3			7		6
		Home equity and second mortgages				3			3			7		7
		Other retail				14			14			29		27

			Total retail			30			29			60		57

				Total recoveries		51			78			111		137
Net Charge-offs
	Commercial
		Commercial				13			9			18		23
		Lease financing				7			6			14		19

			Total commercial			20			15			32		42
	Commercial real estate
		Commercial mortgages				(1	)		1			1		5
		Construction and development				1			(3	)		1		(1	)

			Total commercial real estate			—			(2	)		2		4
	Residential mortgages					11			8			18		17
	Retail
		Credit card				50			64			96		129
		Retail leasing				2			5			6		13
		Home equity and second mortgages				13			16			25		33
		Other retail				29			38			61		78

			Total retail			94			123			188		253

				Total net charge-offs		125			144			240		316

Provision for credit losses						125			144			240		316

Balance at end of period						$2,251			$2,269			$2,251		$2,269

Components
	Allowance for loan losses					$2,039			$2,082
	Liability for unfunded credit commitments					212			187

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

Allowance for credit losses as a percentage of
	Period-end loans					1.59	%		1.70	%
	Nonperforming loans					500			441
	Nonperforming assets					409			372
	Annualized net charge-offs					449			393


U.S. Bancorp	15

Several factors were taken into consideration in evaluating the allowance for credit losses at June 30, 2006, including the risk profile of the portfolios and loan net charge-offs during the period, the level of nonperforming assets, accruing loans 90 days or more past due, delinquency ratios and changes in restructured loan balances compared with December 31, 2005. Management also considered the uncertainty related to certain industry sectors, including the airline industry, and the extent of credit exposure to other borrowers within the portfolio. In addition, concentration risks associated with commercial real estate and the mix of loans, including credit cards, loans originated through the consumer finance division and residential mortgages, and their relative credit risk were evaluated. Finally, the Company considered current economic conditions that might impact the portfolio.

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 residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of June 30, 2006, no significant change in the amount of residuals or concentration of the portfolios has occurred since December 31, 2005. 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, 2005, for further discussion on residual 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”) provides oversight and assesses the most significant operational risks facing the Company within its business lines. Under the guidance of the Risk Committee, enterprise risk management personnel establish policies and interact with business lines to monitor significant operational 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, 2005, for further discussion on operational 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 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 net interest income is simulation analysis. Through this simulation, management estimates the impact on net interest income of a 200 basis point upward or downward gradual change of market interest rates over a one-year period. This represents a change, effective in the first quarter of 2006, from a previous policy of estimating the effect of a 300 basis point upward or downward gradual change on net interest income. The simulation also estimates 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.

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, 2005, for further discussion on net interest income simulation analysis.


16	U.S. Bancorp

Sensitivity of Net Interest Income:

June 30, 2006

December 31, 2005

Down 50

Up 50

Down 200

Up 200

Down 50

Up 50

Down 200

Up 200

Immediate

Gradual

Immediate

Gradual*

Net interest income

1.17%

(1.39)%

2.55%

(2.94)%

.66%

(.73)%

1.19%

(2.60)%


*		As of January 31, 2006, due to the change to a 200 basis point gradual change policy during the first quarter of 2006.

The table above summarizes the interest rate risk of net interest income based on forecasts over the succeeding 12 months. At June 30, 2006, 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. ALPC policy guidelines limit the estimated change in net interest income to 3.0 percent of forecasted net interest income over the succeeding 12 months. At June 30, 2006, and December 31, 2005, 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 June 30, 2006. The up 200 basis point scenario resulted in a 6.2 percent decrease in the market value of equity at June 30, 2006, compared with a 6.8 percent decrease at December 31, 2005. The down 200 basis point scenario resulted in a 1.1 percent decrease in the market value of equity at June 30, 2006, compared with a 4.1 percent decrease at December 31, 2005. At June 30, 2006, and December 31, 2005, 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 1.9 years at June 30, 2006, compared with 1.6 years at December 31, 2005. The duration of liabilities was 1.8 years at June 30, 2006, compared with 1.6 years at December 31, 2005. At June 30, 2006, the duration of equity was 1.9 years, compared with 1.8 years at December 31, 2005. 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, 2005, 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, 2005, 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 $24.4 billion of total notional amount of asset and liability management derivative positions at June 30, 2006, $19.2 billion was designated as either fair value or cash flow hedges or net investment hedges of foreign operations. The cash flow hedge derivative positions are interest rate swaps that hedge the forecasted cash flows from the underlying variable-rate LIBOR loans and floating-rate debt. The fair value hedges are primarily interest rate swaps that hedge the change in fair value related to interest rate changes of underlying fixed-rate debt and subordinated obligations.

In addition, the Company uses forward commitments to sell residential mortgage loans to hedge its interest rate risk related to residential mortgage loans held for sale. Related to its mortgage banking operations, the Company held $2.3 billion of forward commitments to sell mortgage loans and $1.7 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. Beginning in March 2006, the Company entered into U.S. Treasury futures and options on U.S. Treasury futures contracts to hedge the change in fair value related to the election of fair value measurement for its residential MSRs.


U.S. Bancorp	17


Table 9		Derivative Positions


				June 30, 2006							December 31, 2005

									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			$5,810		$(106	)		17.73		$16,370		$(82	)		7.79
		Pay fixed/receive floating swaps			8,398		123			2.00		9,163		139			1.33
		Futures and forwards
			Buy		53		—			.11		104		—			.07
			Sell		5,625		(2	)		.14		2,669		(15	)		.09
		Options
			Written		4,046		(4	)		.12		1,086		3			.08
	Foreign exchange contracts
		Cross-currency swaps			403		19			9.12		387		11			9.61
		Forwards			10		—			.08		404		7			.05
	Equity contracts				46		1			2.79		42		3			3.29

Customer-related Positions

	Interest rate contracts
		Receive fixed/pay floating swaps			$10,218		$(264	)		5.33		$9,753		$(69	)		5.25
		Pay fixed/receive floating swaps			10,189		318			5.42		9,707		121			5.25
		Options
			Purchased		1,611		14			2.25		1,453		6			2.26
			Written		1,597		(13	)		2.25		1,453		(5	)		2.26
	Risk participation agreements (a)
		Purchased			147		—			7.49		143		—			8.02
		Written			224		—			5.89		169		—			4.64
	Foreign exchange rate contracts
		Forwards and swaps
			Buy		2,265		67			.39		2,042		77			.43
			Sell		2,212		(59	)		.41		2,018		(73	)		.46
		Options
			Purchased		134		(1	)		.46		56		1			.24
			Written		134		1			.46		56		(1	)		.24


(a)		At June 30, 2006, the credit equivalent amount was $1 million and $32 million, compared with $1 million and $18 million at December 31, 2005, for purchased and written risk participation agreements, respectively.

At June 30, 2006, the Company had $36 million in accumulated other comprehensive income related to realized and unrealized losses on derivatives classified as cash flow hedges. Unrealized gains and losses are reflected in earnings when the related cash flows or hedged transactions occur and offset the related performance of the hedged items. The estimated amount to be reclassified from accumulated other comprehensive income into earnings during the remainder of 2006 and the next 12 months is a gain of $21 million and $39 million, respectively.

Gains or losses on customer-related derivative positions were not material for the second quarter and first six months of 2006. The change in fair value of forward commitments attributed to hedge ineffectiveness recorded in noninterest income was not significant for the second quarter of 2006 and was a decrease of $1 million for the first six months of 2006. The change in the fair value of all other asset and liability management derivative positions attributed to hedge ineffectiveness recorded in noninterest income was not material for the second quarter and first six months of 2006.

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


18	U.S. Bancorp

adjustment for the second quarter and first six months of 2006 was not material.

Market Risk ManagementIn addition to interest rate risk, the Company is exposed to other forms of market risk as a consequence of conducting normal trading activities. Business activities that contribute to market risk include primarily residential mortgage related risks, but also other things, such as 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. Due to the election of fair value measurement of its residential MSRs and related hedging strategy in the first quarter of 2006, the Company increased its VaR limit to $40 million at March 31, 2006, compared with $20 million at December 31, 2005. The Company’s market valuation risk, as estimated by the VaR analysis, was $16 million at June 30, 2006, compared with $1 million at December 31, 2005. 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, 2005, for further discussion on market risk management.

Liquidity Risk ManagementALPC establishes policies, as well as analyzes and manages liquidity, to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-effective manner. 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, 2005, for further discussion on liquidity risk management.

At June 30, 2006, parent company long-term debt outstanding was $12.6 billion, compared with $10.9 billion at December 31, 2005. The $1.7 billion increase was primarily due to the issuances of $1.8 billion of junior subordinated debentures and $1.5 billion of medium-term notes, offset by long-term debt maturities and repayments during the first six months of 2006. As of June 30, 2006, there is no parent company debt scheduled to mature in the remainder of 2006.

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 June 30, 2006.

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

In the ordinary course of business, the Company enters into an array of commitments to extend credit, letters of credit and various forms of guarantees that may be considered off-balance sheet arrangements. The extent of these arrangements is provided in Note 10 of the Notes to Consolidated Financial Statements.

Asset securitizations 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 $3.0 billion at June 30, 2006, and $3.8 billion at December 31, 2005. The Company provides a liquidity facility to the conduit. A liability for the estimate of the potential risk of loss for the Company as the liquidity facility provider is recorded on the balance sheet in other liabilities and was $15 million at June 30, 2006, and $20 million at December 31, 2005. In addition, the Company recorded at fair value its retained residual interest in the investment securities conduit of $21 million at June 30, 2006, and $28 million at December 31, 2005.

The Company does not rely significantly onoff-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, 2005, for further discussion onoff-balance sheet arrangements.


