U.S. Bancorp 10Q 2005 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from (not applicable)

Commission file number 1-6880

U.S. BANCORP

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of Incorporation or organization)		41-0255900 (I.R.S. Employer Identification Number)

800 Nicollet Mall

Minneapolis, Minnesota 55402

(Address of principal executive offices, including zip code)

651-466-3000

(Registrant’s telephone number, including area code)

(not applicable)

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

YES X NO

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

YES X NO

Indicate 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 April 30, 2005 1,832,752,013 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	3
	c) Balance Sheet Analysis	7
	d) Accounting Changes	28
	e) Critical Accounting Policies	28
	f) Controls and Procedures (Item 4)	28
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	17
	f) Market Risk Management	20
	g) Liquidity Risk Management	21
	h) Capital Management	22
3) Line of Business Financial Review		23
4) Financial Statements (Item 1)		30
Part II — Other Information
1) Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)		44
2) Submission of Matters to a Vote of Security Holders (Item 4)		44
3) Exhibits (Item 6)		44
4) Signature		45
5) Exhibits		46
Restated Certificate of Incorporation
Appendix B-10 to Non-Qualified Executive Retirement Plan
Amendment No. 5 to Non-Qualified Executive Retirement Plan
Offer of Employment to Richard C. Hartnack

Forward-Looking Statements

This Form 10-Q contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following, in addition to those contained in U.S. Bancorp’s reports on file with the SEC: (i) general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for credit losses, or a reduced demand for credit or fee-based products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; (iii) inflation, changes in securities market conditions and monetary fluctuations could adversely affect the value or credit quality of our assets, or the availability and terms of funding necessary to meet our liquidity needs; (iv) changes in the extensive laws, regulations and policies governing financial services companies could alter our business environment or affect operations; (v) the potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could present operational issues or require significant capital spending; (vi) competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments or bank regulatory reform; (vii) changes in consumer spending and savings habits could adversely affect our results of operations; (viii) changes in the financial performance and condition of our borrowers could negatively affect repayment of such borrowers’ loans; (ix) acquisitions may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated, or may result in unforeseen integration difficulties; (x) capital investments in our businesses may not produce expected growth in earnings anticipated at the time of the expenditure; and (xi) acts or threats of terrorism, and/or political and military actions taken by the U.S. or other governments in response to acts or threats of terrorism or otherwise could adversely affect general economic or industry conditions. Forward-looking statements speak only as of the date they are made, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.


U.S. Bancorp	1


Table 1		Selected Financial Data


		Three Months Ended
		March 31,

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

Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)		$	1,751		$	1,779			(1.6	)%
Noninterest income			1,441			1,318			9.3
Securities losses, net			(59	)		—			*

	Total net revenue		3,133			3,097			1.2
Noninterest expense			1,331			1,455			(8.5	)
Provision for credit losses			172			235			(26.8	)

	Income before taxes		1,630			1,407			15.8
Taxable-equivalent adjustment			7			7			—
Applicable income taxes			552			392			40.8

	Net income	$	1,071		$	1,008			6.3

Per Common Share
Earnings per share		$	.58		$	.53			9.4	%
Diluted earnings per share			.57			.52			9.6
Dividends declared per share			.30			.24			25.0
Book value per share			10.43			10.23			2.0
Market value per share			28.82			27.65			4.2
Average common shares outstanding			1,852			1,915			(3.3	)
Average diluted common shares outstanding			1,880			1,941			(3.1	)
Financial Ratios
Return on average assets			2.21	%		2.14	%
Return on average equity			21.9			20.7
Net interest margin (taxable-equivalent basis)			4.08			4.29
Efficiency ratio (b)			41.7			47.0
Average Balances
Loans		$	127,654		$	118,810			7.4	%
Loans held for sale			1,429			1,445			(1.1	)
Investment securities			42,813			44,744			(4.3	)
Earning assets			173,294			166,359			4.2
Assets			196,935			189,663			3.8
Noninterest-bearing deposits			28,417			29,025			(2.1	)
Deposits			119,423			116,019			2.9
Short-term borrowings			15,606			13,419			16.3
Long-term debt			35,440			34,553			2.6
Shareholders’ equity			19,803			19,584			1.1

			March 31, 2005		December 31, 2004

Period End Balances
Loans		$	128,905		$	126,315			2.1	%
Allowance for credit losses			2,269			2,269			—
Investment securities			43,103			41,481			3.9
Assets			198,466			195,104			1.7
Deposits			119,718			120,741			(.8	)
Long-term debt			38,071			34,739			9.6
Shareholders’ equity			19,208			19,539			(1.7	)
Regulatory capital ratios
	Tangible common equity		6.2	%		6.4	%
	Tier 1 capital		8.6			8.6
	Total risk-based capital		13.3			13.1
	Leverage		7.9			7.9


*		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 $1,071 million for the first quarter of 2005, or $.57 per diluted share, compared with $1,008 million, or $.52 per diluted share, for the first quarter of 2004. Return on average assets and return on average equity were 2.21 percent and 21.9 percent, respectively, for the first quarter of 2005, compared with returns of 2.14 percent and 20.7 percent, respectively, for the first quarter of 2004. The Company’s results for the first quarter of 2005 improved over the same period of 2004, as net income rose by $63 million (6.3 percent), primarily due to lower credit costs and growth in fee-based products and services. During the first quarter of 2005, the Company recognized a $54 million reparation of its mortgage servicing rights (“MSR”) asset, reflecting rising longer–term interest rates in 2005, compared with the recognition of $109 million of MSR impairment in the first quarter of 2004. The yield on 10-year Treasury Notes and 30-year Fannie Mae commitments increased approximately 26 and 34 basis points, respectively. In connection with its asset/liability management activities, the Company sold certain investment securities during the first quarter of 2005, resulting in net securities losses of $59 million. The Company realized no securities gains or losses in the first quarter of 2004. Also included in the first quarter of 2004 results was a $35 million expense charge related to the prepayment of certain debt and a $90 million reduction in income tax expense related to the resolution of federal tax examinations.

Total net revenue, on a taxable-equivalent basis, was $3,133 million for the first quarter of 2005, compared with $3,097 million for the first quarter of 2004, a year-over-year increase of $36 million (1.2 percent). The increase in net revenue was comprised of a 4.9 percent increase in noninterest income and a 1.6 percent decline in net interest income. The increase in noninterest income over the first quarter of 2004 was driven by favorable variances in the majority of fee income categories, partially offset by a $59 million increase in losses on the sale of securities. The expansion of the Company’s merchant acquiring business in Europe accounted for approximately $26 million of the favorable change in noninterest income year-over-year. The 1.6 percent decline in net interest income reflected modest growth in average earning assets, offset by lower net interest margins. Average earning assets for the first quarter of 2005 increased over the same period of 2004 by $6.9 billion (4.2 percent), primarily driven by increases in retail loans and commercial loans, partially offset by a decline in investment securities. The net interest margin in the first quarter of 2005 was 4.08 percent, compared with 4.29 percent in the first quarter of 2004. The decline in the net interest margin reflected the current lending environment, asset/liability management decisions and the impact of changes in the yield curve from a year ago.

Total noninterest expense was $1,331 million for the first quarter of 2005, compared with $1,455 million for the first quarter of 2004. The year-over-year decrease in total noninterest expense of $124 million (8.5 percent), primarily reflected the $163 million favorable change in the valuation of mortgage servicing rights and the $35 million debt prepayment expense that was taken in the first quarter of 2004. The expansion of the Company’s merchant acquiring business in Europe added approximately $31 million of expense. In addition, expenses reflected incremental investments in in-store branches, marketing initiatives, technology and higher pension costs from a year ago. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 41.7 percent for the first quarter of 2005, compared with 47.0 percent for the first quarter of 2004.

The provision for credit losses for the first quarter of 2005 was $172 million, a decrease of $63 million (26.8 percent) from the first quarter of 2004. The decrease in the provision for credit losses year-over-year reflected a decrease in total net charge-offs. Net charge-offs in the first quarter of 2005 were $172 million, compared with $234 million in the first quarter of 2004. The decline in losses from a year ago was primarily the result of declining levels of stressed and nonperforming loans, continuing collection efforts and improving economic conditions. 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 $1,751 million in the first quarter of 2005, compared with $1,779 million in the first quarter of 2004, a decrease of $28 million (1.6 percent). The decline in net interest income reflected modest growth in average earning assets, more than offset by


U.S. Bancorp	3

lower net interest margins. Average earning assets in the first quarter of 2005 increased over the first quarter of 2004 by $6.9 billion (4.2 percent), primarily driven by increases in retail loans and commercial loans, partially offset by a decline in investment securities. The net interest margin in the first quarter of 2005 was 4.08 percent, compared with 4.29 percent in the first quarter of 2004. The decline in the net interest margin reflected the current lending environment, asset/liability management decisions and the impact of changes in the yield curve from a year ago. Since the first quarter of 2004, credit spreads have tightened by approximately 14 basis points across most lending products due to competitive pricing and a higher proportion of lower spread credit products. The net interest margin also declined due to higher short-term rates and asset/liability decisions designed to maintain a neutral rate risk position, including a 40 percent reduction in the net receive fixed swap position between March 31, 2004, and March 31, 2005. Lower prepayment fees also contributed to the year-over-year decline. Increases in the value of deposits and net free funds helped to partially offset these factors.

Average loans for the first quarter of 2005 were $8.8 billion (7.4 percent) higher than the first quarter of 2004, driven by growth in average retail loans of $3.8 billion (9.5 percent), residential mortgages of $2.2 billion (16.3 percent) and total commercial loans of $2.5 billion (6.4 percent). Total commercial real estate loans also increased slightly year-over-year by $394 million (1.5 percent) relative to the first quarter of 2004.

Average investment securities in the first quarter of 2005 were $1.9 billion (4.3 percent) lower than in the first quarter of 2004. The decline principally reflected the repositioning of the investment portfolio in mid-2004 as part of asset/liability risk management decisions to acquire variable-rate and shorter-term fixed-rate securities while selling more longer-term fixed-rate mortgage-backed securities. During the first quarter of 2005, the Company retained its mix of approximately 39 percent variable-rate securities while investing in some principal-only and fixed-rate securities to economically hedge the MSR portfolio against a flattening yield curve. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of net interest income to changes in interest rates.

Average noninterest-bearing deposits for the first quarter of 2005 were lower than the first quarter of 2004 by $608 million (2.1 percent). The year-over-year change in the average balance of noninterest-bearing deposits was impacted by product changes in the Consumer Banking business line. In late 2004, the Company migrated approximately $1.3 billion of noninterest-bearing deposit balances to interest checking


Table 2		Analysis of Net Interest Income


		Three Months Ended
		March 31,

(Dollars in Millions)		2005			2004			Change

Components of net interest income
	Income on earning assets (taxable-equivalent basis) (a)	$	2,442		$	2,265		$	177
	Expense on interest-bearing liabilities		691			486			205

Net interest income (taxable-equivalent basis)		$	1,751		$	1,779		$	(28	)

Net interest income, as reported		$	1,744		$	1,772		$	(28	)

Average yields and rates paid
	Earning assets yield (taxable-equivalent basis)		5.69	%		5.47	%		.22	%
	Rate paid on interest-bearing liabilities		1.97			1.45			.52

Gross interest margin (taxable-equivalent basis)			3.72	%		4.02	%		(.30	)%

Net interest margin (taxable-equivalent basis)			4.08	%		4.29	%		(.21	)%

Average balances
	Investment securities	$	42,813		$	44,744		$	(1,931	)
	Loans		127,654			118,810			8,844
	Earning assets		173,294			166,359			6,935
	Interest-bearing liabilities		142,052			134,966			7,086
	Net free funds (b)		31,242			31,393			(151	)


(a)		Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b)		Represents noninterest-bearing deposits, allowance for loan losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity.


4	U.S. Bancorp

accounts as an enhancement to its Silver Elite Checking product. Average branch-based noninterest-bearing deposits in the first quarter of 2005, excluding the migration of certain high-value customers to Silver Elite Checking, were higher by approximately $599 million (5.4 percent) over the same quarter of 2004. Average noninterest-bearing deposits in other areas, including commercial banking, private client, corporate trust, and mortgage, also increased year-over-year. These favorable variances were offset, however, by expected declines in average noninterest-bearing deposits in corporate banking as business customers utilized their excess liquidity.

Average total savings products declined year-over-year by $1.9 billion (3.0 percent), principally due to a reduction in average money market account balances, partially offset by higher interest checking and savings accounts balances. Average branch-based interest checking deposits increased by $2.6 billion (18.0 percent) over the same quarter of 2004, in part, due to the change in the Silver Elite Checking product, as well as new account growth. Average branch-based interest checking deposits, excluding Silver Elite Checking, were higher by approximately $1.3 billion (9.2 percent) year-over-year. This positive variance in branch-based interest checking account deposits was partially offset by reductions in other areas, including broker dealer and institutional trust. Average money market account balances declined by $4.1 billion (12.0 percent) year-over-year, with the largest declines in government banking, national corporate banking, and the branches. These reductions were partially offset by strong growth in corporate trust deposits. The overall decrease in average money market account balances year-over-year was the result of the Company’s deposit pricing decisions in selected markets, given modest loan growth and excess liquidity throughout 2004. A portion of the money market balances migrated to time deposits greater than $100,000 as rates increased on the time deposit products.

Average time certificates less than $100,000 were lower in the first quarter of 2005 than the first quarter of 2004 by $640 million (4.7 percent), as older, higher rate certificates continued to mature. This reduction was more than offset by an increase year-over-year of average time deposits greater than $100,000, most notably in corporate banking.