U.S. Bancorp	19


Table 10		Capital Ratios


		June 30,			December 31,
(Dollars in Millions)		2006			2005

Tier 1 capital			$16,841			$15,145
	As a percent of risk-weighted assets		8.9	%		8.2	%
	As a percent of adjusted quarterly average assets (leverage ratio)		8.2	%		7.6	%
Total risk-based capital			$24,893			$23,056
	As a percent of risk-weighted assets		13.1	%		12.5	%
Tangible common equity			$11,535			$11,873
	As a percent of tangible assets		5.6	%		5.9	%

Capital ManagementThe Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. The Company has targeted returning 80 percent of earnings to its common shareholders through a combination of dividends and share repurchases. In the first six months of 2006, the Company returned 116 percent of earnings. The Company continually assesses its business risks and capital position. The Company also manages its capital to exceed regulatory capital requirements for well-capitalized bank holding companies. To achieve these capital goals, the Company employs a variety of capital management tools including dividends, common share repurchases, and the issuance of subordinated debt and other capital instruments. Total shareholders’ equity was $20.4 billion at June 30, 2006, compared with $20.1 billion at December 31, 2005. The increase was the result of corporate earnings and the issuance of $1.0 billion of non-cumulative, perpetual preferred stock on March 27, 2006, partially offset by share repurchases and dividends.

Table 10 provides a summary of capital ratios as of June 30, 2006, and December 31, 2005. Tier 1 capital at June 30, 2006, was positively affected by the $1.0 billion issuance of preferred stock and the $1.8 billion issuance of junior subordinated debentures during the first six months of 2006. All regulatory ratios continue to be in excess of regulatory “well-capitalized” requirements.

On December 21, 2004, the Board of Directors approved and announced 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 program during the second quarter of 2006:


					Maximum Number of
	Total Number of		Average		Shares that May Yet
	Shares Purchased as		Price Paid		Be Purchased
Period	Part of the Program		per Share		Under the Program

April		6,588,329		$30.64		35,948,635
May		2,284,831		31.17		33,663,804
June		811,039		30.89		32,852,765

Total		9,684,199		$30.78		32,852,765

On August 3, 2006, the Company announced that the Board of Directors approved an authorization to repurchase 150 million shares of common stock through December 2008. This new authorization replaces the December 21, 2004, share repurchase program.

LINE OF BUSINESS FINANCIAL REVIEW

Within the Company, financial performance is measured by major lines of business, which include Wholesale Banking, Consumer Banking, Wealth 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 PresentationBusiness line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. Refer to “Management’s Discussion and Analysis — Line of Business Financial Review” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, for further discussion on the business lines’ basis for financial presentation.

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 the Company’s diverse customer base. During 2006, certain organization and methodology changes were made and, accordingly, 2005 results were restated and presented on a comparable basis, including a change in the allocation of risk adjusted capital to the business lines. Business lines are allocated risk adjusted capital based upon economic capital requirements, regulatory capital requirements, goodwill and intangibles. The allocations to the business lines are equal to the capital that is held by the Company. The capital allocations include credit and operational capital allocations which are performed using a Basel II


20	U.S. Bancorp

approach with adjustments for regulatory Tier I leverage requirements.

Wholesale Bankingoffers lending, depository, treasury management and other financial services to middle market, large corporate, commercial real estate, equipment finance, small-ticket leasing and public sector clients, along with lending guaranteed by the Small Business Administration. Wholesale Banking contributed $298 million of the Company’s net income in the second quarter and $598 million in the first six months of 2006, or increases of $6 million and $27 million, respectively, compared with the same periods of 2005. The increases were primarily driven by growth in total net revenue.

Total net revenue increased $21 million (3.1 percent) in the second quarter and $46 million (3.4 percent) in the first six months of 2006, compared with the same periods of 2005. Net interest income, on a taxable-equivalent basis, increased $15 million in the second quarter and $39 million in the first six months of 2006, compared with the same periods of 2005. 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 and commercial real estate loan demand in 2005 and the first six months of 2006. Total deposits increased year-over-year driven by growth in fixed-rate time deposits, partially offset by a decrease in interest checking deposits.

The $6 million (2.7 percent) and $7 million (1.6 percent) increases in noninterest income in the second quarter and first six months of 2006, respectively, compared with the same periods of 2005, were due to higher commercial products revenue and equipment leasing revenue, partially offset by lower other commercial loan fees and treasury management-related 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.

Noninterest expense was relatively flat in the second quarter of 2006, compared with the second quarter of 2005. Noninterest expense increased $8 million (1.7 percent) in the first six months of 2006, compared with the same period of 2005. The increase was primarily driven by higher personnel-related costs and net shared services expense.

The provision for credit losses increased $12 million in the second quarter and decreased $5 million in the first six months of 2006, compared with the same periods of 2005. The increase in the provision for credit losses in the second quarter of 2006 was due to lower net recoveries compared to the second quarter of 2005. Nonperforming assets within Wholesale Banking were $218 million at June 30, 2006, $260 million at March 31, 2006, and $298 million at June 30, 2005. Nonperforming assets as a percentage of period-end loans were .43 percent at June 30, 2006, ..52 percent at March 31, 2006, and .63 percent at June 30, 2005. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.

Consumer Bankingdelivers 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, consumer lending, mortgage banking, consumer finance, workplace banking, student banking and24-hour banking. Consumer Banking contributed $488 million of the Company’s net income in the second quarter and $899 million in the first six months of 2006, or increases of $59 million and $83, respectively, compared with the same periods of 2005. While the retail banking business grew net income 13.9 percent in the second quarter and 11.2 percent in the first six months of 2006, the contribution of the mortgage banking business increased 12.5 percent and decreased 3.4 percent, respectively, compared with the same periods of 2005.

Total net revenue increased $22 million (1.6 percent) in the second quarter and $31 million (1.1 percent) in the first six months of 2006, compared with the same periods of 2005. Net interest income, on a taxable-equivalent basis, increased $19 million in the second quarter and $56 million in the first six months of 2006, compared with the same periods of 2005. 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. The increases in average loan balances reflected growth in retail loans, residential mortgages, commercial loans and commercial real estate loans. The growth in retail loans was principally driven by an increase in installment loans which increased 15.8 percent in the second quarter and 15.5 percent in the first six months of 2006 over the same periods of 2005. Residential mortgages, which include traditional residential mortgages, grew 21.6 percent in the second


U.S. Bancorp	21

quarter and 27.1 percent in the first six months of 2006, compared with the same periods of a year ago, reflecting the Company’s retention of adjustable-rate residential mortgages during 2005. Average balances of residential mortgages are expected to remain essentially flat in future periods due to the Company’s decision in the first quarter of 2006 to package and sell the majority of its residential mortgage loan production in the secondary markets. The year-over-year decreases in average deposits were primarily due to a reduction in saving products, offset by growth in interest checking and time deposits. The year-over-year increases in interest checking balances reflected strong branch-based new account deposit growth. On a combined basis, the Consumer Banking line of business generated growth of $90 million (.3 percent) in average checking account balances in the second quarter of 2006, compared with the second quarter of 2005, driven by 5.7 percent growth in net new checking accounts. Offsetting this growth was a decline in average savings balances of $3.2 billion (13.0 percent) from second quarter of 2005, principally related to money market accounts. Average time deposit balances grew $1.6 billion in the second quarter and $1.7 billion in the first six months of 2006, compared with the same periods of 2005, as a portion of money market balances migrated to fixed-rate time deposit products.

Fee-based noninterest income increased $3 million in the second quarter and decreased $25 million in the first six months of 2006, compared with the same periods of 2005. The year-over-year decline in fee-based revenue was driven by a reduction in mortgage banking revenue, partially offset by increases in deposit service charges, retail leasing revenue, and other revenue. The increase in other revenue reflected higher gains from the sales of student loans. The reduction in mortgage banking revenue reflected the adoption of fair value accounting for MSRs as of January 1, 2006.

Noninterest expense decreased $61 million (9.1 percent) in the second quarter and $78 million (5.9 percent) in the first six months of 2006, compared with the same periods of 2005. The decreases were primarily attributable to the elimination of MSR amortization under SFAS 156 which resulted in a reduction of other intangible expense. Partially offsetting this decrease were increases in compensation and employee benefit expenses. The increases in compensation and employee benefit expenses reflect the impact of the net addition of 38 in-store and 13 traditional branches at June 30, 2006, compared with June 30, 2005.

The provision for credit losses decreased $9 million and $20 million in the second quarter and first six months of 2006, respectively, compared with the same periods of 2005. The improvements were attributable to lower net charge-offs. As a percentage of average loans outstanding, net charge-offs declined to .30 percent in the second quarter of 2006, compared with .38 percent in the second quarter of 2005. The decline in net charge-offs included both the commercial and retail loan portfolios. Commercial and commercial real estate loan net charge-offs declined $3 million in the second quarter of 2006, compared with the second quarter of 2005. Retail loan and residential mortgage net charge-offs declined by $6 million in the second quarter of 2006, compared with the second quarter of 2005. Nonperforming assets within Consumer Banking were $275 million at June 30, 2006, $291 million at March 31, 2006, and $304 million at June 30, 2005. Nonperforming assets as a percentage of period-end loans were .39 percent at June 30, 2006, ..42 percent at March 31, 2006, and .49 percent at June 30, 2005. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.

Wealth Managementprovides trust, private banking, financial advisory, investment management, insurance, custody and mutual fund servicing through six businesses: Private Client Group, Corporate Trust, U.S. Bancorp Investments and Insurance, FAF Advisors, Institutional Trust and Custody and Fund Services. Wealth Management contributed $148 million of the Company’s net income in the second quarter and $282 million in the first six months of 2006, or increases of $32 million and $55 million, respectively, compared with the same periods of 2005. The growth was primarily attributable to higher total net revenue, partially offset by an increase in noninterest expense.

Total net revenue increased $88 million (21.6 percent) in the second quarter and $170 million (21.2 percent) in the first six months of 2006, compared with the same periods of 2005. Net interest income, on a taxable-equivalent basis, increased $21 million in the second quarter and $47 million in the first six months of 2006, compared with the same periods of 2005. 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 increase in total deposits was attributable to growth in noninterest-bearing deposits and time deposits principally in Corporate Trust. Noninterest income increased $67 million in the second quarter and $123 million in the first six months of 2006, compared with the same periods of 2005, primarily driven by the acquisition of the corporate and institutional trust


22	U.S. Bancorp

business of a large national bank, growth in core revenue, and favorable equity market valuations.