Provision for Credit LossesThe provision for credit losses was $172 million for the first quarter of 2005, and $235 million for the first quarter of 2004, a year-over-year decrease of $63 million (26.8 percent). The decrease in the provision for credit losses year-over-year reflected a decrease in total net charge-offs. Net charge-offs in the first quarter of 2005 were $172 million, compared with $234 million in the first quarter of 2004. The decline in losses from a year ago was primarily the result of declining levels of stressed and nonperforming loans, continuing collection efforts and improving economic conditions. 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 first quarter of 2005 was $1,382 million, compared with $1,318 million in the first quarter of 2004. The increase in noninterest income of $64 million (4.9 percent), was driven by favorable variances in the majority of fee income categories, partially offset by a $59 million increase in losses on the sale of securities.

Credit and debit card revenue and corporate payment products revenue were both higher in the first quarter of 2005 than the first quarter of 2004 by $12 million, or 8.5 percent and 12.6 percent, respectively. The growth in credit and debit card revenue was driven by higher transaction volumes and rate changes. The corporate payment products revenue growth reflected growth in sales, card usage, rate changes and the recent acquisition of a small aviation card business. ATM processing services revenue was higher by $5 million (11.9 percent) in the first quarter of 2005 than the same quarter of the prior year due to increases in transaction volumes and sales. Merchant processing services revenue was higher in the first quarter of 2005 than the same quarter of 2004 by $37 million (26.2 percent), reflecting an increase in same store sales volume, new business, higher equipment fees, and the recent expansion of the Company’s merchant acquiring business in Europe. The recent European acquisitions accounted for approximately $26 million of the total increase. Deposit service charges were higher year-over-year by $25 million (13.5 percent) due to account growth, revenue enhancement initiatives and higher transaction-related fees. The favorable variance year-over-year in mortgage banking revenue of $8 million (8.5 percent) was primarily due to higher loan servicing revenue. Other income was higher by $51 million (49.5 percent), primarily due to higher income from equity investments relative to the same quarter of 2004. Partially offsetting these positive variances year-over-year were commercial products revenue, treasury management fees and trust and investment management fees, which declined by


U.S. Bancorp	5

$14 million (12.7 percent), $11 million (9.3 percent), and $2 million (.8 percent), respectively. Commercial products revenue declined due to reductions in loan syndication fees and leasing revenues. The decrease in treasury management fees was primarily due to higher earnings credit on customers’ compensating balances. Trust and investment management fees declined as revenues generated by favorable equity market valuations and core balance growth were more than offset by a change in the mix of fund balances and customers’ migration from paying for services with fees to paying with compensating balances.

Noninterest ExpenseNoninterest expense in the first quarter of 2005 was $1,331 million, compared with $1,455 million in the first quarter of 2004. The decrease of $124 million (8.5 percent) was primarily driven by the $163 million favorable change in the valuation of mortgage servicing rights, as well as the decrease of $35 million in debt prepayment charges relative to the first quarter of 2004. Offsetting these favorable variances were increases in compensation, employee benefits, professional services, marketing and business development, technology and communications, postage, printing and supplies and other expense. Included in the first quarter of 2005 was approximately $31 million related to the recent European merchant acquiring acquisitions completed during 2004. Compensation expense was higher year-over-year by $31 million (5.8 percent), principally due to business expansion of in-store branches, the expansion of the Company’s merchant acquiring business in Europe and other initiatives. Employee benefits increased year-over-year by $16 million (16.0 percent), primarily as a result of higher pension expense and payroll taxes. Professional services and marketing and business development were higher in the first quarter of 2005 than the first quarter of 2004 by $4 million (12.5 percent) and $8 million (22.9 percent), respectively, due to general growth in business activity and timing of marketing programs. Technology and communications expense rose by $4 million (3.9 percent), reflecting technology investments that increased software expense amortization, in addition to outside data processing. Other expense was higher in the first quarter than the same quarter of 2004 by $4 million (2.3 percent), primarily due to increases in loan-related expense, affordable housing operating costs and processing costs for payment services products, the result of increases in transaction volume year-over-year.


Table 3		Noninterest Income


		Three Months Ended
		March 31,

							Percent
(Dollars in Millions)		2005			2004		Change

Credit and debit card revenue		$	154		$	142		8.5	%
Corporate payment products revenue			107			95		12.6
ATM processing services			47			42		11.9
Merchant processing services			178			141		26.2
Trust and investment management fees			247			249		(.8	)
Deposit service charges			210			185		13.5
Treasury management fees			107			118		(9.3	)
Commercial products revenue			96			110		(12.7	)
Mortgage banking revenue			102			94		8.5
Investment products fees and commissions			39			39		—
Securities losses, net			(59	)		—		*
Other			154			103		49.5

	Total noninterest income	$	1,382		$	1,318		4.9	%


*		Not meaningful


6	U.S. Bancorp

Income Tax ExpenseThe provision for income taxes was $552 million (an effective rate of 34.0 percent) for the first quarter of 2005, compared with $392 million (an effective rate of 28.0 percent) for the first quarter of 2004. The first quarter of 2004 included a $90 million reduction in income tax expense related to the resolution of federal tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999. For further information on income taxes, refer to Note 10 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS

LoansThe Company’s total loan portfolio was $128.9 billion at March 31, 2005, compared with $126.3 billion at December 31, 2004, an increase of $2.6 billion (2.1 percent). The increase in total loans was driven by growth in commercial loans, residential mortgages and to a lesser extent by retail loans. Commercial loans, including lease financing, totaled $41.5 billion at March 31, 2005, compared with $40.2 billion at December 31, 2004, an increase of $1.4 billion (3.4 percent). The increase in commercial loans was driven by new customer relationships, increases in corporate card balances and to a lesser extent, increased utilization under lines of credit by commercial customers. The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction loans, was $27.4 billion at March 31, 2005, compared with $27.6 billion at December 31, 2004.

Residential mortgages held in the loan portfolio were $16.6 billion at March 31, 2005, compared with $15.4 billion at December 31, 2004, an increase of $1.2 billion (7.8 percent) from December 31, 2004. The increase in residential mortgages was primarily the result of an increase in consumer finance originations and asset/liability risk management decisions to retain a greater portion of the Company’s adjustable-rate loan production.

Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, were $43.4 billion at March 31, 2005, compared with $43.2 billion at December 31, 2004. The growth of $.2 billion was driven primarily by an increase in installment and student loans, partially offset by reduced credit card activity due to seasonality.

Loans Held for SaleLoans held for sale, consisting of residential mortgages to be sold in the secondary market, were $1.6 billion at March 31, 2005, compared with $1.4 billion at December 31, 2004. The increase of $.2 billion (13.6 percent) was primarily due to stronger mortgage banking activities caused by a mid-quarter decline in interest rates and the timing of loan originations and sales during the first quarter of 2005.

Investment SecuritiesAt March 31, 2005, investment securities, both available-for-sale and held-to-maturity, totaled $43.1 billion, compared with $41.5 billion at December 31, 2004. The $1.6 billion (3.9 percent) increase primarily reflected purchases of $6.6 billion of securities, partially offset by sales, along with maturities and prepayments. During the quarter, securities transactions were principally related to asset/liability management decisions intended to maintain a substantively neutral interest rate risk position. As of March 31, 2005, and December 31, 2004, approximately 39 percent of the investment securities


Table 4		Noninterest Expense


		Three Months Ended
		March 31,

								Percent
(Dollars in Millions)		2005			2004			Change

Compensation		$	567		$	536			5.8	%
Employee benefits			116			100			16.0
Net occupancy and equipment			154			156			(1.3	)
Professional services			36			32			12.5
Marketing and business development			43			35			22.9
Technology and communications			106			102			3.9
Postage, printing and supplies			63			62			1.6
Other intangibles			71			226			(68.6	)
Debt prepayment			—			35			*
Other			175			171			2.3

	Total noninterest expense	$	1,331		$	1,455			(8.5	)%

Efficiency ratio (a)			41.7	%		47.0	%


*		Not meaningful
(a)		Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.


U.S. Bancorp	7

portfolio represented adjustable-rate financial instruments. Adjustable-rate financial instruments include variable-rate collateralized mortgage obligations, mortgage-backed securities, agency securities, adjustable-rate money market accounts and asset-backed securities.

DepositsTotal deposits were $119.7 billion at March 31, 2005, compared with $120.7 billion at December 31, 2004, a decrease of $1.0 billion (.8 percent). The decrease in total deposits was primarily the result of declines in non-interest bearing deposits and money market accounts, partially offset by increases in time deposits greater than $100,000, time


Table 5		Investment Securities


			Available-for-Sale									Held-to-Maturity

							Weighted-									Weighted-
							Average		Weighted-							Average		Weighted-
			Amortized		Fair		Maturity in		Average			Amortized		Fair		Maturity in		Average
March 31, 2005 (Dollars in Millions)			Cost		Value		Years		Yield (c)			Cost		Value		Years		Yield (c)

U.S. Treasury and agencies
	Maturing in one year or less		$	145	$	145		.34		2.97	%	$	—	$	—		—		—	%
	Maturing after one year through five years			52		53		3.05		5.21			—		—		—		—
	Maturing after five years through ten years			26		27		7.44		4.94			—		—		—		—
	Maturing after ten years			—		—		—		—			—		—		—		—

		Total	$	223	$	225		1.80		3.71	%	$	—	$	—		—		—	%

Mortgage-backed securities (a)
	Maturing in one year or less		$	1,037	$	1,040		.55		4.39	%	$	—	$	—		—		—	%
	Maturing after one year through five years			22,194		21,777		3.90		4.40			10		10		3.05		5.04
	Maturing after five years through ten years			17,929		17,590		6.71		4.67			—		—		—		—
	Maturing after ten years			1,233		1,241		13.85		4.21			—		—		—		—

		Total	$	42,393	$	41,648		5.30		4.51	%	$	10	$	10		3.05		5.04	%

Asset-backed securities (a)
	Maturing in one year or less		$	30	$	30		.58		5.61	%	$	—	$	—		—		—	%
	Maturing after one year through five years			15		15		1.76		5.36			—		—		—		—
	Maturing after five years through ten years			—		—		—		—			—		—		—		—
	Maturing after ten years			—		—		—		—			—		—		—		—

		Total	$	45	$	45		.97		5.53	%	$	—	$	—		—		—	%

Obligations of state and political subdivisions
	Maturing in one year or less		$	78	$	79		.44		7.32	%	$	2	$	3		.55		6.77	%
	Maturing after one year through five years			85		88		2.47		7.23			33		34		2.49		6.51
	Maturing after five years through ten years			6		6		6.36		7.69			21		23		7.28		7.24
	Maturing after ten years			1		1		17.50		5.25			37		38		15.47		6.74

		Total	$	170	$	174		1.76		7.28	%	$	93	$	98		8.72		6.77	%

Other debt securities
	Maturing in one year or less		$	265	$	264		.10		2.21	%	$	3	$	3		.37		6.75	%
	Maturing after one year through five years			71		72		2.35		12.99			11		11		2.75		5.81
	Maturing after five years through ten years			—		—		—		—			4		4		5.31		3.21
	Maturing after ten years			499		494		22.10		3.56			—		—		—		—

		Total	$	835	$	830		13.44		3.94	%	$	18	$	18		2.90		5.39	%

Other investments			$	62	$	60		—		—	%	$	—	$	—		—		—	%

Total investment securities (b)			$	43,728	$	42,982		5.42		4.50	%	$	121	$	126		7.38		6.42	%


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

(b)	The weighted average maturity of the available-for-sale investment securities was 4.45 years at December 31, 2004, with a corresponding weighted-average yield of 4.43%. The weighted-average maturity of the held-to-maturity investment securities was 6.19 years at December 31, 2004, with a corresponding weighted-average yield of 6.28%.

(c)	Average yields are presented on a fully-taxable equivalent basis. Yields on available-for-sale and held-to-maturity securities are computed based on historical cost balances. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity.


		March 31, 2005					December 31, 2004

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

U.S. Treasury and agencies		$	223		.5	%	$	684		1.6	%
Mortgage-backed securities			42,403		96.7			39,820		95.4
Asset-backed securities			45		.1			64		.2
Obligations of state and political subdivisions			263		.6			303		.7
Other securities and investments			915		2.1			881		2.1

	Total investment securities	$	43,849		100.0	%	$	41,752		100.0	%


8	U.S. Bancorp

certificates of deposit less than $100,000 and savings products.

Noninterest-bearing deposits were $28.9 billion at March 31, 2005, compared with $30.8 billion at December 31, 2004, a decrease of $1.9 billion (6.1 percent), primarily due to seasonality of corporate trust deposits and declining corporate banking deposits.

Interest-bearing deposits totaled $90.8 billion at March 31, 2005, compared with $90.0 billion at December 31, 2004, an increase of $.9 billion (.9 percent). The increase in interest-bearing deposits was primarily due to increases in time deposits greater than $100,000 of $1.0 billion (5.8 percent), along with increases in time certificates of deposit less than $100,000 of $.4 billion (2.9 percent) and savings accounts of $.2 billion (3.0 percent). The Company also experienced growth in interest checking deposits. These increases were partially offset by a decrease of $.8 billion (2.5 percent) in money market accounts. Time deposits greater than $100,000 are largely viewed as purchased funds and are managed to levels deemed appropriate given alternative funding sources. The decrease in money market savings account balances reflects the Company’s deposit pricing decisions in selected markets, given modest loan growth and excess liquidity and a migration of some customer balances to time deposits.

BorrowingsThe Company utilizes both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $14.3 billion at March 31, 2005, compared with $13.1 billion at December 31, 2004. Short-term funding is managed to levels deemed appropriate given alternative funding sources. The increase of $1.2 billion in short-term borrowings reflected wholesale funding associated with the Company’s earning asset growth. Long-term debt was $38.1 billion at March 31, 2005, compared with $34.7 billion at December 31, 2004, an increase of $3.3 billion. The increase in long-term debt was primarily driven by the issuance of $2.7 billion of bank notes and the addition of $2.0 billion of Federal Home Loan Bank (“FHLB”) advances, partially offset by long-term debt maturities of $2.0 billion. 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 the end-of-term value of leased assets or the residual cash flows related to asset securitization and other off-balance sheet structures. Operational risk includes risks related to fraud, legal and compliance risk, processing errors, technology, breaches of internal controls and business continuation and disaster recovery risk. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Rate movements can affect the repricing of assets and liabilities differently, as well as their market value. Market risk arises from fluctuations in interest rates, foreign exchange rates, and equity prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities that are accounted for on a mark-to-market basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. In addition, corporate strategic decisions, as well as the risks described above, could give rise to reputation risk. Reputation risk is the risk that negative publicity or press, whether true or not, could result in costly litigation or cause a decline in the Company’s stock value, customer base or revenue.