Noninterest expense increased $39 million (17.5 percent) in the second quarter and $84 million (19.0 percent) in the first six months of 2006, compared with the same periods of 2005. The increases in noninterest expense were primarily attributable to the acquisition of a large national bank’s corporate and institutional trust business.

Payment Servicesincludes consumer and business credit cards, stored-value cards, debit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. Payment Services contributed $251 million of the Company’s net income in the second quarter and $474 in the first six months of 2006, or increases of $68 million and $123 million, respectively, compared with the same periods of 2005. The increases were due to growth in total net revenue driven by higher transaction volumes and a lower provision for credit losses, partially offset by increases in total noninterest expense.

Total net revenue increased $128 million (18.8 percent) in the second quarter and $251 million (19.1 percent) in the first six months of 2006, compared with the same periods of 2005. Net interest income increased $21 million in the second quarter and $38 million in the first six months of 2006, compared with the same periods of 2005. The increases were primarily due to increases in retail credit card balances and customer late fees, partially offset by an increase in nonearning assets resulting in higher funding expense. Noninterest income increased $107 million in the second quarter and $213 million in the first six months of 2006, compared with the same periods of 2005. 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 due to higher customer transaction volume. Corporate payment products revenue reflected organic growth in sales volumes and card usage. ATM processing services revenue increased primarily due to the acquisition of an ATM business in May of 2005. Merchant processing revenue also grew from a year ago due to an increase in sales volume driven by acquisitions, higher same store sales and equipment fees. Noninterest income for the first six months of 2006 also included the impact of a $10 million settlement in the first quarter.

Noninterest expense increased $48 million (15.8 percent) in the second quarter and $113 million (19.5 percent) in the first six months of 2006, compared with the same periods of 2005. The increases in noninterest expense were primarily attributable to the acquisition of merchant acquiring businesses, 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, and higher ATM processing services volumes.

The provision for credit losses decreased $27 million (29.3 percent) in the second quarter and $56 million (30.9 percent) in the first six months of 2006, compared with the same periods of 2005, due to lower net charge-offs. As a percentage of average loans outstanding, net charge-offs were 2.16 percent in the second quarter of 2006, compared with 3.26 percent in the second quarter of 2005. The favorable change in credit losses reflected the near-term impact of changes in bankruptcy legislation in the fourth quarter of 2005.

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. In addition, prior to the adoption of SFAS 156, changes in MSR valuations due to interest rate changes were managed at a corporate level and, as such, reported within this business unit. Treasury and Corporate Support recorded net income of $16 million in the second quarter and $101 million in the first six months of 2006, or decreases of $85 million and $126 million, respectively, compared with the same periods of 2005.

Total net revenue decreased $109 million (92.4 percent) in the second quarter and $142 million (61.2 percent) in the first six months of 2006, compared with the same periods of 2005. The year-over-year decreases in total net revenue were primarily due to unfavorable variances in net interest income, partially offset by higher noninterest income. The decrease in net interest income reflected the impact of a flatter yield curve and asset/liability management decisions during the past year, including reducing the investment securities portfolio, changes in interest rate derivative positions and the issuance of higher cost wholesale funding. Noninterest income increased $31 million in the second quarter and $128 million in the first six months of 2006, compared with the same periods of 2005. The increase in noninterest income in the second quarter and first six months of 2006 was driven by a gain from an initial public offering of a cardholder association. The increase during the first six months of 2006 was also due to a gain on derivatives that did not qualify as hedges, realized in the first quarter of 2006, and securities losses incurred in the first six months of 2005.


U.S. Bancorp	23


Table 11		Line of Business Financial Performance


			Wholesale								Consumer
			Banking								Banking

								Percent							Percent
Three Months Ended June 30 (Dollars in Millions)			2006		2005			Change			2006		2005		Change

Condensed Income Statement
Net interest income (taxable-equivalent basis)				$478		$463			3.2	%		$968		$949		2.0	%
Noninterest income				224		220			1.8			465		462		.6
Securities gains (losses), net				2		—			*			—		—		—

	Total net revenue			704		683			3.1			1,433		1,411		1.6
Noninterest expense				230		231			(.4	)		600		609		(1.5	)
Other intangibles				4		4			—			12		64		(81.3	)

	Total noninterest expense			234		235			(.4	)		612		673		(9.1	)

		Income before provision and income taxes		470		448			4.9			821		738		11.2
Provision for credit losses				1		(11	)		*			54		63		(14.3	)

Income before income taxes				469		459			2.2			767		675		13.6
Income taxes and taxable-equivalent adjustment				171		167			2.4			279		246		13.4

Net income				$298		$292			2.1			$488		$429		13.8

Average Balance Sheet Data
Commercial				$33,292		$31,187			6.7	%		$6,380		$6,143		3.9	%
Commercial real estate				17,346		16,630			4.3			10,699		10,226		4.6
Residential mortgages				59		57			3.5			20,365		16,742		21.6
Retail				40		28			42.9			35,112		33,710		4.2

	Total loans			50,737		47,902			5.9			72,556		66,821		8.6
Goodwill				1,329		1,329			—			2,108		2,108		—
Other intangible assets				55		73			(24.7	)		1,453		1,168		24.4
Assets				56,934		53,886			5.7			80,774		74,795		8.0
Noninterest-bearing deposits				12,107		12,303			(1.6	)		12,720		13,035		(2.4	)
Interest checking				3,164		3,189			(.8	)		17,789		17,384		2.3
Savings products				5,569		5,469			1.8			21,393		24,581		(13.0	)
Time deposits				13,020		12,267			6.1			18,669		17,034		9.6

	Total deposits			33,860		33,228			1.9			70,571		72,034		(2.0	)
Shareholders’ equity				5,554		5,308			4.6			6,436		6,457		(.3	)


			Wholesale									Consumer
			Banking									Banking

									Percent							Percent
Six Months Ended June 30 (Dollars in Millions)			2006			2005			Change			2006		2005		Change

Condensed Income Statement
Net interest income (taxable-equivalent basis)				$950			$911			4.3	%		$1,918		$1,862		3.0	%
Noninterest income				449			448			.2			848		873		(2.9	)
Securities gains (losses), net				2			(4	)		*			—		—		—

	Total net revenue			1,401			1,355			3.4			2,766		2,735		1.1
Noninterest expense				459			451			1.8			1,211		1,188		1.9
Other intangibles				8			8			—			25		126		(80.2	)

	Total noninterest expense			467			459			1.7			1,236		1,314		(5.9	)

		Income before provision and income taxes		934			896			4.2			1,530		1,421		7.7
Provision for credit losses				(7	)		(2	)		*			117		137		(14.6	)

Income before income taxes				941			898			4.8			1,413		1,284		10.0
Income taxes and taxable-equivalent adjustment				343			327			4.9			514		468		9.8

Net income				$598			$571			4.7			$899		$816		10.2

Average Balance Sheet Data
Commercial				$32,866			$30,709			7.0	%		$6,345		$6,010		5.6	%
Commercial real estate				17,312			16,615			4.2			10,650		10,194		4.5
Residential mortgages				61			60			1.7			20,420		16,069		27.1
Retail				42			38			10.5			35,075		33,425		4.9

	Total loans			50,281			47,422			6.0			72,490		65,698		10.3
Goodwill				1,329			1,329			—			2,107		2,109		(.1	)
Other intangible assets				57			76			(25.0	)		1,392		1,141		22.0
Assets				56,287			53,248			5.7			80,405		73,251		9.8
Noninterest-bearing deposits				12,049			12,125			(.6	)		12,747		12,937		(1.5	)
Interest checking				3,139			3,397			(7.6	)		17,722		17,198		3.0
Savings products				5,427			5,351			1.4			21,877		25,027		(12.6	)
Time deposits				12,536			11,660			7.5			18,422		16,760		9.9

	Total deposits			33,151			32,533			1.9			70,768		71,922		(1.6	)
Shareholders’ equity				5,474			5,296			3.4			6,424		6,445		(.3	)


*		Not meaningful


24	U.S. Bancorp


Wealth							Payment							Treasury and									Consolidated
Management							Services							Corporate Support									Company

				Percent							Percent									Percent							Percent
2006		2005		Change			2006		2005		Change			2006			2005			Change			2006		2005		Change

	$127		$106		19.8	%		$156		$135		15.6	%		$(32	)		$108			*	%		$1,697		$1,761		(3.6	)%
	369		302		22.2			654		547		19.6			40			9			*			1,752		1,540		13.8
	—		—		—			—		—		—			1			1			—			3		1		*

	496		408		21.6			810		682		18.8			9			118			(92.4	)		3,452		3,302		4.5
	240		208		15.4			300		260		15.4			71			106			(33.0	)		1,441		1,414		1.9
	22		15		46.7			51		43		18.6			—			55			*			89		181		(50.8	)

	262		223		17.5			351		303		15.8			71			161			(55.9	)		1,530		1,595		(4.1	)

	234		185		26.5			459		379		21.1			(62	)		(43	)		(44.2	)		1,922		1,707		12.6
	2		2		—			65		92		(29.3	)		3			(2	)		*			125		144		(13.2	)

	232		183		26.8			394		287		37.3			(65	)		(41	)		(58.5	)		1,797		1,563		15.0
	84		67		25.4			143		104		37.5			(81	)		(142	)		43.0			596		442		34.8

	$148		$116		27.6			$251		$183		37.2			$16			$101			(84.2	)		$1,201		$1,121		7.1


	$1,520		$1,582		(3.9	)%		$3,758		$3,433		9.5	%		$120			$172			(30.2	)%		$45,070		$42,517		6.0	%
	689		639		7.8			—		—		—			61			87			(29.9	)		28,795		27,582		4.4
	440		393		12.0			—		—		—			4			6			(33.3	)		20,868		17,198		21.3
	2,422		2,313		4.7			8,512		7,878		8.0			44			49			(10.2	)		46,130		43,978		4.9