Credit Risk ManagementThe Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans experiencing deterioration of credit quality. The credit risk management strategy also includes a credit risk assessment process, independent of business line managers, that performs assessments of compliance with commercial and consumer credit policies, risk ratings, and other critical credit information. The Company strives to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels for probable loan losses inherent in the portfolio. Commercial banking operations rely on a strong credit culture that combines prudent credit policies and individual lender accountability. Lenders are assigned lending grades based on their level of experience and customer service requirements. Lending grades represent the level of approval authority for the amount of credit exposure and level of risk. Credit officers reporting to an


U.S. Bancorp	9

independent credit administration function have higher levels of lending grades and support the business units in their credit decision process. Loan decisions are documented as to the borrower’s business, purpose of the loan, evaluation of the repayment source and the associated risks, evaluation of collateral, covenants and monitoring requirements, and risk rating rationale. The Company utilizes a credit risk rating system to measure the credit quality of individual commercial loan transactions. The Company uses the risk rating system for regulatory reporting, determining the frequency of review of the credit exposures, and evaluation and determination of specific allowance for commercial credit losses. The Company regularly forecasts potential changes in risk ratings, nonperforming status and potential for loss and the estimated impact on the allowance for credit losses. In the Company’s retail banking operations, standard credit scoring systems are used to assess credit risks of consumer, small business and small-ticket leasing customers and to price consumer products accordingly. The Company conducts the underwriting and collections of its retail products in loan underwriting and servicing centers specializing in certain retail products. Forecasts of delinquency levels, bankruptcies and losses in conjunction with projection of estimated losses by delinquency categories and vintage information are regularly prepared and are used to evaluate underwriting and collection and determine the specific allowance for credit losses for these products. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments. The Company also engages in non-lending activities that may give rise to credit risk, including interest rate swap and option contracts for balance sheet hedging purposes, foreign exchange transactions, deposit overdrafts and interest rate swap contracts for customers, and settlement risk, including Automated Clearing House transactions, and the processing of credit card transactions for merchants. These activities are also subject to credit review, analysis and approval processes.

In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors. Economic conditions during the first quarter of 2005 have improved from the first quarter of 2004, as reflected in improved unemployment rates and bankruptcy levels, favorable trends related to corporate profits and consumer spending for retail goods and services. Relative to December 31, 2004, economic conditions are relatively unchanged with somewhat higher energy costs and some increasing inflationary trends. The Federal Reserve Bank continued its measured approach to increasing short-term interest rates in an effort to prevent an acceleration of inflation and maintain the current rate of economic growth.

Analysis of Nonperforming AssetsThe level of nonperforming assets represents an indicator, among other considerations, of the potential for future credit losses. Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms and 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 March 31, 2005, total nonperforming assets were $665 million, compared with $748 million at December 31, 2004. The ratio of total nonperforming assets to total loans and other real estate decreased to ..52 percent at March 31, 2005, compared with ..59 percent at December 31, 2004. While nonperforming assets are expected to continue to decline slightly during the next few quarters, the ongoing level of nonperforming assets is not expected to decline much further after mid-2005.


10	U.S. Bancorp


Table 6		Nonperforming Assets (a)


				March 31,			December 31,
(Dollars in Millions)				2005			2004

Commercial
	Commercial			$	254		$	289
	Lease financing				70			91

		Total commercial			324			380
Commercial real estate
	Commercial mortgages				159			175
	Construction and development				21			25

		Total commercial real estate			180			200
Residential mortgages					41			43
Retail
	Retail leasing				—			—
	Other retail				16			17

		Total retail			16			17

			Total nonperforming loans		561			640
Other real estate					66			72
Other assets					38			36

			Total nonperforming assets	$	665		$	748

Restructured loans accruing interest (b)				$	7		$	10
Accruing loans 90 days or more past due				$	285		$	294
Nonperforming loans to total loans					.44	%		.51	%
Nonperforming assets to total loans plus other real estate					.52	%		.59	%

Changes in Nonperforming Assets


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

Balance December 31, 2004					$	619		$	129		$	748
	Additions to nonperforming assets
		New nonaccrual loans and foreclosed properties				73			10			83
		Advances on loans				20			—			20

			Total additions			93			10			103
	Reductions in nonperforming assets
		Paydowns, payoffs				(69	)		(11	)		(80	)
		Net sales				(23	)		—			(23	)
		Return to performing status				(25	)		(4	)		(29	)
		Charge-offs (c)				(53	)		(1	)		(54	)

			Total reductions			(170	)		(16	)		(186	)

				Net reductions in nonperforming assets		(77	)		(6	)		(83	)

Balance March 31, 2005					$	542		$	123		$	665


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


U.S. Bancorp	11

The Company had restructured loans of $58 million at March 31, 2005, compared with $68 million at December 31, 2004. Commitments to lend additional funds under restructured loans were $2 million as of March 31, 2005, compared with $12 million as of December 31, 2004. Restructured loans performing under the restructured terms beyond a specific timeframe are reported as accruing. Of the Company’s total restructured loans at March 31, 2005, $7 million were reported as accruing.

Accruing loans 90 days or more past due totaled $285 million at March 31, 2005, compared with $294 million at December 31, 2004. These loans were not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. The ratio of delinquent loans to total loans was ..22 percent at March 31, 2005, compared with ..23 percent at December 31, 2004.

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


Table 7		Delinquent Loan Ratios as a Percent of Ending Loan Balances


				March 31,			December 31,
90 days or more past dueexcludingnonperforming loans				2005			2004

Commercial
	Commercial				.06	%		.05	%
	Lease financing				—			.02

		Total commercial			.06			.05
Commercial real estate
	Commercial mortgages				—			—
	Construction and development				.07			—

		Total commercial real estate			.02			—
Residential mortgages					.41			.46
Retail
	Credit card				1.80			1.74
	Retail leasing				.04			.08
	Other retail				.24			.29

		Total retail			.43			.47

			Total loans		.22	%		.23	%


		March 31,			December 31,
90 days or more past dueincludingnonperforming loans		2005			2004

Commercial			.84	%		.99	%
Commercial real estate			.68			.73
Residential mortgages (a)			.66			.74
Retail			.47			.51

	Total loans		.66	%		.74	%


(a)		Delinquent loan ratios exclude advances made pursuant to servicing agreements to Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Including the guaranteed amounts, the ratio of residential mortgages 90 days or more past due was 4.68 percent at March 31, 2005, and 5.19 percent at December 31, 2004.


12	U.S. Bancorp

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


									As a Percent of Ending
					Amount				Loan Balances

					March 31,		December 31,		March 31,			December 31,
(Dollars in Millions)					2005		2004		2005			2004

Residential mortgages
		30-89 days			$	86	$	108		.52	%		.70	%
		90 days or more				68		70		.41			.46
		Nonperforming				41		43		.25			.28

			Total	��	$	195	$	221		1.18	%		1.44	%

Retail
	Credit card
		30-89 days			$	136	$	142		2.17	%		2.15	%
		90 days or more				113		115		1.80			1.74
		Nonperforming				—		—		—			—

			Total		$	249	$	257		3.97	%		3.89	%
	Retail leasing
		30-89 days			$	44	$	59		.61	%		.83	%
		90 days or more				3		6		.04			.08
		Nonperforming				—		—		—			—

			Total		$	47	$	65		.65	%		.91	%
	Other retail
		30-89 days			$	199	$	224		.67	%		.76	%
		90 days or more				72		84		.24			.29
		Nonperforming				16		17		.05			.05

			Total		$	287	$	325		.96	%		1.10	%

In general, delinquency ratios for retail loans continued to improve relative to December 31, 2004, reflecting current economic conditions and ongoing risk management and underwriting practices of the Company. The slight increase in credit card delinquencies principally reflects seasonal impacts subsequent to the holidays.

Analysis of Loan Net Charge-OffsTotal loan net charge-offs decreased $62 million to $172 million in the first quarter of 2005, compared with $234 million in the first quarter of 2004. The ratio of total loan net charge-offs to average loans was .55 percent in the first quarter of 2005, compared with .79 percent in the first quarter of 2004. The overall level of net charge-offs in the first quarter of 2005 reflected the Company’s ongoing efforts to reduce the overall risk profile of the organization and the stable economic conditions.

Commercial and commercial real estate loan net charge-offs for the first quarter of 2005 were $33 million (.20 percent of average loans outstanding), compared with $84 million (.51 percent of average loans outstanding) in the first quarter of 2004. The year-over-year improvement from the first quarter of 2004 was broad-based across most industries within the commercial loan portfolio.

Retail loan net charge-offs for the first quarter of 2005 were $130 million (1.22 percent of average loans outstanding), compared with $143 million (1.45 percent of average loans outstanding) for the first quarter of 2004. Lower levels of retail loan net charge-offs principally reflected the Company’s ongoing improvement in collection efforts and risk management.


U.S. Bancorp	13


Table 8		Net Charge-offs as a Percent of Average Loans Outstanding


				Three Months Ended
				March 31,

				2005			2004

Commercial
	Commercial				.16	%		.65	%
	Lease financing				1.07			1.72

		Total commercial			.27			.78
Commercial real estate
	Commercial mortgages				.08			.08
	Construction and development				.11			.31

		Total commercial real estate			.09			.13
Residential mortgages					.23			.21
Retail
	Credit card				4.11			4.31
	Retail leasing				.45			.71
	Home equity and second mortgages				.46			.60
	Other retail				1.09			1.40

		Total retail			1.22			1.45

			Total loans		.55	%		.79	%

The Company’s retail lending business utilizes several distinct business processes and channels to originate retail credit including traditional branch credit, indirect lending and a consumer finance division. Each distinct underwriting and origination activity manages unique credit risk characteristics and prices its loan production commensurate with the differing risk profiles. Within Consumer Banking, U.S. Bank Consumer Finance (“USBCF”) participates in all facets of the Company’s consumer lending activities. USBCF specializes in serving channel-specific and alternative lending markets in residential mortgages, home equity and installment loan financing. USBCF manages loans originated through a broker network, correspondent relationships and U.S. Bank branch offices. Generally, loans managed by the Company’s consumer finance division exhibit higher credit risk characteristics, but are priced commensurate with the differing risk profile.

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


	Average Loan				Percent of
	Amount				Average Loans
Three Months Ended March 31
(Dollars in Millions)	2005		2004		2005			2004

Consumer Finance (a)
Residential mortgages	$	5,121	$	4,178		.55	%		.39	%
Home equity and second mortgages		2,657		2,174		1.68			2.41
Other retail		382		402		5.31			5.00
Traditional Branch
Residential mortgages	$	10,706	$	9,432		.08	%		.13	%
Home equity and second mortgages		12,187		11,202		.20			.25
Other retail		14,485		13,711		.98			1.29
Total Company
Residential mortgages	$	15,827	$	13,610		.23	%		.21	%
Home equity and second mortgages		14,844		13,376		.46			.60
Other retail		14,867		14,113		1.09			1.40


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

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


14	U.S. Bancorp


Table 9		Summary of Allowance for Credit Losses


					Three Months Ended
					March 31,

(Dollars in Millions)					2005			2004

Balance at beginning of period					$	2,269		$	2,369
Charge-offs
	Commercial
		Commercial				32			83
		Lease financing				23			32

			Total commercial			55			115
	Commercial real estate
		Commercial mortgages				6			9
		Construction and development				2			5

			Total commercial real estate			8			14
	Residential mortgages					10			8
	Retail
		Credit card				73			70
		Retail leasing				11			13
		Home equity and second mortgages				21			23
		Other retail				53			62

			Total retail			158			168

				Total charge-offs		231			305
Recoveries
	Commercial
		Commercial				18			29
		Lease financing				10			11

			Total commercial			28			40
	Commercial real estate
		Commercial mortgages				2			5
		Construction and development				—			—

			Total commercial real estate			2			5
	Residential mortgages					1			1
	Retail
		Credit card				8			7
		Retail leasing				3			2
		Home equity and second mortgages				4			3
		Other retail				13			13

			Total retail			28			25

				Total recoveries		59			71
Net Charge-offs
	Commercial
		Commercial				14			54
		Lease financing				13			21

			Total commercial			27			75
	Commercial real estate
		Commercial mortgages				4			4
		Construction and development				2			5

			Total commercial real estate			6			9
	Residential mortgages					9			7
	Retail
		Credit card				65			63
		Retail leasing				8			11
		Home equity and second mortgages				17			20
		Other retail				40			49

			Total retail			130			143

				Total net charge-offs		172			234

Provision for credit losses						172			235

Balance at end of period					$	2,269		$	2,370

Components
	Allowance for loan losses				$	2,082		$	2,186
	Liability for unfunded credit commitments					187			184

		Total allowance for credit losses			$	2,269		$	2,370

Allowance for credit losses as a percentage of
	Period-end loans					1.76	%		1.98	%
	Nonperforming loans					404			258
	Nonperforming assets					341			226
	Annualized net charge-offs					325			252


U.S. Bancorp	15

At March 31, 2005, the allowance for credit losses was $2,269 million (1.76 percent of loans), compared with an allowance of $2,269 million (1.80 percent of loans) at December 31, 2004. The ratio of the allowance for credit losses to nonperforming loans was 404 percent at March 31, 2005, compared with 355 percent at December 31, 2004. The ratio of the allowance for credit losses to annualized loan net charge-offs was 325 percent at March 31, 2005, compared with 296 percent at December 31, 2004.

Several factors were taken into consideration in evaluating the allowance for credit losses at March 31, 2005, including the risk profile of the portfolios and loan net charge-offs during the period, the level of nonperforming assets, the accruing loans 90 days or more past due, and delinquency ratios in most loan categories compared with December 31, 2004. Management also considered the uncertainty related to certain industry sectors, including the airline industry, and the extent of credit exposure to highly leveraged enterprise-value borrowers within the portfolio. In addition, concentration risks associated with commercial real estate and the mix of loans, including credit cards, loans originated through the consumer finance division and residential mortgages balances, and their relative credit risk were evaluated compared with other banks. Finally, the Company considers 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 asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. Commercial lease originations are subject to the same well-defined underwriting standards referred to in the “Credit Risk Management” section which includes an evaluation of the residual risk. Retail lease residual risk is mitigated further by originating longer-term vehicle leases and effective end-of-term marketing of off-lease vehicles. Also, to reduce the financial risk of potential changes in vehicle residual values, the Company maintains residual value insurance. The catastrophic insurance maintained by the Company provides for the potential recovery of losses on individual vehicle sales in an amount equal to the difference between: (a) 105 percent or 110 percent of the average wholesale auction price for the vehicle at the time of sale and (b) the vehicle residual value specified by the Automotive Lease Guide (an authoritative industry source) at the inception of the lease. The potential recovery is calculated for each individual vehicle sold in a particular policy year and is reduced by any gains realized on vehicles sold during the same period. The Company will receive claim proceeds under this insurance program if, in the aggregate, there is a net loss for such period. In addition, the Company obtains separate residual value insurance for all vehicles at lease inception where end-of-lease term settlement is based solely on the residual value of the individual leased vehicles. Under this program, the potential recovery is computed for each individual vehicle sold and does not allow the insurance carrier to offset individual determined losses with gains from other leases. This individual vehicle coverage is included in the calculation of minimum lease payments when making the capital lease assessment. To reduce the risk associated with collecting insurance claims, the Company monitors the financial viability of the insurance carrier based on insurance industry ratings and available financial information.

Included in the retail leasing portfolio was approximately $4.1 billion of retail leasing residuals at March 31, 2005, compared with $4.0 billion at December 31, 2004. At March 31, 2005, the commercial leasing portfolio had $739 million of residuals, compared with $769 million at December 31, 2004. No significant change in the concentration of the portfolios has occurred since December 31, 2004.

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

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


16	U.S. Bancorp

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

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

Customer-related business conditions may also increase operational risk or the level of operational losses in certain transaction processing business units, including merchant processing activities. Ongoing risk monitoring of customer activities and their financial condition and operational processes serve to mitigate customer-related operational risk. Refer to Note 11 of the Notes to Consolidated Financial Statements for further discussion on merchant processing.

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

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

Net Interest Income Simulation AnalysisOne of the primary tools used to measure interest rate risk and the effect of interest rate changes on rate sensitive income and net interest income is simulation analysis. The monthly analysis incorporates substantially all of the Company’s assets and liabilities and off-balance sheet instruments, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on interest rate sensitive income of a 300 basis point upward or downward gradual change of market interest rates over a one-year period. The simulations also estimate the effect of immediate and sustained parallel shifts in the yield curve of 50 basis points as well as the effect of immediate and sustained flattening or steepening of the yield curve. These simulations include assumptions about how the balance sheet is likely to be affected by changes in loan and deposit growth. Assumptions are made to project interest rates for new loans and deposits based on historical analysis, management’s outlook and repricing strategies. These assumptions are validated on a periodic basis. A sensitivity analysis is provided for key variables of the simulation. The results are reviewed by ALPC monthly and are used to guide hedging strategies. ALPC policy guidelines limit the estimated change in interest rate sensitive income to 5.0 percent of forecasted interest rate sensitive income over the succeeding 12 months.


U.S. Bancorp	17

Sensitivity of Net Interest Income and Rate Sensitive Income


	March 31, 2005												December 31, 2004

	Down 50			Up 50			Down 300			Up 300			Down 50			Up 50			Down 300			Up 300
	Immediate			Immediate			Gradual			Gradual			Immediate			Immediate			Gradual			Gradual

Net interest income		(.04)	%		(.18)	%		*	%		(.72)	%		(.49)	%		.04	%		*	%		(.19)	%
Rate sensitive income		.05	%		(.35)	%		*	%		(1.23	)%		(.40)	%		(.13)	%		*	%		(.69)	%


*		Given the current level of interest rates, a downward 300 basis point scenario can not be computed.

The table above summarizes the interest rate risk of net interest income and rate sensitive income based on forecasts over the succeeding 12 months. At March 31, 2005, the Company’s overall interest rate risk position was slightly liability sensitive to changes in interest rates. Rate sensitive income includes net interest income as well as other income items that are sensitive to interest rates, including asset management fees, mortgage banking and the impact from compensating deposit balances. The Company manages its interest rate risk position by holding assets on the balance sheet with desired interest rate risk characteristics, implementing certain pricing strategies for loans and deposits and through the selection of derivatives and various funding and investment portfolio strategies. The Company manages the overall interest rate risk profile within policy limits. At March 31, 2005, and December 31, 2004, the Company was within its policy guidelines.

Market Value of Equity ModelingThe Company also utilizes the market value of equity as a measurement tool in managing interest rate sensitivity. The market value of equity measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. ALPC guidelines limit the change in market value of equity in a 200 basis point parallel rate shock to 15 percent of the market value of equity assuming interest rates at March 31, 2005. The up 200 basis point scenario resulted in a 4.0 percent decrease in the market value of equity at March 31, 2005, compared with a 2.7 percent decrease at December 31, 2004. The down 200 basis point scenario resulted in a 2.5 percent decrease in the market value of equity at March 31, 2005, compared with a 4.2 percent decrease at December 31, 2004. At March 31, 2005, and December 31, 2004, the Company was within its policy guidelines.

The valuation analysis is dependent upon certain key assumptions about the nature of assets and liabilities with non-contractual maturities. Management estimates the average life and rate characteristics of asset and liability accounts based upon historical analysis and management’s expectation of rate behavior. These assumptions are validated on a periodic basis. A sensitivity analysis of key variables of the valuation analysis is provided to ALPC monthly and is used to guide hedging strategies. The results of the valuation analysis as of March 31, 2005, were well within policy guidelines. The Company also uses duration of equity as a measure of interest rate risk. The duration of equity is a measure of the net market value sensitivity of the assets, liabilities and derivative positions of the Company. The duration of assets was 1.74 years at March 31, 2005, compared with 1.68 years at December 31, 2004. The duration of liabilities was 1.96 years at March 31, 2005, compared with 2.02 years at December 31, 2004. After giving effect to the Company’s derivative positions and mortgage servicing valuation, the estimated duration of equity was 1.39 years at March 31, 2005, compared with .12 years at December 31, 2004. The duration of equity measure shows that sensitivity of the market value of equity of the Company was slightly liability sensitive to changes in interest rates.

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


18	U.S. Bancorp

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

By their nature, derivative instruments are subject to market risk. The Company does not utilize derivative instruments for speculative purposes. Of the Company’s $39 billion of total notional amount of asset and liability management derivative positions at March 31, 2005, $35 billion was designated as either fair value or cash flow hedges. The cash flow hedge positions are interest rate swaps that hedge the forecasted cash flows from the underlying variable-rate LIBOR loans and floating-rate debt. The fair value hedges are primarily interest rate contracts that hedge the change in fair value related to interest rate changes of underlying fixed-rate debt and subordinated obligations. In addition, the Company uses forward commitments to


Table 10		Derivative Positions


				March 31, 2005							December 31, 2004

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


Asset and Liability Management Positions

	Interest rate contracts
		Receive fixed/pay floating swaps		$	21,395	$	13			5.33	$	20,070	$	379			5.25
		Pay fixed/receive floating swaps			12,475		124			1.25		10,775		56			1.42
		Futures and forwards			2,978		16			.12		2,262		(4	)		.12
		Options
			Written		1,509		—			.14		1,059		1			.15
	Foreign exchange forward contracts				240		3			.03		314		(12	)		.04
	Equity contracts				55		(3	)		4.05		53		4			4.29

Customer-related Positions

	Interest rate contracts
		Receive fixed/pay floating swaps		$	6,902	$	(29	)		4.83	$	6,708	$	76			4.67
		Pay fixed/receive floating swaps			6,858		66			4.83		6,682		(40	)		4.67
		Options
			Purchased		1,188		9			2.83		1,099		7			3.00
			Written		1,188		(9	)		2.83		1,099		(7	)		3.00
	Risk participation agreements (a)
		Purchased			138		—			6.88		137		—			7.13
		Written			98		—			3.43		84		—			2.93
	Foreign exchange rate contracts
		Forwards, spots and swaps
			Buy		2,323		61			.33		2,047		80			.31
			Sell		2,280		(55	)		.34		2,015		(76	)		.33
		Options
			Purchased		67		1			.44		77		1			.59
			Written		67		(1	)		.44		77		(1	)		.59


(a)		At March 31, 2005, the credit equivalent amount was $1 million and $9 million, compared with $1 million and $7 million at December 31, 2004, for purchased and written risk participation agreements, respectively.


U.S. Bancorp	19

sell residential mortgage loans to hedge its interest rate risk related to residential mortgage loans held for sale. The Company commits to sell the loans at specified prices in a future period, typically within 90 days. The Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market. Related to its mortgage banking operations, the Company held $1.5 billion of forward commitments to sell mortgage loans and $1.5 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 10.

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

At March 31, 2005, the Company had $38 million in accumulated other comprehensive income related to unrealized gains on derivatives classified as cash flow hedges. The unrealized gains will be reflected in earnings when the related cash flows or hedged transactions occur and will offset the related performance of the hedged items. The estimated amount of gain to be reclassified from accumulated other comprehensive income into earnings during the remainder of 2005 and the next 12 months is $35 million and $45 million, respectively.

Gains or losses on customer-related derivative positions were not material for the first quarter of 2005. The change in fair value of forward commitments attributed to hedge ineffectiveness recorded in noninterest income was an increase of $3 million for the first quarter of 2005. The change in the fair value of all other asset and liability management derivative positions attributed to hedge ineffectiveness was not material for the first quarter of 2005.

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

The notional amount of receive fixed/pay floating interest rate swaps was $21.4 billion at March 31, 2005, compared with $20.1 billion at December 31, 2004. The $1.3 billion increase was related to the issuance of new long-term debt instruments. However, the Company’s overall strategy is to continue to decrease the level of receive fixed/pay floating interest rate swaps. Table 10 summarizes information on the Company’s derivative positions at March 31, 2005, and December 31, 2004.

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

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

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


20	U.S. Bancorp

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

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

The Company’s ability to raise negotiated funding at competitive prices is influenced by rating agencies’ views of the Company’s credit quality, liquidity, capital and earnings. On January 18, 2005, Moody’s Investors Service upgraded the Company’s senior long-term debt rating to “Aa2” and U.S. Bank National Association’s long-term debt and deposit ratings to “Aa1.” At January 18, 2005, the credit ratings outlook for the Company was considered “Stable” by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.

The parent company’s routine funding requirements consist primarily of operating expenses, dividends to shareholders, debt service, repurchases of common stock and funds used for acquisitions. The parent company obtains funding to meet its obligations from dividends collected from its subsidiaries and the issuance of debt securities.

At both March 31, 2005, and December 31, 2004, parent company long-term debt outstanding was $6.9 billion. During the first quarter of 2005, the parent company had issuances of $.3 billion of junior subordinated debentures, offset by medium-term note maturities of $.3 billion. Total parent company debt scheduled to mature in the remainder of 2005 is $1.1 billion. These debt obligations may be met through medium-term note issuances and dividends from subsidiaries, as well as from parent company cash and cash equivalents. Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. The amount of dividends available to the parent company from its banking subsidiaries after meeting the regulatory capital requirements for well-capitalized banks was approximately $1.7 billion at March 31, 2005.

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

In the ordinary course of business, the Company enters into an array of commitments to extend credit, letters of credit, lease commitments and various forms of guarantees that may be considered off-balance sheet arrangements. The nature and extent of these arrangements are provided in Note 11 of the Notes to Consolidated Financial Statements.

Asset securitization and conduits represent a source of funding for the Company through off-balance sheet structures. Credit, liquidity, operational and legal structural risks exist due to the nature and complexity of asset securitizations and other off-balance sheet structures. ALPC regularly monitors the performance of each off-balance sheet structure in an effort to minimize these risks and ensure compliance with the requirements of the structures.


U.S. Bancorp	21

The Company utilizes its credit risk management systems to evaluate the credit quality of underlying assets and regularly forecasts cash flows to evaluate any potential impairment of retained interests. Also, regulatory guidelines require consideration of asset securitizations in the determination of risk-based capital ratios. The Company does not rely significantly on off-balance sheet arrangements for liquidity or capital resources.

The Company sponsors an off-balance sheet conduit to which it transferred high-grade investment securities, funded by the issuance of commercial paper. The conduit held assets of $5.2 billion at March 31, 2005, and $5.7 billion at December 31, 2004. These investment securities include primarily (i) private label asset-backed securities, which are insurance “wrapped” by AAA/Aaa-rated monoline insurance companies and (ii) government agency mortgage-backed securities and collateralized mortgage obligations. The conduit had commercial paper liabilities of $5.2 billion at March 31, 2005, and $5.7 billion at December 31, 2004. The Company provides a liquidity facility to the conduit. Utilization of the liquidity facility would be triggered if the conduit is unable to, or does not, issue commercial paper to fund its assets. A liability for the estimate of the potential risk of loss the Company has as the liquidity facility provider is recorded on the balance sheet in other liabilities. The liability is adjusted downward over time as the underlying assets pay down with the offset recognized as other noninterest income. The liability for the liquidity facility was $29 million at March 31, 2005, and $32 million at December 31, 2004. In addition, the Company recorded at fair value its retained residual interest in the investment securities conduit of $48 million at March 31, 2005, and $57 million at December 31, 2004.