	5,071		4,927		2.9			12,270		11,311		8.5			229			314			(27.1	)		140,863		131,275		7.3
	1,378		874		57.7			2,463		2,030		21.3			1			—			*			7,279		6,341		14.8
	473		316		49.7			1,165		972		19.9			—			3			*			3,146		2,532		24.2
	7,487		6,647		12.6			17,294		15,163		14.1			49,918			51,327			(2.7	)		212,407		201,818		5.2
	3,668		3,616		1.4			297		134		*			157			60			*			28,949		29,148		(.7	)
	2,379		2,445		(2.7	)		—		—		—			1			6			(83.3	)		23,333		23,024		1.3
	5,677		5,368		5.8			19		15		26.7			43			16			*			32,701		35,449		(7.8	)
	2,900		1,102		*			3		1		*			1,658			3,207			(48.3	)		36,250		33,611		7.9

	14,624		12,531		16.7			319		150		*			1,859			3,289			(43.5	)		121,233		121,232		—
	2,349		1,663		41.3			4,747		4,011		18.3			1,470			2,381			(38.3	)		20,556		19,820		3.7


Wealth							Payment							Treasury and									Consolidated
Management							Services							Corporate Support									Company

				Percent							Percent									Percent								Percent
2006		2005		Change			2006		2005		Change			2006			2005			Change			2006		2005			Change

	$252		$205		22.9	%		$319		$281		13.5	%		$(17	)		$253			*	%		$3,422		$3,512			(2.6	)%
	719		596		20.6			1,244		1,031		20.7			106			33			*			3,366		2,981			12.9
	—		—		—			—		—		—			1			(54	)		*			3		(58	)		*

	971		801		21.2			1,563		1,312		19.1			90			232			(61.2	)		6,791		6,435			5.5
	482		411		17.3			596		496		20.2			108			128			(15.6	)		2,856		2,674			6.8
	44		31		41.9			97		84		15.5			—			3			*			174		252			(31.0	)

	526		442		19.0			693		580		19.5			108			131			(17.6	)		3,030		2,926			3.6

	445		359		24.0			870		732		18.9			(18	)		101			*			3,761		3,509			7.2
	2		2		—			125		181		(30.9	)		3			(2	)		*			240		316			(24.1	)

	443		357		24.1			745		551		35.2			(21	)		103			*			3,521		3,193			10.3
	161		130		23.8			271		200		35.5			(122	)		(124	)		1.6			1,167		1,001			16.6

	$282		$227		24.2			$474		$351		35.0			$101			$227			(55.5	)		$2,354		$2,192			7.4


	$1,508		$1,568		(3.8	)%		$3,647		$3,315		10.0	%		$135			$159			(15.1	)%		$44,501		$41,761			6.6	%
	681		642		6.1			—		—		—			63			92			(31.5	)		28,706		27,543			4.2
	442		380		16.3			—		—		—			4			8			(50.0	)		20,927		16,517			26.7
	2,412		2,295		5.1			8,417		7,846		7.3			45			49			(8.2	)		45,991		43,653			5.4

	5,043		4,885		3.2			12,064		11,161		8.1			247			308			(19.8	)		140,125		129,474			8.2
	1,376		874		57.4			2,375		1,986		19.6			1			(1	)		*			7,188		6,297			14.1
	484		323		49.8			1,111		940		18.2			—			8			*			3,044		2,488			22.3
	7,466		6,638		12.5			16,882		14,818		13.9			50,182			51,435			(2.4	)		211,222		199,390			5.9
	3,649		3,527		3.5			295		137		*			153			58			*			28,893		28,784			.4
	2,376		2,482		(4.3	)		—		—		—			1			8			(87.5	)		23,238		23,085			.7
	5,527		5,430		1.8			19		15		26.7			33			15			*			32,883		35,838			(8.2	)
	2,487		1,035		*			3		—		*			2,239			3,170			(29.4	)		35,687		32,625			9.4

	14,039		12,474		12.5			317		152		*			2,426			3,251			(25.4	)		120,701		120,332			.3
	2,351		1,671		40.7			4,557		3,941		15.6			1,547			2,459			(37.1	)		20,353		19,812			2.7


U.S. Bancorp	25

Noninterest expense decreased $90 million in the second quarter and $23 million in the first six months of 2006, compared with the same periods of 2005. The decreases in noninterest expense were driven by lower debt prepayment expense and the elimination of MSR impairment or reparation due to the adoption of SFAS 156 in the first quarter of 2006.

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. Refer to the “Corporate Risk Profile” section for further information on the provision for credit losses, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Income taxes are assessed to each line of business at a managerial tax rate of 36.4 percent with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support. The consolidated effective tax rate of the Company was 32.8 percent and 32.7 percent in the second quarter and first six months of 2006, respectively, compared with 28.0 percent and 31.0 percent in the same periods of 2005, respectively. The second quarter of 2005 included a $94 million reduction in income tax expense related to the resolution of federal income tax examinations covering substantially all of the Company’s legal entities for the years 2000 through 2002.

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 “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, 2005. Refer to Note 2 of the Notes to Consolidated Financial Statements for discussion of the change in accounting for MSRs implemented in the first quarter of 2006.

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) and15d-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) and15d-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.


26	U.S. Bancorp

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U.S. Bancorp	27

U.S. Bancorp

Consolidated Balance Sheet


				June 30,			December 31,
(Dollars in Millions)				2006			2005

				(Unaudited)
Assets
Cash and due from banks					$7,234			$8,004
Investment securities
	Held-to-maturity (fair value $101 and $113, respectively)				98			109
	Available-for-sale				38,364			39,659
Loans held for sale					2,589			1,686
Loans
	Commercial				45,369			42,942
	Commercial real estate				28,562			28,463
	Residential mortgages				21,063			20,730
	Retail				46,388			45,671

		Total loans			141,382			137,806
			Less allowance for loan losses		(2,039	)		(2,041	)

			Net loans		139,343			135,765
Premises and equipment					1,817			1,841
Goodwill					7,283			7,005
Other intangible assets					3,158			2,874
Other assets					13,519			12,522

		Total assets			$213,405			$209,465

Liabilities and Shareholders’ Equity
Deposits
	Noninterest-bearing				$30,730			$32,214
	Interest-bearing				69,302			70,024
	Time deposits greater than $100,000				22,687			22,471

		Total deposits			122,719			124,709
Short-term borrowings					20,570			20,200
Long-term debt					41,952			37,069
Other liabilities					7,749			7,401

		Total liabilities			192,990			189,379
Shareholders’ equity
	Preferred stock, par value $1.00 a share (liquidation preference of $25,000 per share) authorized: 50,000,000 shares; issued and outstanding: 6/30/06 — 40,000 shares				1,000			—
	Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares; issued: 6/30/06 and 12/31/05 — 1,972,643,007 shares				20			20
	Capital surplus				5,789			5,907
	Retained earnings				20,164			19,001
	Less cost of common stock in treasury: 6/30/06 — 189,672,491 shares; 12/31/05 — 157,689,004 shares				(5,421	)		(4,413	)
	Other comprehensive income				(1,137	)		(429	)

		Total shareholders’ equity			20,415			20,086

		Total liabilities and shareholders’ equity			$213,405			$209,465

See Notes to Consolidated Financial Statements.


28	U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Income


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars and Shares in Millions, Except Per Share Data)
(Unaudited)	2006		2005		2006		2005

Interest Income
Loans		$2,449		$2,027		$4,781		$3,938
Loans held for sale		33		24		59		45
Investment securities		500		486		990		962
Other interest income		36		28		79		55

Total interest income		3,018		2,565		5,909		5,000
Interest Expense
Deposits		578		361		1,081		669
Short-term borrowings		270		143		540		255
Long-term debt		484		307		887		578

Total interest expense		1,332		811		2,508		1,502

Net interest income		1,686		1,754		3,401		3,498
Provision for credit losses		125		144		240		316

Net interest income after provision for credit losses		1,561		1,610		3,161		3,182
Noninterest Income
Credit and debit card revenue		202		177		384		331
Corporate payment products revenue		139		120		266		227
ATM processing services		61		57		120		104
Merchant processing services		253		198		466		376
Trust and investment management fees		314		253		611		500
Deposit service charges		264		234		496		444
Treasury management fees		116		117		223		224
Commercial products revenue		107		100		211		196
Mortgage banking revenue		75		110		99		212
Investment products fees and commissions		42		39		80		78
Securities gains (losses), net		3		1		3		(58	)
Other		179		135		410		289

Total noninterest income		1,755		1,541		3,369		2,923
Noninterest Expense
Compensation		627		612		1,260		1,179
Employee benefits		123		108		256		224
Net occupancy and equipment		161		159		326		313
Professional services		41		39		76		75
Marketing and business development		58		67		98		110
Technology and communications		127		113		244		219
Postage, printing and supplies		66		63		132		126
Other intangibles		89		181		174		252
Debt prepayment		11		54		11		54
Other		227		199		453		374

Total noninterest expense		1,530		1,595		3,030		2,926

Income before income taxes		1,786		1,556		3,500		3,179
Applicable income taxes		585		435		1,146		987

Net income		$1,201		$1,121		$2,354		$2,192

Net income applicable to common equity		$1,184		$1,121		$2,337		$2,192

Earnings per common share		$.66		$.61		$1.30		$1.19
Diluted earnings per common share		$.66		$.60		$1.29		$1.17
Dividends declared per common share		$.33		$.30		$.66		$.60
Average common shares outstanding		1,781		1,833		1,791		1,842
Average diluted common shares outstanding		1,805		1,857		1,816		1,869

See Notes to Consolidated Financial Statements.


U.S. Bancorp	29

U.S. Bancorp

Consolidated Statement of Shareholders’ Equity


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

Balance December 31, 2004			1,858			$—		$20		$5,902			$16,758			$(3,125	)		$(16	)		$19,539
Net income													2,192									2,192
Unrealized gain on securities available for sale																			246			246
Unrealized loss on derivatives																			(56	)		(56	)
Foreign currency translation adjustment																			3			3
Realized loss on derivatives																			(90	)		(90	)
Reclassification adjustment for losses realized in net income																			104			104
Income taxes																			(78	)		(78	)

Total comprehensive income																						2,321
Cash dividends declared on common stock													(1,101	)								(1,101	)
Issuance of common and treasury stock			9							(51	)					236						185
Purchase of treasury stock			(38	)												(1,092	)					(1,092	)
Stock option and restricted stock grants										51												51
Shares reserved to meet deferred compensation obligations										1						(3	)					(2	)

Balance June 30, 2005			1,829			$—		$20		$5,903			$17,849			$(3,984	)		$113			$19,901

Balance December 31, 2005			1,815			$—		$20		$5,907			$19,001			$(4,413	)		$(429	)		$20,086
Change in accounting principle													4									4
Net income													2,354									2,354
Unrealized loss on securities available for sale																			(1,105	)		(1,105	)
Unrealized gain on derivatives																			153			153
Foreign currency translation adjustment																			4			4
Realized loss on derivatives																			(199	)		(199	)
Reclassification adjustment for losses realized in net income																			6			6
Income taxes																			433			433

Total comprehensive income																						1,646
Cash dividends declared:
	Preferred												(17	)								(17	)
	Common												(1,178	)								(1,178	)
Issuance of common and treasury stock			18							(79	)					533						454
Purchase of treasury stock			(50	)												(1,538	)					(1,538	)
Stock option and restricted stock grants										12												12
Shares reserved to meet deferred compensation obligations										1						(3	)					(2	)
Issuance of preferred stock						1,000				(52	)											948

Balance June 30, 2006			1,783			$1,000		$20		$5,789			$20,164			$(5,421	)		$(1,137	)		$20,415

See Notes to Consolidated Financial Statements.


30	U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Cash Flows


		Six Months Ended
		June 30,
(Dollars in Millions)
(Unaudited)		2006			2005

Operating Activities
	Net cash provided by operating activities		$1,861			$1,813
Investing Activities
Proceeds from sales of available-for-sale investment securities			859			2,992
Proceeds from maturities of investment securities			2,573			5,011
Purchases of investment securities			(3,649	)		(7,637	)
Net (increase) decrease in loans outstanding			(3,217	)		(6,182	)
Proceeds from sales of loans			1,089			849
Purchases of loans			(1,563	)		(1,814	)
Other, net			(736	)		(1,394	)

	Net cash used in investing activities		(4,644	)		(8,175	)
Financing Activities
Net increase (decrease) in deposits			(1,990	)		1,082
Net increase (decrease) in short-term borrowings			370			7,350
Principal payments or redemption of long-term debt			(2,384	)		(6,472	)
Proceeds from issuance of long-term debt			7,538			6,558
Proceeds from issuance of preferred stock			948			—
Proceeds from issuance of common stock			383			153
Repurchase of common stock			(1,528	)		(1,149	)
Cash dividends paid on common stock			(1,188	)		(1,111	)

	Net cash provided by financing activities		2,149			6,411

	Change in cash and cash equivalents		(634	)		49
Cash and cash equivalents at beginning of period			8,202			6,537

	Cash and cash equivalents at end of period		$7,568			$6,586

See Notes to Consolidated Financial Statements.


U.S. Bancorp	31

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, 2005. Certain amounts in prior periods have been reclassified to conform to the current presentation.

Accounting policies for the lines of business are generally 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

Accounting for Servicing of Financial Assets In March 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”), that amends accounting and reporting standards for servicing assets and liabilities under Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. Specifically, SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. For subsequent measurement purposes, SFAS 156 permits an entity to choose to measure servicing assets and liabilities either based on fair value or lower of cost or market (“LOCOM”). The Company elected to adopt SFAS 156 effective January 1, 2006, utilizing the fair value measurement option for residential mortgage servicing rights (“MSRs”) and continuing the LOCOM method for all other servicing assets and liabilities. Adopting the fair value measurement method resulted in the Company recording a cumulative-effect accounting adjustment to increase beginning retained earnings by $4 million (net of tax). Approximately $3 million represented the difference between the fair value and the carrying amount of the Company’s MSRs as of January 1, 2006, and the additional $1 million represented the reclassification of unrealized gains in accumulated other comprehensive income at adoption, for certain available-for-sale securities reclassified to trading securities upon the adoption of the provisions of this statement. Additional information regarding MSRs is disclosed in Note 5 in the Notes to Consolidated Financial Statements.

Other-Than-Temporary ImpairmentIn November 2005, the FASB issued FASB Staff Position FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”), effective for the Company beginning on January 1, 2006. FSP 115-1 provides clarification on when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. FSP 115-1 also requires certain disclosures for unrealized losses that have not been recognized as other-than-temporary impairments. The adoption of FSP 115-1 did not have a material impact on the Company’s financial statements.

Stock-Based CompensationIn December 2004, the FASB 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 were effective for the Company beginning on January 1, 2006. The Company adopted SFAS 123R using the modified retrospective method. Because the Company retroactively adopted the fair value method in 2003, the impact of expensing stock-based awards was


32	U.S. Bancorp

already recorded in the Company’s financial results. In conjunction with the adoption of SFAS 123R, the Company recognized $13 million of incremental stock-based compensation expense due to certain provisions that require immediate recognition of the value of stock awards to employees that meet retirement status, despite their continued active employment. Upon adoption, the Company also changed its method of expensing all new awards from an accelerated to a straight-line attribution method. This methodology change for expensing stock awards is expected to reduce expenses in 2006 by approximately $33 million ($20 million after tax).

Accounting for Uncertainty in Income TaxesIn June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes,” effective for the Company beginning on January 1, 2007. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is currently assessing the impact of this guidance on its financial statements.


Note 3		Investment Securities

The detail of the amortized cost, gross unrealized holding gains and losses, and fair value ofheld-to-maturity and available-for-sale securities was as follows:


		June 30, 2006									December 31, 2005

		Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(Dollars in Millions)		Cost		Gains		Losses			Value		Cost		Gains		Losses			Value

Held-to-maturity (a)
	Mortgage-backed securities		$8		$—		$—			$8		$8		$—		$—			$8
	Obligations of state and political subdivisions		73		4		(1	)		76		84		5		(1	)		88
	Other debt securities		17		—		—			17		17		—		—			17

	Total held-to-maturity securities		$98		$4		$(1	)		$101		$109		$5		$(1	)		$113

Available-for-sale (b)
	U.S. Treasury and agencies		$508		$1		$(15	)		$494		$496		$2		$(9	)		$489
	Mortgage-backed securities		35,853		48		(1,738	)		34,163		38,161		86		(733	)		37,514
	Asset-backed securities		8		—		—			8		12		—		—			12
	Obligations of state and political subdivisions		2,801		1		(64	)		2,738		640		3		(6	)		637
	Other securities and investments		961		5		(5	)		961		1,012		2		(7	)		1,007

	Total available-for-sale securities		$40,131		$55		$(1,822	)		$38,364		$40,321		$93		$(755	)		$39,659


(a)		Held-to-maturity securities are carried at historical cost adjusted for amortization of premiums and accretion of discounts.
(b)		Available-for-sale securities are carried at fair value with unrealized net gains or losses reported within other comprehensive income in shareholders’ equity.

The weighted-average maturity of the available-for-sale investment securities was 7.4 years at June 30, 2006, compared with 6.1 years at December 31, 2005. The corresponding weighted-average yields were 5.17 percent and 4.89 percent, respectively. The weighted-average maturity of theheld-to-maturity investment securities was 8.4 years at June 30, 2006, compared with 7.2 years at December 31, 2005. The corresponding weighted-average yields were 6.37 percent and 6.44 percent, respectively.

Securities carried at $33.9 billion at June 30, 2006, and $36.9 billion at December 31, 2005, were pledged to secure public, private and trust deposits, repurchase agreements and for other purposes required by law. Securities sold under agreements to repurchase, where the buyer/lender has the right to sell or pledge the securities, were collateralized by securities with an amortized cost of $6.7 billion at June 30, 2006, and $10.9 billion at December 31, 2005, respectively.

The following table provides information as to the amount of interest income from taxable and non-taxable investment securities:


	Three Months Ended				Six Months Ended
	June 30,				June 30,

(Dollars in Millions)	2006		2005		2006		2005

Taxable		$475		$482		$951		$955
Non-taxable		25		4		39		7

Total interest income from investment securities		$500		$486		$990		$962


U.S. Bancorp	33

The following table provides information as to the amount of gross gains and losses realized through the sales of available-for-sale investment securities:


	Three Months Ended					Six Months Ended
	June 30,					June 30,

(Dollars in Millions)	2006			2005		2006			2005

Realized gains		$4			$1		$4			$12
Realized losses		(1	)		—		(1	)		(70	)

Net realized gains (losses)		$3			$1		$3			$(58	)

Income tax (benefit) on realized gains (losses)		$1			$—		$1			$(22	)

For amortized cost, fair value and yield by maturity date ofheld-to-maturity and available-for-sale securities outstanding at June 30, 2006, refer to Table 4 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired which have been in a continuous unrealized loss position at June 30, 2006:


		Less Than 12 Months					12 Months or Greater					Total

		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in Millions)		Value		Losses			Value		Losses			Value		Losses

Held-to-maturity
	Mortgage-backed securities		$—		$—			$—		$—			$—		$—
	Obligations of state and political subdivisions		16		(1	)		2		—			18		(1	)
	Other debt securities		—		—			—		—			—		—

	Total		$16		$(1	)		$2		$—			$18		$(1	)

Available-for-sale
	U.S. Treasury and agencies		$447		$(15	)		$5		$—			$452		$(15	)
	Mortgage-backed securities		15,938		(768	)		15,149		(970	)		31,087		(1,738	)
	Asset-backed securities		8		—			—		—			8		—
	Obligations of state and political subdivisions		2,615		(63	)		28		(1	)		2,643		(64	)
	Other securities and investments		86		—			312		(5	)		398		(5	)

	Total		$19,094		$(846	)		$15,494		$(976	)		$34,588		$(1,822	)

The Company’s rationale, by investment category, for determining if investments with unrealized losses that are not deemed to be other-than-temporarily impaired at June 30, 2006, was as follows:

Held-to-Maturity

Obligations of state and political subdivisionsDuring the second quarter of 2006, the Company recorded an impairment of $1 million on a municipal security with a balance of $2 million as it was determined that the revenues supporting the security may not be sufficient to make all contractual principal and interest payments. The remaining unrealized losses were caused by increases in interest rates. The issuers of these securities do not have the contractual ability to pay off these securities at less than par. The Company has the ability and intent to hold these investments until maturity which is consistent with their designation as held-to-maturity. Consequently, the Company does not consider these investments to be other-than-temporarily impaired as of June 30, 2006.