The Company also has an asset-backed securitization to fund an unsecured small business credit product. The unsecured small business credit securitization trust held assets of $348 million at March 31, 2005, of which the Company retained $70 million of subordinated securities and a residual interest-only strip of $34 million. This compared with $375 million in assets at December 31, 2004, of which the Company retained $85 million of subordinated securities and a residual interest-only strip of $36 million. The securitization trust issued asset-backed variable funding notes in various tranches. The Company provides credit enhancement in the form of subordinated securities and reserve accounts. The Company’s risk, primarily from losses in the underlying assets, was considered in determining the fair value of the Company’s retained interests in this securitization. From this securitization, the Company recognizes income from subordinated securities, an interest-only strip and servicing fees, net of impairment. The Company recognized a loss of $1 million in the first quarter of 2005, compared with income of $6 million in the first quarter of 2004. The unsecured small business credit securitization held average assets of $364 million and $486 million in the first quarter of 2005 and 2004, respectively.

Capital ManagementThe Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. The Company has targeted returning 80 percent of earnings to our shareholders through a combination of dividends and share repurchases. In keeping with this target, the Company returned 108 percent of earnings in the first quarter of 2005. The Company continually assesses its business risks and capital position. The Company also manages its capital to exceed regulatory capital requirements for well-capitalized bank holding companies. To achieve these capital goals, the Company employs a variety of capital management tools including dividends, common share repurchases, and the issuance of subordinated debt and other capital instruments. Total shareholders’ equity was $19.2 billion at March 31, 2005, compared with $19.5 billion at December 31, 2004. The decrease was the result of share buybacks and dividends offset by corporate earnings.

Tangible common equity to assets was 6.2 percent at March 31, 2005, compared with 6.4 percent at December 31, 2004. The Tier 1 capital ratio was 8.6 percent at both March 31, 2005, and December 31, 2004. The total risk-based capital ratio was 13.3 percent at March 31, 2005, compared with 13.1 percent at December 31, 2004. The leverage ratio was 7.9 percent at both March 31, 2005, and December 31, 2004. All regulatory ratios continue to be in excess of stated “well-capitalized” requirements.


Table 11		Capital Ratios


		March 31,			December 31,
(Dollars in Millions)		2005			2004

Tangible common equity		$	11,894		$	11,950
	As a percent of tangible assets		6.2	%		6.4	%
Tier 1 capital		$	14,943		$	14,720
	As a percent of risk-weighted assets		8.6	%		8.6	%
	As a percent of adjusted quarterly average assets (leverage ratio)		7.9	%		7.9	%
Total risk-based capital		$	23,099		$	22,352
	As a percent of risk-weighted assets		13.3	%		13.1	%


22	U.S. Bancorp

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

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


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

January		4,104,459	$	30.33		140,855,329
February		10,013,387		30.07		130,841,942
March		6,173,569		29.00		124,668,373

Total		20,291,415	$	29.80		124,668,373


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

LINE OF BUSINESS FINANCIAL REVIEW

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

Basis for Financial 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. Goodwill and other intangible assets are assigned to the lines of business based on the mix of business of the acquired entity. Funds transfer-pricing methodologies are utilized to allocate a cost of funds used or credit for funds provided to all business line assets and liabilities using a matched funding concept. Also, the business unit is allocated the taxable-equivalent benefit of tax-exempt products. Noninterest income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct costs are accounted for within each segment’s financial results in a manner similar to the consolidated financial statements. Occupancy costs are allocated based on utilization of facilities by the lines of business. Noninterest expenses incurred by centrally managed operations or business lines that directly support another business line’s operations are charged to the applicable business line based on its utilization of those services primarily measured by the volume of customer activities, number of employees or other relevant factors. These allocated expenses are reported as net shared services expense within noninterest expense. Certain corporate activities that do not directly support the operations of the lines of business are not charged to the lines of business. The provision for credit losses within the Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management and Payment Services lines of business is based on net charge-offs, while Treasury and Corporate Support reflects the residual component of the Company’s total consolidated provision for credit losses determined in accordance with accounting principles generally accepted in the United States. Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support. Within the Company, capital levels are evaluated and managed centrally; however, capital is allocated to the operating segments to support evaluation of business performance. Capital allocations to the business lines are based on the amount of goodwill and other intangibles, the extent of off-balance sheet managed assets and lending commitments and the ratio of on-balance sheet assets relative to the total Company. Certain lines of business, such as Trust and Asset Management, have no significant balance sheet components. For these business units, capital is allocated taking into consideration fiduciary and operational risk, capital levels of independent organizations operating similar businesses, and regulatory requirements.

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


U.S. Bancorp	23

Wholesale Banking offers lending, depository, treasury management and other financial services to middle market, large corporate and public sector clients. Wholesale Banking contributed $270 million of the Company’s net income in the first quarter of 2005, compared with $240 million in the first quarter of 2004, an increase of $30 million (12.5 percent). The increase in net income in the first quarter of 2005 was driven by higher total net revenue and a reduction in the provision for credit losses, partially offset by an increase in noninterest expense, compared with the first quarter of 2004.

Total net revenue increased $23 million (3.9 percent) in the first quarter of 2005, compared with the first quarter of 2004. Net interest income, on a taxable-equivalent basis, increased $8 million (2.1 percent) in the first quarter of 2005, compared with the first quarter of 2004. The increase in net interest income was driven by growth in average loan balances (4.7 percent) and increased net interest spread on total deposits due to the funding benefit associated with the impact of rising interest rates during the last three quarters, partially offset by reduced loan spreads due to competitive pricing. The increase in average loans was driven by stronger commercial loan demand in late 2004 and the first quarter of 2005. Total deposits increased 10.1 percent year-over-year driven by growth in time deposits, partially offset by decreases in noninterest-bearing deposits, interest checking and saving products. Total noninterest income increased $15 million (7.5 percent) in the first quarter of 2005 to $214 million, compared with $199 million in the first quarter of 2004. The increase in noninterest income in the first quarter of 2005 was due to higher revenue from equity investments, partially offset by reductions in treasury management-related fees, equipment leasing, syndication fees and securities gains (losses). Treasury management-related fees were lower primarily due to higher interest earnings credit on customers’ compensating balances and the impact of an industry-wide shift of payments from paper-based to electronic and card-based transactions. Equipment leasing revenue declined due to lower end of term lease residual gains.

Noninterest expense was $184 million in the first quarter of 2005, compared with $178 million in the first quarter of 2004. The $6 million (3.4 percent) increase was primarily driven by higher personnel-related costs, loan workout expenses and net shared services expense. The increase in loan workout expenses was due to higher leasing inventory write-downs.


Table 12		Line of Business Financial Performance


		Wholesale								Consumer
		Banking								Banking

							Percent								Percent
Three Months Ended March 31 (Dollars in Millions)		2005			2004		Change			2005			2004		Change

Condensed Income Statement
Net interest income (taxable-equivalent basis)		$	398		$	390		2.1	%	$	959		$	876		9.5	%
Noninterest income			218			198		10.1			465			438		6.2
Securities gains (losses), net			(4	)		1		*			(54	)		—		*

	Total net revenue		612			589		3.9			1,370			1,314		4.3
Noninterest expense			180			173		4.0			643			628		2.4
Other intangibles			4			5		(20.0	)		10			170		(94.1	)

	Total noninterest expense		184			178		3.4			653			798		(18.2	)

Income before provision and income taxes			428			411		4.1			717			516		39.0
Provision for credit losses			3			34		(91.2	)		80			108		(25.9	)

Income before income taxes			425			377		12.7			637			408		56.1
Income taxes and taxable-equivalent adjustment			155			137		13.1			232			148		56.8

Net income		$	270		$	240		12.5		$	405		$	260		55.8


Average Balance Sheet Data
Commercial		$	27,913		$	25,767		8.3	%	$	8,130		$	8,127		—	%
Commercial real estate			15,660			15,828		(1.1	)		11,122			10,517		5.8
Residential mortgages			61			65		(6.2	)		15,389			13,253		16.1
Retail			48			51		(5.9	)		33,132			29,983		10.5

	Total loans		43,682			41,711		4.7			67,773			61,880		9.5
Goodwill			1,225			1,225		—			2,243			2,243		—
Other intangible assets			76			95		(20.0	)		1,116			986		13.2
Assets			49,605			47,958		3.4			75,472			69,423		8.7
Noninterest-bearing deposits			11,920			12,396		(3.8	)		13,077			13,765		(5.0	)
Interest checking			3,594			3,846		(6.6	)		17,020			14,418		18.0
Savings products			5,213			7,217		(27.8	)		25,540			27,813		(8.2	)
Time deposits			11,041			5,393		*			16,484			16,524		(.2	)

	Total deposits		31,768			28,852		10.1			72,121			72,520		(.6	)
Shareholders’ equity			5,091			5,100		(.2	)		6,415			6,336		1.2


*		Not meaningful


24	U.S. Bancorp

The provision for credit losses was $3 million and $34 million in the first quarter of 2005 and the first quarter of 2004, respectively, a decline of $31 million (91.2 percent). The decrease in the provision for credit losses for Wholesale Banking was due to lower net charge-offs, which declined to .03 percent of average loans in the first quarter of 2005 from .33 percent of average loans in the first quarter of 2004. The reduction in net charge-offs was attributable to improvements in credit quality driven by initiatives taken by the Company during the past three years, including asset workout strategies and reductions in commitments to certain industries and customers. Nonperforming assets within Wholesale Banking were $330 million at March 31, 2005, $387 million at December 31, 2004, and $616 million at March 31, 2004. Nonperforming assets as a percentage of end-of-period loans were .75 percent at March 31, 2005, .90 percent at December 31, 2004, and 1.45 percent at March 31, 2004. 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, telemarketing, on-line services, direct mail and ATMs. It encompasses community banking, metropolitan banking, in-store banking, small business banking, including lending guaranteed by the Small Business Administration, small-ticket leasing, consumer lending, mortgage banking, workplace banking, student banking, 24-hour banking and investment product and insurance sales. Consumer Banking contributed $405 million of the Company’s net income for the first quarter of 2005 and $260 million for the first quarter of 2004, an increase of $145 million (55.8 percent). While the retail banking business grew net income 26.4 percent from a year ago, the contribution of mortgage banking business increased 169.2 percent from the first quarter of 2004.

Total net revenue increased $56 million (4.3 percent) in the first quarter of 2005, compared with the first quarter of 2004, as growth in net interest income and noninterest income was partially offset by a $54 million increase in securities losses associated with the mortgage banking business. Net interest income, on a taxable-equivalent basis, increased $83 million (9.5 percent) in the first quarter of 2005 compared with the first quarter of 2004. The year-over-year increase in net interest income was due to 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, a reduction in noninterest-bearing


Private Client, Trust							Payment							Treasury and									Consolidated
and Asset Management							Services							Corporate Support									Company

				Percent							Percent									Percent								Percent
2005		2004		Change			2005		2004		Change			2005			2004			Change			2005			2004		Change

$	104	$	82		26.8	%	$	141	$	146		(3.4	)%	$	149		$	285			(47.7	)%	$	1,751		$	1,779		(1.6	)%
	253		254		(.4	)		481		414		16.2			24			14			71.4			1,441			1,318		9.3
	—		—		—			—		—		—			(1	)		(1	)		—			(59	)		—		*

	357		336		6.3			622		560		11.1			172			298			(42.3	)		3,133			3,097		1.2
	163		157		3.8			234		193		21.2			40			78			(48.7	)		1,260			1,229		2.5
	15		15		—			41		35		17.1			1			1			—			71			226		(68.6	)

	178		172		3.5			275		228		20.6			41			79			(48.1	)		1,331			1,455		(8.5	)

	179		164		9.1			347		332		4.5			131			219			(40.2	)		1,802			1,642		9.7
	—		1		*			89		93		(4.3	)		—			(1	)		*			172			235		(26.8	)

	179		163		9.8			258		239		7.9			131			220			(40.5	)		1,630			1,407		15.8
	65		59		10.2			94		87		8.0			13			(32	)		*			559			399		40.1

$	114	$	104		9.6		$	164	$	152		7.9		$	118		$	252			(53.2	)	$	1,071		$	1,008		6.3

$	1,579	$	1,668		(5.3	)%	$	3,210	$	2,837		13.1	%	$	165		$	132			25.0	%	$	40,997		$	38,531		6.4	%
	626		602		4.0			—		—		—			96			163			(41.1	)		27,504			27,110		1.5
	367		279		31.5			—		—		—			10			13			(23.1	)		15,827			13,610		16.3
	2,284		2,107		8.4			7,813		7,375		5.9			49			43			14.0			43,326			39,559		9.5

	4,856		4,656		4.3			11,023		10,212		7.9			320			351			(8.8	)		127,654			118,810		7.4
	843		769		9.6			1,941		1,815		6.9			—			—			*			6,252			6,052		3.3
	331		357		(7.3	)		907		649		39.8			12			9			33.3			2,442			2,096		16.5
	6,638		6,415		3.5			14,498		13,084		10.8			50,722			52,783			(3.9	)		196,935			189,663		3.8
	3,356		2,999		11.9			140		106		32.1			(76	)		(241	)		(68.5	)		28,417			29,025		(2.1	)
	2,523		2,685		(6.0	)		—		—		—			9			(1	)		*			23,146			20,948		10.5
	5,450		5,239		4.0			14		11		27.3			15			15			—			36,232			40,295		(10.1	)
	970		493		96.8			—		—		—			3,133			3,341			(6.2	)		31,628			25,751		22.8

	12,299		11,416		7.7			154		117		31.6			3,081			3,114			(1.1	)		119,423			116,019		2.9
	2,133		2,064		3.3			3,432		3,025		13.5			2,732			3,059			(10.7	)		19,803			19,584		1.1


U.S. Bancorp	25

deposits and lower saving products balances. The increase in average loan balances of 9.5 percent reflected retail loan growth of 10.5 percent and growth in residential mortgages of 16.1 percent in the first quarter of 2005, compared with the first quarter of 2004. Included within the retail loan category are second-lien home equity loans and retail leases that had a year-over-year growth rate of 11.0 percent and 16.2 percent, respectively. Residential mortgages, which includes traditional residential mortgages, grew $2.6 billion (35.2 percent) year-over-year, reflecting the company’s decision to retain adjustable-rate residential mortgages. This increase was partially offset by a decline in first-lien home equity loans of $465 million (7.9 percent). Commercial real estate loan balances increased 5.8 percent in the first quarter of 2005, compared with the first quarter of 2004. The year-over-year decrease in average deposits was due to a reduction in noninterest-bearing deposits and saving products, offset by growth in interest checking. The decline in noninterest-bearing deposits of $.7 billion was due to the Company’s decision to migrate $1.3 billion of certain high-value customer accounts to interest checking as an enhancement to its Silver Elite Checking product. The increase in interest checking of $2.6 billion reflects this migration of the Silver Elite product and strong branch-based new account deposit growth. On a combined basis, the Consumer Banking line of business generated growth of $1.9 billion (6.8 percent) in average checking account balances from a year ago, driven by 6.3 percent growth in net new checking accounts. Offsetting this growth was a reduction in average savings balances of $2.3 billion (8.2 percent) from first quarter of 2004, principally related to money market accounts.