Available-for-Sale

U.S. Treasury and agenciesThe unrealized losses on these securities were caused solely by rising interest rates since credit quality is not an issue for these types of securities. None of these securities can be paid off for less than par at maturity or any earlier call date. Because the Company has the ability and intent to hold these securities until a recovery to adjusted book value, they are not considered to be other-than-temporarily impaired as of June 30, 2006.

Mortgage-backed securitiesSubstantially all of these securities were issued by GNMA, FNMA and FHLMC, and the remainder were privately issued with high investment grade credit ratings. The unrealized losses for these securities were caused by rising interest rates over the past few years. Given the high credit quality of these investments, the Company fully expects to receive all contractual cash flows. Because the Company has the ability and intent to hold


34	U.S. Bancorp

these securities until a recovery to adjusted book value, they are not considered to be other-than-temporarily impaired as of June 30, 2006.

Obligations of state and political subdivisionsThe unrealized losses were caused by rising interest rates. These municipal securities are investment grade credit quality with substantially all rated AAA. None of these securities can be paid off for less than par at maturity or any earlier call date. Because the Company has the ability and intent to hold these securities until a recovery to adjusted book value, they are not considered to be other-than-temporarily impaired as of June 30, 2006.

Other securities and investmentsThe securities in this category consist primarily of debt issued by major U.S. banks. The losses are a result of a modest widening of credit spreads since the initial purchase dates. Given the high credit quality of these issuers, the Company expects to receive all contractual cash flows. None of these securities can be paid off for less than par at maturity or any earlier call date. Because the Company has the ability and intent to hold these securities until a recovery to adjusted book value, they are not considered to be other-than-temporarily impaired as of June 30, 2006.


Note 4		Loans

The composition of the loan portfolio was as follows:


				June 30, 2006					December 31, 2005

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

Commercial
	Commercial				$40,055		28.3	%		$37,844		27.5	%
	Lease financing				5,314		3.8			5,098		3.7

		Total commercial			45,369		32.1			42,942		31.2
Commercial real estate
	Commercial mortgages				19,966		14.1			20,272		14.7
	Construction and development				8,596		6.1			8,191		6.0

		Total commercial real estate			28,562		20.2			28,463		20.7
Residential mortgages
	Residential mortgages				14,902		10.5			14,538		10.5
	Home equity loans, first liens				6,161		4.4			6,192		4.5

		Total residential mortgages			21,063		14.9			20,730		15.0
Retail
	Credit card				7,432		5.3			7,137		5.2
	Retail leasing				7,092		5.0			7,338		5.3
	Home equity and second mortgages				15,124		10.7			14,979		10.9
	Other retail
		Revolving credit			2,505		1.8			2,504		1.8
		Installment			4,090		2.9			3,582		2.6
		Automobile			8,257		5.8			8,112		5.9
		Student			1,888		1.3			2,019		1.4

			Total other retail		16,740		11.8			16,217		11.7

		Total retail			46,388		32.8			45,671		33.1

			Total loans		$141,382		100.0	%		$137,806		100.0	%

Loans are presented net of unearned interest and deferred fees and costs, which amounted to $1.3 billion at June 30, 2006, and December 31, 2005.


U.S. Bancorp	35


Note 5		Mortgage Servicing Rights

The Company’s portfolio of residential mortgages serviced for others was $76.4 billion and $69.0 billion at June 30, 2006, and December 31, 2005, respectively. Effective January 1, 2006, the Company early adopted SFAS 156 and elected the fair value measurement method for MSRs. The fair value measurement method requires MSRs to be recorded initially at fair value, if practicable, and at each subsequent reporting date. In accordance with SFAS 156 the changes in fair value are to be recorded in earnings in the period in which they occur. Prior to the adoption of SFAS 156, the initial carrying value of MSRs was amortized in proportion to, and over the period of, estimated net servicing revenue and recorded in noninterest expense as amortization of intangible assets.

Beginning in March 2006, the Company began entering into U.S. Treasury futures and options on U.S. Treasury futures contracts to offset the change in fair value of the MSRs. Changes in fair value related to the MSRs and the futures and options contracts, as well as, servicing and other related fees are recorded in mortgage banking revenue. The Company recorded $80 million and $156 million of servicing and other related fees revenue in the second quarter and first six months of 2006, respectively. Changes in fair value of capitalized MSRs are summarized as follows:


			Three Months Ended			Six Months Ended
(Dollars in Millions)			June 30, 2006			June 30, 2006

Balance at beginning of period				$1,228			$1,123
	Rights purchased			1			47
	Rights capitalized			99			170
	Changes in fair value of MSRs:
		Due to change in valuation assumptions (a)		38			71
		Other changes in fair value (b)		(43	)		(88	)

Balance at end of period				$1,323			$1,323


(a)		Principally reflects changes in discount rates and prepayment speed assumptions, primarily arising from interest rate changes.
(b)		Primarily represents changes due to collection/realization of expected cash flows over time.

The Company determines fair value by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates, and other assumptions validated through comparison to trade information, industry surveys, and independent third party appraisals. Risks inherent in the MSRs valuation include higher than expected prepayment rates and/or delayed receipt of cash flows. In March 2006, the Company implemented a program utilizing futures and options contracts to mitigate the valuation risk. The estimated sensitivity to changes in interest rates of the fair value of the MSRs portfolio and the related derivative instruments at June 30, 2006, was as follows:


	Down Scenario						Up Scenario

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

Net fair value		$(22	)		$(6	)		$(2	)		$(15	)

The fair value of MSRs 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-income 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.


36	U.S. Bancorp

A summary of the Company’s MSRs and related characteristics by portfolio as of June 30, 2006, was as follows:


(Dollars in Millions)	MRBP			Government			Conventional			Total

Servicing portfolio		$7,034			$8,603			$60,738			$76,375
Fair market value		$138			$163			$1,022			$1,323
Value (bps)*		196			189			168			173
Weighted-average servicing fees (bps)		41			44			35			37
Multiple (value/servicing fees)		4.78			4.30			4.80			4.68
Weighted-average note rate		5.94	%		6.07	%		5.77	%		5.82	%
Age (in years)		3.6			2.9			2.3			2.5
Expected life (in years)		7.8			7.3			7.9			7.8
Discount rate		11.5	%		11.3	%		10.6	%		10.8	%


*		Value is calculated as fair market value divided by the servicing portfolio.


Note 6		Earnings Per Common Share

The components of earnings per common share were:


	Three Months Ended					Six Months Ended
	June 30,					June 30,

(Dollars and Shares in Millions, Except Per Share Data)	2006			2005		2006			2005

Net income		$1,201			$1,121		$2,354			$2,192
Preferred dividends		(17	)		—		(17	)		—

Net income applicable to common equity		$1,184			$1,121		$2,337			$2,192
Average common shares outstanding		1,781			1,833		1,791			1,842
Net effect of the assumed purchase of stock based on the treasury stock method for options and stock plans		24			24		25			27

Average diluted common shares outstanding		1,805			1,857		1,816			1,869

Earnings per common share		$.66			$.61		$1.30			$1.19
Diluted earnings per common share		$.66			$.60		$1.29			$1.17

Options to purchase 4 million and 38 million common shares for the three months ended June 30, 2006 and 2005, respectively, and 4 million and 17 million common shares for the six months ended June 30, 2006 and 2005, respectively, were outstanding but not included in the computation of diluted earnings per common share because they were antidilutive.


Note 7		Employee Benefits

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


		Three Months Ended											Six Months Ended
		June 30,											June 30,

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

(Dollars in Millions)		2006			2005			2006		2005			2006			2005			2006		2005

Components of net periodic benefit cost (income)
	Service cost		$18			$16			$1		$1			$36			$32			$2		$2
	Interest cost		29			28			4		4			59			56			7		8
	Expected return on plan assets		(47	)		(48	)		—		(1	)		(95	)		(97	)		—		(1	)
	Net amortization and deferral		(1	)		(1	)		—		—			(3	)		(3	)		—		—
	Recognized actuarial loss		22			14			—		1			45			29			—		1

Net periodic benefit cost (income)			$21			$9			$5		$5			$42			$17			$9		$10


U.S. Bancorp	37


Note 8		Stock-based Compensation

As part of its employee and director compensation programs, the Company may grant certain stock awards under the provisions of the existing stock compensation plans, including plans assumed in acquisitions. The plans provide for grants of options to purchase shares of common stock at a fixed price equal to the fair value of the underlying stock at the date of grant. Option grants are generally exercisable up to ten years from the date of grant. In addition, the plans provide for grants of shares of common stock or stock units that are subject to restriction on transfer prior to vesting. Most stock awards vest over three to five years and are subject to forfeiture if certain vesting requirements are not met. At June 30, 2006, there were 13 million shares (subject to adjustment for forfeitures) available for grant under various plans.

The following is a summary of stock options outstanding and exercised under various stock options plans of the Company:


		2006									2005

							Weighted-									Weighted-
					Weighted-		Average		Aggregate					Weighted-		Average		Aggregate
					Average		Remaining		Intrinsic					Average		Remaining		Intrinsic
		Stock			Exercise		Contractual		Value		Stock			Exercise		Contractual		Value
Three Months Ended June 30,		Options/Shares			Price		Term		(in millions)		Options/Shares			Price		Term		(in millions)

Stock option plans
Number outstanding at beginning of period			128,459,228			$25.08						140,842,422			$24.03
	Granted		678,767			31.16						909,032			29.13
	Exercised		(9,440,942	)		22.52						(3,131,672	)		20.70
	Cancelled (a)		(982,713	)		27.52						(639,170	)		24.44

Number outstanding at end of period (b)			118,714,340			$25.30		5.2		$663		137,980,612			$24.14		5.5		$930
Exercisable at end of period			88,362,876			$24.32		4.0		$580		100,363,009			$23.74		4.6		$717


		2006									2005

							Weighted-									Weighted-
					Weighted-		Average		Aggregate					Weighted-		Average		Aggregate
					Average		Remaining		Intrinsic					Average		Remaining		Intrinsic
		Stock			Exercise		Contractual		Value		Stock			Exercise		Contractual		Value
Six Months Ended June 30,		Options/Shares			Price		Term		(in millions)		Options/Shares			Price		Term		(in millions)

Stock option plans
Number outstanding at beginning of period			125,983,461			$24.38						134,727,285			$23.41
	Granted		12,000,109			30.05						12,191,833			30.15
	Exercised		(17,801,534	)		21.82						(7,397,036	)		20.72
	Cancelled (a)		(1,467,696	)		27.41						(1,541,470	)		24.46

Number outstanding at end of period (b)			118,714,340			$25.30		5.2		$663		137,980,612			$24.14		5.5		$930
Exercisable at end of period			88,362,876			$24.32		4.0		$580		100,363,009			$23.74		4.6		$717


(a)		Options cancelled includes both non-vested (i.e., forfeitures) and vested options.
(b)		Outstanding options include stock-based awards that may be forfeited in future periods, however the impact of the estimated forfeitures is reflected in compensation expense.

The weighted-average grant-date fair value of options granted was $6.00 and $6.35 for the three months ended June 30, 2006 and 2005, respectively, and was $6.32 and $6.68 for the six months ended June 30, 2006 and 2005, respectively. The total intrinsic value of options exercised was $82 million and $27 million for the three months ended June 30, 2006 and 2005, respectively, and was $162 million and $68 million for the six months ended June 30, 2006 and 2005, respectively. The total fair value of option shares vested was $9 million and $8 million for the three months ended June 30, 2006 and 2005, respectively, and was $49 million and $53 million for the six months ended June 30, 2006 and 2005, respectively.

Cash received from option exercises under all share-based payment arrangements was $212 million and $65 million for the three months ended June 30, 2006 and 2005, respectively, and was $388 million and $153 million for the six months ended June 30, 2006 and 2005, respectively. The tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements totaled $31 million and $10 million for the three months ended June 30, 2006 and 2005, respectively, and totaled $61 million and $25 million for the six


38	U.S. Bancorp

months ended June 30, 2006 and 2005, respectively. To satisfy share option exercises, the Company predominantly uses treasury stock.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, requiring the use of subjective assumptions. The following table includes the assumptions utilized by the Company:


	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2006			2005			2006			2005

Risk-free interest rate		4.3	%		3.6	%		4.3	%		3.6	%
Dividend yield		4.0	%		3.5	%		4.0	%		3.5	%
Stock volatility factor		.28			.29			.28			.29
Expected life of options (in years)		5.4			5.4			5.4			5.4

Expected stock volatility is based on several factors including the historical volatility of the Company’s stock, implied volatility determined from traded options and other factors. The Company uses historical data to estimate option exercises and employee terminations to estimate the expected life of options. The risk-free interest rate for the expected life of the options is based on the U.S. Treasury yield curve in effect on the date of grant. The expected dividend yield is based on the Company’s expected dividend yield over the life of the options.

Additional information regarding stock options outstanding as of June 30, 2006, is as follows:


	Options Outstanding						Exercisable Options

			Weighted-
			Average		Weighted-				Weighted-
			Remaining		Average				Average
			Contractual		Exercise				Exercise
Range of Exercise Prices	Shares		Life (Years)		Price		Shares		Price

$5.05 - $10.00		31,469		.7		$8.05		31,469		$8.05
$10.01 - $15.00		739,936		2.3		12.14		739,936		12.14
$15.01 - $20.00		16,047,010		4.7		18.80		15,745,797		18.79
$20.01 - $25.00		44,171,250		4.7		22.35		38,473,296		22.47
$25.01 - $30.00		42,701,863		5.4		29.02		26,756,634		28.71
$30.01 - $35.00		14,746,285		6.6		30.93		6,339,217		31.74
$35.01 - $36.95		276,527		.9		35.89		276,527		35.89

		118,714,340		5.2		$25.30		88,362,876		$24.32

A summary of the status of the Company’s restricted shares of stock is presented below:


		Three Months Ended June 30,										Six Months Ended June 30,

		2006					2005					2006					2005

					Weighted-					Weighted-					Weighted-					Weighted-
					Average					Average					Average					Average
					Grant-					Grant-					Grant-					Grant-
					Date					Date					Date					Date
		Shares			Fair Value		Shares			Fair Value		Shares			Fair Value		Shares			Fair Value

Nonvested shares
Number outstanding at beginning of period			3,037,250			$27.26		2,817,001			$26.45		2,644,171			$26.73		2,265,625			$25.06
	Granted		138,758			31.04		82,276			29.14		990,250			30.13		990,618			30.04
	Cancelled/vested		(57,189	)		26.33		(50,540	)		26.62		(480,581	)		28.89		(385,956	)		26.78
	Forfeited		(100,505	)		29.19		(22,321	)		29.27		(135,526	)		29.25		(43,871	)		29.04

Number outstanding at end of period			3,018,314			$27.39		2,826,416			$26.51		3,018,314			$27.39		2,826,416			$26.51

The total fair value of shares vested was $1 million and $2 million for the three months ended June 30, 2006 and 2005, respectively, and was $14 million and $12 million for the six months ended June 30, 2006 and 2005, respectively.

Stock-based compensation expense was $22 million and $38 million for the three months ended June 30, 2006 and 2005, respectively, and was $58 million and $72 million for the six months ended June 30, 2006 and 2005, respectively. At the time employee stock options expire, are exercised or cancelled, the Company determines the tax benefit associated with the stock award and under certain circumstances may be required to recognize an adjustment to tax expense. On an after-tax basis, stock-based compensation was $14 million and $24 million for three months ended June 30, 2006, and 2005, respectively, and was $36 million and $45 million for the six months ended June 30, 2006 and 2005, respectively. As of June 30, 2006, there was $140 million of total unrecognized


U.S. Bancorp	39

compensation cost related to nonvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 3 years.


Note 9		Income Taxes

The components of income tax expense were:


		Three Months Ended					Six Months Ended
		June 30,					June 30,

(Dollars in Millions)		2006			2005		2006			2005

Federal
Current			$631			$321		$1,212			$744
Deferred			(154	)		64		(236	)		128

	Federal income tax		477			385		976			872
State
Current			120			44		188			104
Deferred			(12	)		6		(18	)		11

	State income tax		108			50		170			115

	Total income tax provision		$585			$435		$1,146			$987

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


		Three Months Ended						Six Months Ended
		June 30,						June 30,

(Dollars in Millions)		2006			2005			2006			2005

Tax at statutory rate (35 percent)			$625			$545			$1,225			$1,113
State income tax, at statutory rates, net of federal tax benefit			70			33			110			75
Tax effect of
	Tax credits		(61	)		(43	)		(119	)		(83	)
	Tax-exempt income		(23	)		(17	)		(43	)		(31	)
	Resolution of federal and state income tax examinations		—			(94	)		—			(94	)
	Other items		(26	)		11			(27	)		7

Applicable income taxes			$585			$435			$1,146			$987

Included in the second quarter of 2005 was a $94 million reduction in income tax expense related to the resolution of federal income tax examinations covering substantially all of the Company’s legal entities for the years 2000 through 2002. 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 $950 million at June 30, 2006, and $1,615 million at December 31, 2005.


40	U.S. Bancorp


Note 10		Guarantees and Contingent Liabilities

The following table is a summary of the guarantees and contingent liabilities of the Company at June 30, 2006:


			Maximum
			Potential
	Carrying		Future
(Dollars in Millions)	Amount		Payments

Standby letters of credit		$77		$10,689
Third-party borrowing arrangements		6		449
Securities lending indemnifications		—		15,461
Asset sales (a)		8		671
Merchant processing		58		63,104
Other guarantees		21		3,134
Other contingent liabilities		13		1,854


(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.

The Company currently processes card transactions for several airlines in the United States. 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. At June 30, 2006, the value of airline tickets purchased to be delivered at a future date was $3.1 billion, and the Company held collateral of $2.0 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 23 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.


U.S. Bancorp	41

U.S. Bancorp

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


				For the Three Months Ended June 30,
				2006								2005

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

Assets
Investment securities					$40,087			$513		5.12	%		$42,341			$488		4.61	%			(5.3	)%
Loans held for sale					2,062			33		6.37			1,697			24		5.71				21.5
Loans (b)
	Commercial				45,070			734		6.53			42,517			614		5.79				6.0
	Commercial real estate				28,795			528		7.36			27,582			437		6.36				4.4
	Residential mortgages				20,868			302		5.80			17,198			239		5.56				21.3
	Retail				46,130			891		7.75			43,978			742		6.77				4.9

		Total loans			140,863			2,455		6.99			131,275			2,032		6.21				7.3
Other earning assets					1,878			36		7.60			1,417			28		7.94				32.5

		Total earning assets			184,890			3,037		6.58			176,730			2,572		5.83				4.6
Allowance for loan losses					(2,051	)							(2,125	)								3.5
Unrealized gain (loss) on available-for-sale securities					(1,431	)							(224	)								*
Other assets					30,999								27,437									13.0

		Total assets			$212,407								$201,818									5.2

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits					$28,949								$29,148									(.7	)
Interest-bearing deposits
	Interest checking				23,333			50		.87			23,024			33		.57				1.3
	Money market savings				26,981			138		2.05			29,563			79		1.07				(8.7	)
	Savings accounts				5,720			5		.33			5,886			4		.24				(2.8	)
	Time certificates of deposit less than $100,000				13,689			126		3.68			13,152			94		2.86				4.1
	Time deposits greater than $100,000				22,561			259		4.61			20,459			151		2.97				10.3

		Total interest-bearing deposits			92,284			578		2.51			92,084			361		1.57				.2
Short-term borrowings					22,246			278		5.01			17,013			143		3.37				30.8
Long-term debt					41,225			484		4.71			36,973			307		3.33				11.5

		Total interest-bearing liabilities			155,755			1,340		3.45			146,070			811		2.23				6.6
Other liabilities					7,147								6,780									5.4
Shareholders’ equity
	Preferred equity				1,000								—									*
	Common equity				19,556								19,820									(1.3	)

		Total shareholders’ equity			20,556								19,820									3.7

			Total liabilities and shareholders’ equity		$212,407								$201,818									5.2	%

Net interest income								$1,697								$1,761

Gross interest margin										3.13	%							3.60	%

Gross interest margin without taxable-equivalent increments										3.11								3.58

Percent of Earning Assets
Interest income										6.58	%							5.83	%
Interest expense										2.90								1.84

Net interest margin										3.68	%							3.99	%

Net interest margin without taxable-equivalent increments										3.66	%							3.97	%


*		Not meaningful
(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.