Fee-based noninterest income was $465 million in the first quarter of 2005, $27 million (6.2 percent) higher than the first quarter of 2004. The year-over-year growth in fee-based revenue was driven by strong deposit service charges, mortgage banking revenue and commercial products revenue, partially offset by lower other revenue and treasury management related fees. Securities losses were $54 million in the first quarter of 2005. The Consumer Banking business line had no securities gains or losses in 2004.

Noninterest expense was $653 million in the first quarter of 2005, compared with $798 million for the first quarter of 2004, a decrease of $145 million (18.2 percent). The year-over-year decrease in noninterest expense was primarily attributable to changes in the valuation of its mortgage servicing rights portfolio, reductions in occupancy, depreciation and professional services expense, partially offset by increases in compensation, net shared services and higher amortization costs from growth in the mortgage servicing portfolio. The first quarter of 2005 reflected a $54 million reparation of MSR impairment, compared with the recognition of $109 million of MSR impairment in the first quarter of 2004, a favorable change of $163 million year-over-year. The change in MSR valuations was driven by rising interest rates and slower prepayment speeds in the first quarter of 2005, compared with the declining interest rates and refinancing activities in the same period in 2004.

The provision for credit losses decreased $28 million (25.9 percent) in the first quarter of 2005, compared with the first quarter of 2004. The improvement in the provision for credit losses was primarily attributable to lower net charge-offs. As a percentage of average loans, net charge-offs declined to .48 percent in the first quarter of 2005, compared with .70 percent in the first quarter of 2004. The decline in net charge-offs included the commercial, commercial real estate and retail loan portfolios. The improvement in commercial and commercial real estate loan net charge-offs within Consumer Banking of $19 million was broad-based across most industry and geographical regions. Retail loan net charge-offs declined by $11 million, primarily resulting from ongoing collection efforts and risk management activities. Nonperforming assets within Consumer Banking were $326 million at March 31, 2005, $354 million at December 31, 2004, and $421 million at March 31, 2004. Nonperforming assets as a percentage of end-of-period loans were .50 percent at March 31, 2005, ..56 percent at December 31, 2004, and .71 percent at March 31, 2004. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.

Private Client, Trust and Asset Managementprovides trust, private banking, financial advisory, investment management and mutual fund servicing through five businesses: Private Client Group, Corporate Trust, Asset Management, Institutional Trust and Custody and Fund Services, LLC. Private Client, Trust and Asset Management contributed $114 million of the Company’s net income in the first quarter of 2005, compared with $104 million in the first quarter of 2004, an increase of $10 million (9.6 percent). The growth was attributable to higher total net revenue partially offset by higher noninterest expense.

Total net revenue was $357 million in the first quarter of 2005, an increase of 6.3 percent, compared with the first quarter of 2004. Net interest income, on a


26	U.S. Bancorp

taxable-equivalent basis, increased $22 million (26.8 percent) in the first quarter of 2005, compared with the first quarter of 2004. The increase in net interest income in the first quarter of 2005 was due to growth in total average deposits of 7.7 percent, the favorable impact of rising interest rates on the funding benefit of customer deposits, and higher average loan balances of 4.3 percent, partially offset by a decline in loan spreads. The increase in total deposits was attributable to growth in noninterest-bearing deposits, savings products and time deposits, primarily within corporate trust and private banking. Noninterest income decreased $1 million (.4 percent) in the first quarter of 2005, compared with the first quarter of 2004. The decrease in noninterest income was primarily attributable to a reduction in trust and investment management fees due to revenues generated by favorable equity market valuations and core balance growth more than offset by a change in the mix of fund balances and customers’ migration from paying for services with fees to paying with compensating balances.

Noninterest expense increased $6 million (3.5 percent) in the first quarter of 2005, compared with the first quarter of 2004, primarily attributable to an increase in personnel-related costs, legal expenses, and net shared services expense partially offset by a decline in occupancy expenses.

The provision for credit losses decreased $1 million in the first quarter of 2005, compared with the first quarter of 2004 due to a reduction in net charge-offs.

Payment Servicesincludes consumer and business credit cards, debit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. Payment Services contributed $164 million of the Company’s net income in the first quarter of 2005, compared with $152 million in the first quarter of 2004, a 7.9 percent increase. The increase was due to growth in total net revenue driven by higher transaction volumes, partially offset by an increase in total noninterest expense.

Total net revenue was $622 million in the first quarter of 2005, an increase of $62 million (11.1 percent), compared with the first quarter of 2004. Net interest income decreased 3.4 percent in the first quarter 2005, compared with the first quarter of 2004, primarily due to lower retail loan spreads, higher corporate card rebates and higher corporate payment card noninterest-bearing loan balances, partially offset by increases in retail credit card balances and customer late fees. Noninterest income increased 16.2 percent in the first quarter of 2005, compared with the first quarter of 2004. The increase in fee-based revenue was driven by strong growth in credit card and debit card revenue (9.2 percent), corporate payment product revenues (12.6 percent), ATM processing services revenue (13.8 percent) and merchant processing revenue (26.2 percent). Credit and debit card revenue increased $13 million due to higher sales volume and increases in interchange rates, partially offset by higher reward expenses. Corporate payment products revenue increased $12 million due to increases in sales volume and the acquisition of a small aviation card business in the first quarter of 2005. ATM processing services revenue increased $4 million primarily due to transaction volume related revenue. Merchant processing revenue increased $37 million due to increases in sales and transaction processing volumes and the expansion of the merchant acquiring business in Europe, which accounted for approximately $26 million of the revenue growth.

Noninterest expense was $275 million in the first quarter of 2005, an increase of $47 million (20.6 percent), compared with the first quarter of 2004. The increase in noninterest expense was primarily attributable to higher compensation and employee benefit costs for processing associated with increased credit and debit card transaction volumes, higher corporate payment products and merchant processing sales volumes, and higher merchant acquiring costs resulting from the expansion of the merchant acquiring business in Europe, which accounted for approximately $31 million of the increase in the first quarter of 2005.

The provision for credit losses decreased $4 million (4.3 percent) in the first quarter of 2005, compared with the first quarter of 2004, due to lower net charge-offs of the business line. As a percentage of average loans, net charge-offs were 3.27 percent in the first quarter of 2005, compared with 3.66 percent of average loans in the first quarter of 2004. The favorable change in credit losses was due to improvements in ongoing collection efforts and risk management activities, as well as improvements in economic conditions from a year ago.

Treasury and Corporate Supportincludes the Company’s investment portfolios, funding, capital management and asset securitization activities, interest rate risk management, the net effect of transfer pricing related to average balances and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $118 million in the first quarter of 2005, a decrease of 53.2 percent, compared with the first quarter of 2004.

Total net revenue was $172 million in the first quarter of 2005, compared with $298 million in the


U.S. Bancorp	27

first quarter of 2004. The year-over-year decrease of $126 million (42.3 percent) in total net revenue was attributable to a reduction in net interest income of $136 million (47.7 percent), partially offset by an increase in fee-based noninterest income of $10 million (71.4 percent). The decrease in net interest income was primarily attributable to an increase in short-term rates and the Company’s asset/liability management decisions to continue to invest in adjustable-rate securities and utilize higher-cost fixed-rate funding given the current rising interest rate environment. It also reflects the residual effect of transfer pricing caused by changes in the mix of earning assets and the yield curve from a year ago. The increase in fee-based noninterest income was primarily attributable to higher equity investment revenue.

Noninterest expense was $41 million in the first quarter of 2005, compared with $79 million in the first quarter of 2004, a $38 million (48.1 percent) decrease. The decrease in noninterest expense was principally driven by the $35 million decrease in debt prepayment charges relative to the first quarter of 2004.

The provision for credit losses for this business unit represents the residual aggregate of the net credit losses allocated to the reportable business units and the Company’s recorded provision determined in accordance with accounting principles generally accepted in the United States. There was no expense related to the provision for credit losses in the first quarter of 2005, compared with a net recovery of $1 million in the first quarter of 2004. Refer to the “Corporate Risk Profile” section for further information on the provision for credit losses, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support. The first quarter of 2004 reflected a $90 million reduction in income tax expense related to the resolution of federal examinations covering substantially all of the company’s legal entities for the years 1995 through 1999.

ACCOUNTING CHANGES

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

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company’s financial statements. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third-parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under generally accepted accounting principles. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee. 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, 2004.

CONTROLS AND PROCEDURES

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


28	U.S. Bancorp

that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

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


U.S. Bancorp	29

U.S. Bancorp

Consolidated Balance Sheet


				March 31,			December 31,
(Dollars in Millions)				2005			2004

				(Unaudited)
Assets
Cash and due from banks				$	5,881		$	6,336
Investment securities
	Held-to-maturity (fair value $126 and $132, respectively)				121			127
	Available-for-sale				42,982			41,354
Loans held for sale					1,635			1,439
Loans
	Commercial				41,540			40,173
	Commercial real estate				27,363			27,585
	Residential mortgages				16,572			15,367
	Retail				43,430			43,190

		Total loans			128,905			126,315
			Less allowance for loan losses		(2,082	)		(2,080	)

			Net loans		126,823			124,235
Premises and equipment					1,877			1,890
Customers’ liability on acceptances					91			95
Goodwill					6,277			6,241
Other intangible assets					2,533			2,387
Other assets					10,246			11,000

		Total assets		$	198,466		$	195,104

Liabilities and Shareholders’ Equity
Deposits
	Noninterest-bearing			$	28,880		$	30,756
	Interest-bearing				71,751			71,936
	Time deposits greater than $100,000				19,087			18,049

		Total deposits			119,718			120,741
Short-term borrowings					14,273			13,084
Long-term debt					38,071			34,739
Acceptances outstanding					91			95
Other liabilities					7,105			6,906

		Total liabilities			179,258			175,565
Shareholders’ equity
	Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares issued: 03/31/05 and 12/31/04 — 1,972,643,007 shares				20			20
	Capital surplus				5,889			5,902
	Retained earnings				17,276			16,758
	Less cost of common stock in treasury: 03/31/05 — 130,189,640 shares; 12/31/04 — 115,020,064 shares				(3,590	)		(3,125	)
	Other comprehensive income				(387	)		(16	)

		Total shareholders’ equity			19,208			19,539

		Total liabilities and shareholders’ equity		$	198,466		$	195,104

See Notes to Consolidated Financial Statements.


30	U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Income


		Three Months Ended
		March 31,
(Dollars and Shares in Millions, Except Per Share Data)
(Unaudited)		2005			2004

Interest Income
Loans		$	1,911		$	1,747
Loans held for sale			21			20
Investment securities			476			469
Other interest income			27			22

	Total interest income		2,435			2,258
Interest Expense
Deposits			308			227
Short-term borrowings			112			50
Long-term debt			271			209

	Total interest expense		691			486

Net interest income			1,744			1,772
Provision for credit losses			172			235

Net interest income after provision for credit losses			1,572			1,537
Noninterest Income
Credit and debit card revenue			154			142
Corporate payment products revenue			107			95
ATM processing services			47			42
Merchant processing services			178			141
Trust and investment management fees			247			249
Deposit service charges			210			185
Treasury management fees			107			118
Commercial products revenue			96			110
Mortgage banking revenue			102			94
Investment products fees and commissions			39			39
Securities losses, net			(59	)		—
Other			154			103

	Total noninterest income		1,382			1,318
Noninterest Expense
Compensation			567			536
Employee benefits			116			100
Net occupancy and equipment			154			156
Professional services			36			32
Marketing and business development			43			35
Technology and communications			106			102
Postage, printing and supplies			63			62
Other intangibles			71			226
Debt prepayment			—			35
Other			175			171

	Total noninterest expense		1,331			1,455

Income before income taxes			1,623			1,400
Applicable income taxes			552			392

Net income		$	1,071		$	1,008

Earnings per share		$	.58		$	.53
Diluted earnings per share		$	.57		$	.52
Dividends declared per share		$	.30		$	.24
Average common shares outstanding			1,852			1,915
Average diluted common shares outstanding			1,880			1,941

See Notes to Consolidated Financial Statements.