42	U.S. Bancorp

U.S. Bancorp

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


				For the Six Months Ended June 30,
				2006								2005

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

Assets
Investment securities					$39,885			$1,009		5.06	%		$42,576			$965		4.53	%		(6.3	)%
Loans held for sale					1,866			59		6.32			1,564			45		5.76			19.3
Loans (b)
	Commercial				44,501			1,424		6.44			41,761			1,191		5.74			6.6
	Commercial real estate				28,706			1,025		7.20			27,543			850		6.22			4.2
	Residential mortgages				20,927			596		5.71			16,517			457		5.55			26.7
	Retail				45,991			1,748		7.66			43,653			1,451		6.70			5.4

		Total loans			140,125			4,793		6.89			129,474			3,949		6.14			8.2
Other earning assets					2,124			79		7.46			1,408			55		7.91			50.9

		Total earning assets			184,000			5,940		6.49			175,022			5,014		5.76			5.1
Allowance for loan losses					(2,055	)							(2,120	)							3.1
Unrealized gain (loss) on available-for-sale securities					(1,117	)							(242	)							*
Other assets					30,394								26,730								13.7

		Total assets			$211,222								$199,390								5.9

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits					$28,893								$28,784								.4
Interest-bearing deposits
	Interest checking				23,238			95		.82			23,085			64		.56			.7
	Money market savings				27,178			254		1.88			29,911			149		1.00			(9.1	)
	Savings accounts				5,705			9		.31			5,927			8		.28			(3.7	)
	Time certificates of deposit less than $100,000				13,598			240		3.55			13,066			180		2.78			4.1
	Time deposits greater than $100,000				22,089			483		4.41			19,559			268		2.77			12.9

		Total interest-bearing deposits			91,808			1,081		2.37			91,548			669		1.47			.3
Short-term borrowings					23,295			550		4.77			16,313			255		3.15			42.8
Long-term debt					39,735			887		4.49			36,211			578		3.21			9.7

		Total interest-bearing liabilities			154,838			2,518		3.28			144,072			1,502		2.10			7.5
Other liabilities					7,138								6,722								6.2
Shareholders’ equity
	Preferred equity				530								—								*
	Common equity				19,823								19,812								.1

		Total shareholders’ equity			20,353								19,812								2.7

			Total liabilities and shareholders’ equity		$211,222								$199,390								5.9	%

Net interest income								$3,422								$3,512

Gross interest margin										3.21	%							3.66	%

Gross interest margin without taxable-equivalent increments										3.19								3.64

Percent of Earning Assets
Interest income										6.49	%							5.76	%
Interest expense										2.75								1.73

Net interest margin										3.74	%							4.03	%

Net interest margin without taxable-equivalent increments										3.72	%							4.01	%


*		Not meaningful
(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	43

Part II — Other Information

Item 1A. Risk Factors — There are a number of factors that may adversely affect the Company’s business, financial results or stock price. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, for discussion of these risks. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks that the Company currently does not know about or currently views as immaterial may also impair the Company’s business or adversely impact its financial results or stock price.

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 second quarter of 2006.

Item 4. Submission of Matters to a Vote of Security Holders — The information contained in Part II, Item 4 of the Company’s Form 10-Q for the quarterly period ended March 31, 2006, is incorporated herein by reference.

Item 6. Exhibits


10.1		Terms of Jerry A. Grundhofer’s service as Non-Executive Chairman of the Board (incorporated by reference to Item 1 of the Company’s Current Report on Form 8-K filed July 20, 2006).
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


44	U.S. Bancorp

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: August 9, 2006


U.S. Bancorp	45

EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges


				Three Months Ended		Six Months Ended
(Dollars in Millions)				June 30, 2006		June 30, 2006

Earnings
1.	Net income				$1,201		$2,354
2.	Applicable income taxes				585		1,146

3.	Income before income taxes (1 + 2)				$1,786		$3,500

4.	Fixed charges:
		a.	Interest expense excluding interest on deposits		$754		$1,427
		b.	Portion of rents representative of interest and amortization of debt expense		17		35

		c.	Fixed charges excluding interest on deposits (4a + 4b)		771		1,462
		d.	Interest on deposits		578		1,081

		e.	Fixed charges including interest on deposits (4c + 4d)		$1,349		$2,543

5.	Amortization of interest capitalized				$—		$—
6.	Earnings excluding interest on deposits (3 + 4c + 5)				2,557		4,962
7.	Earnings including interest on deposits (3 + 4e + 5)				3,135		6,043
8.	Fixed charges excluding interest on deposits (4c)				771		1,462
9.	Fixed charges including interest on deposits (4e)				1,349		2,543

Ratio of Earnings to Fixed Charges
10.	Excluding interest on deposits (line 6/line 8)				3.32		3.39
11.	Including interest on deposits (line 7/line 9)				2.32		2.38


46	U.S. Bancorp

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Jerry A. Grundhofer, 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) and15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-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: August 9, 2006


U.S. Bancorp	47

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, David M. Moffett, 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) and15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-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: August 9, 2006


48	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 June 30, 2006 (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 Jerry A. Grundhofer Chief Executive Officer		/s/David M. Moffett David M. Moffett Chief Financial Officer

Dated: August 9, 2006


U.S. Bancorp	49



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Corporate Information

Executive Offices

U.S. Bancorp

800 Nicollet Mall

Minneapolis, MN 55402

Common Stock Transfer Agent and Registrar

Mellon Investor Services acts as our transfer agent and registrar, dividend paying agent and dividend reinvestment plan administrator, and maintains all shareholder records for the corporation. Inquiries related to shareholder records, stock transfers, changes of ownership, lost stock certificates, changes of address and dividend payment should be directed to the transfer agent at:

Mellon Investor Services

P.O. Box 3315

South Hackensack, NJ 07606-1915

Phone: 888-778-1311 or 201-680-4000

Internet: melloninvestor.com

For Registered or Certified Mail:

Mellon Investor Services

480 Washington Boulevard

Jersey City, NJ 07310

Telephone representatives are available weekdays from 8:00 a.m. to 6:00 p.m. Central Time, and automated support is available 24 hours a day, 7 days a week. Specific information about your account is available on Mellon’s internet site by clicking on For Investors and then the Investor ServiceDirect^® link.

Independent Auditors

Ernst & Young LLP serves as the independent auditors of U.S. Bancorp’s financial statements.

Common Stock Listing and Trading

U.S. Bancorp common stock is listed and traded on the New York Stock Exchange under the ticker symbol USB.

Dividends and Reinvestment Plan

U.S. Bancorp currently pays quarterly dividends on our common stock on or about the 15th day of January, April, July and October, subject to approval by our Board of Directors. U.S. Bancorp shareholders can choose to participate in a plan that provides automatic reinvestment of dividends and/or optional cash purchase of additional shares of U.S. Bancorp common stock. For more information, please contact our transfer agent, Mellon Investor Services. See above.

Investment Community Contacts

Judith T. Murphy

Senior Vice President, Investor Relations

judith.murphy@usbank.com

Phone: 612-303-0783 or866-775-9668

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, click on About U.S. Bancorp, then Investor/Shareholder Information.

Mail. At your request, we will mail to you our quarterly earnings, news releases, quarterly financial data reported on Form 10-Q and additional copies of our annual reports. Please contact:

U.S. Bancorp Investor Relations

800 Nicollet Mall

Minneapolis, Minnesota 55402

investorrelations@usbank.com

Phone: 612-303-0799 or866-775-9668

Media Requests

Steven W. Dale

Senior Vice President, Media Relations

steve.dale@usbank.com

Phone: 612-303-0784

Privacy

U.S. Bancorp is committed to respecting the privacy of our customers and safeguarding the financial and personal information provided to us. To learn more about the U.S. Bancorp commitment to protecting privacy, visit usbank.com and click on Privacy Pledge.

Code of Ethics

U.S. Bancorp places the highest importance on honesty and integrity. Each year, every U.S. Bancorp employee certifies compliance with the letter and spirit of our Code of Ethics and Business Conduct, the guiding ethical standards of our organization. For details about our Code of Ethics and Business Conduct, visit usbank.com and click on About U.S. Bancorp, then Ethics at U.S. Bank.

Diversity

U.S. Bancorp and our subsidiaries are committed to developing and maintaining a workplace that reflects the diversity of the communities we serve. We support a work environment where individual differences are valued and respected and where each individual who shares the fundamental values of the company has an opportunity to contribute and grow based on individual merit.

Equal Employment Opportunity/Affirmative Action

U.S. Bancorp and our subsidiaries are committed to providing Equal Employment Opportunity to all employees and applicants for employment. In keeping with this commitment, employment decisions are made based upon performance, skill and ability, not race, color, religion, national origin or ancestry, gender, age, disability, veteran status, sexual orientation or any other factors protected by law. The corporation complies with municipal, state and federal fair employment laws, including regulations applying to federal contractors.

U.S. Bancorp, including each of our subsidiaries, is an Equal Opportunity Employer committed to creating a diverse workforce.

U.S. Bancorp

Member FDIC

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U.S. Bancorp (USB) 10-Q2006 Q2 Quarterly report

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