U.S. Bancorp	31

U.S. Bancorp

Consolidated Statement of Shareholders’ Equity


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

Balance December 31, 2003			1,922,920,151		$	20	$	5,851		$	14,508		$	(1,205	)	$	68		$	19,242
Net income											1,008									1,008
Unrealized gain on securities available for sale																	484			484
Unrealized gain on derivatives																	53			53
Foreign currency translation adjustment																	(2	)		(2	)
Realized gain on derivatives																	3			3
Reclassification adjustment for gains realized in net income																	(12	)		(12	)
Income taxes																	(200	)		(200	)

	Total comprehensive income																			1,334
Cash dividends declared on common stock											(457	)								(457	)
Issuance of common and treasury stock			12,514,253					(40	)					311						271
Purchase of treasury stock			(33,824,803	)										(947	)					(947	)
Stock option and restricted stock grants								12												12
Shares reserved to meet deferred compensation obligations			(442,411	)				9						(12	)					(3	)

Balance March 31, 2004			1,901,167,190		$	20	$	5,832		$	15,059		$	(1,853	)	$	394		$	19,452

Balance December 31, 2004			1,857,622,943		$	20	$	5,902		$	16,758		$	(3,125	)	$	(16	)	$	19,539
Net income											1,071									1,071
Unrealized loss on securities available for sale																	(541	)		(541	)
Unrealized loss on derivatives																	(98	)		(98	)
Foreign currency translation adjustment																	5			5
Realized gain on derivatives																	1			1
Reclassification adjustment for losses realized in net income																	35			35
Income taxes																	227			227

	Total comprehensive income																			700
Cash dividends declared on common stock											(553	)								(553	)
Issuance of common and treasury stock			5,180,499					(36	)					142						106
Purchase of treasury stock			(20,291,415	)										(605	)					(605	)
Stock option and restricted stock grants								22												22
Shares reserved to meet deferred compensation obligations			(58,660	)				1						(2	)					(1	)

Balance March 31, 2005			1,842,453,367		$	20	$	5,889		$	17,276		$	(3,590	)	$	(387	)	$	19,208

See Notes to Consolidated Financial Statements.


32	U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Cash Flows


		Three Months Ended
		March 31,

(Dollars in Millions)
(Unaudited)		2005			2004

Operating Activities
	Net cash provided by (used in) operating activities	$	871		$	1,240
Investing Activities
Proceeds from sales of available-for-sale investment securities			2,824			335
Proceeds from maturities of investment securities			2,497			1,974
Purchases of investment securities			(6,596	)		(3,913	)
Net (increase) decrease in loans outstanding			(1,869	)		(1,749	)
Proceeds from sales of loans			351			459
Purchases of loans			(1,033	)		(598	)
Proceeds from sales of premises and equipment			1			7
Purchases of premises and equipment			(44	)		(31	)
Other, net			(113	)		(118	)

	Net cash provided by (used in) investing activities		(3,982	)		(3,634	)
Financing Activities
Net increase (decrease) in deposits			(1,023	)		(89	)
Net increase (decrease) in short-term borrowings			1,189			2,582
Principal payments on long-term debt			(2,028	)		(4,390	)
Proceeds from issuance of long-term debt			5,544			3,951
Proceeds from issuance of common stock			90			231
Repurchase of common stock			(638	)		(966	)
Cash dividends paid			(558	)		(462	)

	Net cash provided by (used in) financing activities		2,576			857

	Change in cash and cash equivalents		(535	)		(1,537	)
Cash and cash equivalents at beginning of period			6,537			8,782

	Cash and cash equivalents at end of period	$	6,002		$	7,245

See Notes to Consolidated Financial Statements.


U.S. Bancorp	33

Notes to Consolidated Financial Statements

(Unaudited)


Note 1		Basis of Presentation

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

Accounting policies for the lines of business are 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 12 “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

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

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


34	U.S. Bancorp


Note 3		Investment Securities

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


			March 31, 2005									December 31, 2004

			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		$	10	$	—	$	—		$	10	$	11	$	—	$	—		$	11
	Obligations of state and political subdivisions			93		7		(2	)		98		98		7		(2	)		103
	Other debt securities			18		—		—			18		18		—		—			18

		Total held-to-maturity securities	$	121	$	7	$	(2	)	$	126	$	127	$	7	$	(2	)	$	132

Available-for-sale (b)
	U.S. Treasury and agencies		$	223	$	2	$	—		$	225	$	684	$	3	$	(8	)	$	679
	Mortgage-backed securities			42,393		72		(817	)		41,648		39,809		65		(337	)		39,537
	Asset-backed securities			45		—		—			45		64		—		—			64
	Obligations of state and political subdivisions			170		4		—			174		205		6		—			211
	Other securities and investments			897		2		(9	)		890		863		11		(11	)		863

		Total available-for-sale securities	$	43,728	$	80	$	(826	)	$	42,982	$	41,625	$	85	$	(356	)	$	41,354


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

The fair value of available-for-sale securities shown above includes securities totaling $3.6 billion with unrealized losses of $163 million which have been in an unrealized loss position for greater than 12 months. All principal and interest payments on available-for-sale debt securities in an unrealized loss position for greater than 12 months are expected to be collected given the high credit quality of the U.S. government agency debt securities and bank holding company issuers and the Company’s ability and intent to hold the securities until such time as the value recovers or maturity. All other available-for-sale securities with unrealized losses have an aggregate fair value of $31.9 billion and have been in an unrealized loss position for less than 12 months and represent both fixed-rate securities and adjustable-rate securities with temporary impairment resulting from increases in interest rates since the purchase of the securities.

The weighted average maturity of the available-for-sale investment securities was 5.42 years at March 31, 2005, compared with 4.45 years at December 31, 2004. The corresponding weighted average yields were 4.50% and 4.43%, respectively. The weighted average maturity of the held-to-maturity investment securities was 7.38 years at March 31, 2005, compared with 6.19 years at December 31, 2004. The corresponding weighted average yields were 6.42% and 6.28%, respectively.

Securities carried at $28.7 billion at March 31, 2005, and $28.0 billion at December 31, 2004, were pledged to secure public, private and trust deposits and for other purposes required by law. Securities sold under agreements to repurchase were collateralized by securities with an amortized cost of $6.0 billion at March 31, 2005, and $4.8 billion at December 31, 2004.

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


		Three Months Ended
		March 31,

(Dollars in Millions)		2005		2004

Taxable		$	473	$	464
Non-taxable			3		5

	Total interest income from investment securities	$	476	$	469


U.S. Bancorp	35

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
		March 31,

(Dollars in Millions)		2005			2004

Realized gains		$	11		$	1
Realized losses			(70	)		(1	)

	Net realized gains (losses)	$	(59	)	$	—

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

For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale securities outstanding at March 31, 2005, refer to Table 5 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.


Note 4		Loans

The composition of the loan portfolio was as follows:


				March 31, 2005					December 31, 2004

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

Commercial
	Commercial			$	36,623		28.4	%	$	35,210		27.9	%
	Lease financing				4,917		3.8			4,963		3.9

		Total commercial			41,540		32.2			40,173		31.8
Commercial real estate
	Commercial mortgages				20,134		15.6			20,315		16.1
	Construction and development				7,229		5.6			7,270		5.7

		Total commercial real estate			27,363		21.2			27,585		21.8
Residential mortgages
	Residential mortgages				10,747		8.4			9,722		7.7
	Home equity loans, first liens				5,825		4.5			5,645		4.5

		Total residential mortgages			16,572		12.9			15,367		12.2
Retail
	Credit card				6,276		4.9			6,603		5.2
	Retail leasing				7,253		5.6			7,166		5.7
	Home equity and second mortgages				14,867		11.5			14,851		11.8
	Other retail
		Revolving credit			2,480		1.9			2,541		2.0
		Installment			3,006		2.4			2,767		2.2
		Automobile			7,445		5.8			7,419		5.9
		Student			2,103		1.6			1,843		1.4

			Total other retail		15,034		11.7			14,570		11.5

		Total retail			43,430		33.7			43,190		34.2

			Total loans	$	128,905		100.0	%	$	126,315		100.0	%

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


36	U.S. Bancorp


Note 5		Mortgage Servicing Rights

The Company’s portfolio of residential mortgages serviced for others was $63.3 billion and $63.2 billion at March 31, 2005, and December 31, 2004, respectively.

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


		Three Months Ended			Year Ended
(Dollars in Millions)		March 31, 2005			December 31, 2004

Balance at beginning of period		$	172		$	160
	Additions charged (reductions credited) to operations		(54	)		57
	Direct write-downs charged against the allowance		(10	)		(45	)

Balance at end of period		$	108		$	172

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


		Three Months Ended			Year Ended
(Dollars in Millions)		March 31, 2005			December 31, 2004

Balance at beginning of period		$	866		$	670
	Rights purchased		2			139
	Rights capitalized		75			300
	Amortization		(49	)		(186	)
	Rights sold		—			—
	Reparation (impairment) (a)		54			(57	)

Balance at end of period			948			866
	Impairment valuation allowance		108			172

Initial carrying value, net of amortization		$	1,056		$	1,038


(a)		Mortgage servicing rights reparation of $54 million and impairment of $109 million were recognized during the first quarter of 2005 and 2004, respectively.

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


	March 31,		December 31,
(Dollars in Millions)	2005		2004

Fair value		$960		$872
Expected weighted-average life (in years)		6.1		5.5
Discount rate		9.8%		9.9%

The estimated sensitivity of the fair value of the mortgage servicing rights portfolio to changes in interest rates at March 31, 2005, was as follows:


	Down Scenario						Up Scenario

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

Fair value	$	(144	)	$	(65	)	$	44	$	90

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


U.S. Bancorp	37

A summary of the Company’s mortgage servicing rights and related characteristics by portfolio as of March 31, 2005, was as follows:


(Dollars in Millions)	MRBP			Government			Conventional			Total

Servicing portfolio	$	7,429		$	9,259		$	46,564		$	63,252
Fair market value	$	133		$	148		$	679		$	960
Value (bps)		179			160			146			152
Weighted-average servicing fees (bps)		43			45			35			37
Multiple (value/servicing fees)		4.16			3.56			4.17			4.11
Weighted-average note rate		6.19	%		6.03	%		5.69	%		5.80	%
Age (in years)		3.7			2.4			1.8			2.1
Expected life (in years)		6.8			5.4			6.1			6.1
Discount rate		10.1	%		10.7	%		9.6	%		9.8	%


Note 6		Intangible Assets

The following table reflects the changes in the carrying value of goodwill for the three months ended March 31, 2005:


						Private Client,
		Wholesale		Consumer		Trust and Asset		Payment		Consolidated
(Dollars in Millions)		Banking		Banking		Management		Services		Company

Balance at December 31, 2004		$	1,225	$	2,242	$	843	$	1,931	$	6,241
	Goodwill acquired		—		—		—		34		34
	Other (a)		—		—		—		2		2

Balance at March 31, 2005		$	1,225	$	2,242	$	843	$	1,967	$	6,277


(a)		Other changes in goodwill include foreign exchange effects on non-dollar-denominated goodwill.

Intangible assets consisted of the following:


		Estimated		Amortization		March 31,		December 31,
(Dollars in Millions)		Life (a)		Method (b)		2005		2004

Goodwill			—		—	$	6,277	$	6,241
Merchant processing contracts			9 years/8 years		SL/AC		748		714
Core deposit benefits			10 years/6 years		SL/AC		317		336
Mortgage servicing rights			6 years		AC		948		866
Trust relationships			15 years/8 years		SL/AC		285		297
Other identified intangibles			7 years/4 years		SL/AC		235		174

	Total					$	8,810	$	8,628


(a)		Estimated life represents the amortization period for assets subject to the straight line method and the weighted average amortization period for intangibles subject to accelerated methods. If more than one amortization method is used for a category, the estimated life for each method is calculated and reported separately.
(b)		Amortization methods: SL = straight line method AC = accelerated methods generally based on cash flows

Aggregate amortization expense consisted of the following:


		Three Months Ended
		March 31,

(Dollars in Millions)		2005			2004

Merchant processing contracts		$	33		$	28
Core deposit benefits			19			21
Mortgage servicing rights (a)			(5	)		154
Trust relationships			12			12
Other identified intangibles			12			11

	Total	$	71		$	226


(a)		Includes mortgage servicing rights reparation of $54 million and impairment of $109 million for the three months ended March 31, 2005 and 2004, respectively.


38	U.S. Bancorp

Below is the estimated amortization expense for the years ending:


(Dollars in Millions)

Remaining 2005	$	443
2006		421
2007		360
2008		294
2009		243


Note 7		Shareholders’ Equity

At March 31, 2005, and December 31, 2004, the Company had authority to issue 4 billion shares of common stock and 10 million shares of preferred stock. The Company had 1,842 million and 1,858 million shares of common stock outstanding at March 31, 2005, and December 31, 2004, respectively.

On December 16, 2003, the Board of Directors approved an authorization to repurchase 150 million shares of common stock during the following 24 months. During 2004, the Company purchased 89 million shares of common stock under the plan. On December 21, 2004, the Board of Directors approved an authorization to repurchase 150 million shares of common stock during the following 24 months. This new repurchase program replaces the Company’s December 16, 2003 program. In the fourth quarter of 2004 and first quarter of 2005, the Company repurchased 5 million shares and 20 million shares, respectively, of common stock under the plan.


Note 8		Earnings Per Share

The components of earnings per share were:


	Three Months Ended
	March 31,

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

Net income	$	1,071	$	1,008

Average common shares outstanding		1,852		1,915
Net effect of the assumed purchase of stock based on the treasury stock method for options and stock plans		28		26

Average diluted common shares outstanding		1,880		1,941

Earnings per share	$	.58	$	.53
Diluted earnings per share	$	.57	$	.52

For the three months ended March 31, 2005 and 2004, options to purchase 15 million and 39 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.


Note 9		Employee Benefits

Retirement PlansThe following table sets forth the components of net periodic benefit cost (income) for the retirement plans for the three months ended March 31:


		2005					2004

					Post-					Post-
					Retirement					Retirement
		Pension			Medical		Pension			Medical
(Dollars in Millions)		Plans			Plans		Plans			Plans

Components of net periodic benefit cost (income)
	Service cost	$	16		$	1	$	15		$	1
	Interest cost		28			4		27			5
	Expected return on plan assets		(49	)		—		(51	)		(1	)
	Net amortization and deferral		(2	)		—		(2	)		—
	Recognized actuarial loss		15			—		8			1

Net periodic benefit cost (income)		$	8		$	5	$	(3	)	$	6


U.S. Bancorp	39


Note 10		Income Taxes

The components of income tax expense were:


		Three Months Ended
		March 31,

(Dollars in Millions)		2005		2004

Federal
Current		$	423	$	278
Deferred			64		66

	Federal income tax		487		344
State
Current			60		36
Deferred			5		12

	State income tax		65		48

	Total income tax provision	$	552	$	392

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


		Three Months Ended
		March 31,

(Dollars in Millions)		2005			2004

Tax at statutory rate (35%)		$	568		$	490
State income tax, at statutory rates, net of federal tax benefit			42			31
Tax effect of
	Resolution of federal income tax examinations		—			(90	)
	Tax credits		(40	)		(31	)
	Tax-exempt interest, net		(5	)		(5	)
	Other items		(13	)		(3	)

Applicable income taxes		$	552		$	392

Included in the first quarter of 2004 was a reduction in income tax expense related to the resolution of federal income tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999. The resolution of these cycles was the result of a series of negotiations held between the Company and representatives of the Internal Revenue Service at both the examination and appellate levels. The resolution of these matters and the taxing authorities’ acceptance of submitted claims and tax return adjustments resulted in the reduction of estimated income tax liabilities.

The Company’s net deferred tax liability was $1,739 million at March 31, 2005, and $1,899 million at December 31, 2004.


Note 11		Guarantees and Contingent Liabilities

COMMITMENTS TO EXTEND CREDIT

Commitments to extend credit are legally binding and generally have fixed expiration dates or other termination clauses. The contractual amount represents the Company’s exposure to credit loss, in the event of default by the borrower. The Company manages this credit risk by using the same credit policies it applies to loans. Collateral is obtained to secure commitments based on management’s credit assessment of the borrower. The collateral may include marketable securities, receivables, inventory, equipment and real estate. Since the Company expects many of the commitments to expire without being drawn, total commitment amounts do not necessarily represent the Company’s future liquidity requirements. In addition, the commitments include consumer credit lines that are cancelable upon notification to the consumer.


40	U.S. Bancorp

LETTERS OF CREDIT

Standby letters of credit are commitments the Company issues to guarantee the performance of a customer to a third-party. The guarantees frequently support public and private borrowing arrangements, including commercial paper issuances, bond financings and other similar transactions. The Company issues commercial letters of credit on behalf of customers to ensure payment or collection in connection with trade transactions. In the event of a customer’s nonperformance, the Company’s credit loss exposure is the same as in any extension of credit, up to the letter’s contractual amount. Management assesses the borrower’s credit to determine the necessary collateral, which may include marketable securities, receivables, inventory, equipment and real estate. Since the conditions requiring the Company to fund letters of credit may not occur, the Company expects its liquidity requirements to be less than the total outstanding commitments. The maximum potential future payments guaranteed by the Company under standby letter of credit arrangements at March 31, 2005, were approximately $10.6 billion with a weighted-average term of approximately 23 months. The estimated fair value of standby letters of credit was approximately $71 million at March 31, 2005.

GUARANTEES

Guarantees are contingent commitments issued by the Company to customers or other third-parties. The Company’s guarantees primarily include parent guarantees related to subsidiaries’ third-party borrowing arrangements; third-party performance guarantees inherent in the Company’s business operations such as indemnified securities lending programs and merchant charge-back guarantees; indemnification or buy-back provisions related to certain asset sales; and contingent consideration arrangements related to acquisitions. For certain guarantees, the Company has recorded a liability related to the potential obligation, or has access to collateral to support the guarantee or through the exercise of other recourse provisions can offset some or all of the maximum potential future payments made under these guarantees.

Third-Party Borrowing ArrangementsThe Company provides guarantees to third-parties as a part of certain subsidiaries’ borrowing arrangements, primarily representing guaranteed operating or capital lease payments or other debt obligations with maturity dates extending through 2013. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $1.9 billion at March 31, 2005. The Company’s recorded liabilities as of March 31, 2005, included $8 million representing outstanding amounts owed to these third-parties and required to be recorded on the Company’s balance sheet in accordance with accounting principles generally accepted in the United States.

Commitments from Securities LendingThe Company participates in securities lending activities by acting as the customer’s agent involving the lending of securities. The Company indemnifies customers for the difference between the market value of the securities lent and the market value of the collateral received. Cash collateralizes these transactions. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $13.0 billion at March 31, 2005, and represented the market value of the securities lent to third-parties. At March 31, 2005, the Company held assets with a market value of $13.4 billion as collateral for these arrangements.

Asset SalesThe Company has provided guarantees to certain third-parties in connection with the sale of certain assets, primarily loan portfolios and low-income housing tax credits. These guarantees are generally in the form of asset buy-back or make-whole provisions that are triggered upon a credit event or a change in the tax-qualifying status of the related projects, as applicable, and remain in effect until the loans are collected or final tax credits are realized, respectively. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $4.1 billion at March 31, 2005, and represented the total proceeds received from the buyer in these transactions where the buy-back or make-whole provisions have not yet expired. Recourse available to the Company includes guarantees from the Small Business Administration (for SBA loans sold), recourse against the correspondent that originated the loan or to the private mortgage issuer, the right to collect payments from the debtors, and/or the right to liquidate the underlying collateral, if any, and retain the proceeds. Based on its established loan-to-value guidelines, the Company believes the recourse available is sufficient to recover future payments, if any, under the loan buy-back guarantees. At March 31, 2005, the Company had a recorded liability for potential losses of $6 million.


U.S. Bancorp	41

Merchant ProcessingThe Company, through its subsidiaries NOVA Information Systems, Inc. and NOVA European Holdings Company, provides merchant processing services. Under the rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In this situation, the transaction is “charged back” to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant, it bears the loss for the amount of the refund paid to the cardholder.

A cardholder, through its issuing bank, generally has until the latter of up to four months after the date the transaction is processed or the receipt of the product or service to present a charge-back to the Company as the merchant processor. The absolute maximum potential liability is estimated to be the total volume of credit card transactions that meet the associations’ requirements to be valid charge-back transactions at any given time. Management estimates that the maximum potential exposure for charge-backs would approximate the total amount of merchant transactions processed through the credit card associations for the last four months. For the last four months this amount totaled approximately $46.5 billion. In most cases, this contingent liability is unlikely to arise, as most products and services are delivered when purchased and amounts are refunded when items are returned to merchants. However, where the product or service is not provided until a future date (“future delivery”), the potential for this contingent liability increases. To mitigate this risk, the Company may require the merchant to make an escrow deposit, may place maximum volume limitations on future delivery transactions processed by the merchant at any point in time, or may require various credit policy enhancements (including letters of credit and bank guarantees). Also, merchant processing contracts may include event triggers to provide the Company more financial and operational control in the event of financial deterioration of the merchant. At March 31, 2005, the Company held $33 million of merchant escrow deposits as collateral.

The Company currently processes card transactions for several of the largest 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 merchant processing contracts consider the potential risk of default. At March 31, 2005, the transaction amounts of future delivery airline tickets purchased was approximately $2.0 billion, and the Company held collateral of $247 million in escrow deposits and letters of credit related to airline customer transactions. At March 31, 2005, the Company had a $62 million liability for guarantee obligations associated with its airline processing business.

In the normal course of business, the Company has unresolved charge-backs that are in process of resolution. The Company assesses the likelihood of its potential liability based on the extent and nature of unresolved charge-backs and its historical loss experience. At March 31, 2005, the Company had a recorded liability for potential losses of $28 million.

Other GuaranteesThe Company provides liquidity and credit enhancement facilities to a Company-sponsored conduit, as more fully described in the “Off-Balance Sheet Arrangements” section within Management’s Discussion and Analysis. Although management believes a draw against these facilities is remote, the maximum potential future payments guaranteed by the Company under these arrangements were approximately $5.2 billion at March 31, 2005. The recorded fair value of the Company’s liability for the credit enhancement recourse obligation and liquidity facility was $29 million at March 31, 2005, and was included in other liabilities.

OTHER CONTINGENT LIABILITIES

In connection with the spin-off of Piper Jaffray Companies, the Company has agreed to indemnify Piper Jaffray Companies against losses that may result from third-party claims relating to certain specified matters. The Company’s indemnification obligation related to these specified matters is capped at approximately $18 million and can be terminated by the Company if there is a change in control event for Piper Jaffray Companies. Through March 31, 2005, the Company has paid approximately $3 million to Piper Jaffray Companies under this agreement.

The Company is subject to various other litigation, investigations and legal and administrative cases and proceedings that arise in the ordinary course of its businesses. Due to their complex nature, it may be years before some matters are resolved. While it is impossible to ascertain the ultimate resolution or range of financial liability with respect to these contingent matters, the Company believes that the aggregate amount of such liabilities will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.


42	U.S. Bancorp

U.S. Bancorp

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


			For the Three Months Ended March 31,
			2005								2004

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

Assets
Investment securities			$	42,813		$	477		4.46	%	$	44,744		$	472		4.22	%		(4.3	)%
Loans held for sale				1,429			21		5.83			1,445			20		5.52			(1.1	)
Loans (b)
	Commercial			40,997			577		5.69			38,531			545		5.69			6.4
	Commercial real estate			27,504			413		6.09			27,110			374		5.55			1.5
	Residential mortgages			15,827			218		5.55			13,610			197		5.82			16.3
	Retail			43,326			709		6.63			39,559			635		6.46			9.5

		Total loans		127,654			1,917		6.08			118,810			1,751		5.93			7.4
Other earning assets				1,398			27		7.88			1,360			22		6.49			2.8

		Total earning assets		173,294			2,442		5.69			166,359			2,265		5.47			4.2
Allowance for loan losses				(2,114	)							(2,431	)							(13.0	)
Unrealized gain (loss) on available-for-sale securities				(261	)							(14	)							*
Other assets				26,016								25,749								1.0

		Total assets	$	196,935							$	189,663								3.8

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits			$	28,417							$	29,025								(2.1	)
Interest-bearing deposits
	Interest checking			23,146			31		.54			20,948			19		.36			10.5
	Money market accounts			30,264			70		.93			34,397			67		.79			(12.0	)
	Savings accounts			5,968			4		.31			5,898			4		.31			1.2
	Time certificates of deposit less than $100,000			12,978			86		2.70			13,618			91		2.68			(4.7	)
	Time deposits greater than $100,000			18,650			117		2.54			12,133			46		1.51			53.7

		Total interest-bearing deposits		91,006			308		1.37			86,994			227		1.05			4.6
Short-term borrowings				15,606			112		2.91			13,419			50		1.50			16.3
Long-term debt				35,440			271		3.09			34,553			209		2.43			2.6

		Total interest-bearing liabilities		142,052			691		1.97			134,966			486		1.45			5.3
Other liabilities				6,663								6,088								9.4
Shareholders’ equity				19,803								19,584								1.1

		Total liabilities and shareholders’ equity	$	196,935							$	189,663								3.8	%

Net interest income						$	1,751							$	1,779

Gross interest margin									3.72	%							4.02	%

Gross interest margin without taxable-equivalent increments									3.70								4.00

Percent of Earning Assets
Interest income									5.69	%							5.47	%
Interest expense									1.61								1.18

Net interest margin									4.08	%							4.29	%

Net interest margin without taxable-equivalent increments									4.06	%							4.27	%


*		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 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 first quarter of 2005.

Item 4. Submission of Matters to a Vote of Security Holders —The 2005 Annual Meeting of Shareholders of U.S. Bancorp was held Tuesday, April 19, 2005, at the Grand Hyatt Denver, Denver, Colorado. Jerry A. Grundhofer, Chairman and Chief Executive Officer, presided.

The holders of 1,636,954,901 shares of common stock, 88.3 percent of the outstanding shares entitled to vote as of the record date, were represented at the meeting in person or by proxy. The candidates for election as Class I Directors listed in the proxy statement were elected to serve three-year terms expiring at the annual shareholders’ meeting in 2008, and the selection of Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending December 31, 2005, was ratified. The proposal to amend our restated certificate of incorporation to eliminate the supermajority voting provisions was approved, and received a vote of 85.1 percent of our outstanding shares of common stock. The shareholder proposal regarding performance-vesting shares and the shareholder proposal to prohibit tax and other non-audit work by our independent auditor were not approved.

Summary of Matters Voted Upon by Shareholders


	Number of Shares

	For	Withheld

Election of Class I Directors:
Joel W. Johnson	1,331,540,117	305,414,784
David B. O’Maley	1,591,755,615	45,199,286
O’dell M. Owens, M.D., M.P.H.	1,599,769,147	37,185,754
Craig D. Schnuck	1,095,595,833	541,359,068
Warren R. Staley	1,543,131,308	93,823,593

	For	Against	Abstain	Broker Non-Vote

Ratification of Independent Auditors	1,494,643,535	129,549,246	12,762,120	N/A
Proposal to Amend Certificate of Incorporation to Eliminate Supermajority Voting	1,576,890,435	40,060,091	20,001,957	2,418
Proposal Regarding Performance Vesting Shares	564,918,964	758,255,538	36,874,865	276,905,534
Proposal to Prohibit Tax and Non-Audit Work by Independent Auditor	202,647,365	1,120,782,638	36,647,900	276,876,998

For a copy of the meeting minutes, please write to the Office of the Secretary, U.S. Bancorp, 800 Nicollet Mall, Minneapolis, Minnesota 55402.

Item 6. Exhibits


3.1		Restated Certificate of Incorporation, as amended through May 5, 2005.
10.1		Appendix B-10 to U.S. Bancorp Non-Qualified Executive Retirement Plan.
10.2		Amendment No. 5 to U.S. Bancorp Non-Qualified Executive Retirement Plan.
10.3		Offer of Employment to Richard C. Hartnack.
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: May 9, 2005


U.S. Bancorp	45

EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges


		Three Months Ended
(Dollars in Millions)		March 31, 2005

Earnings
1. Net income		$	1,071
2. Applicable income taxes			552

3. Net income before taxes (1 + 2)		$	1,623

4. Fixed charges:
	a. Interest expense excluding interest on deposits	$	383
	b. Portion of rents representative of interest and amortization of debt expense		17

	c. Fixed charges excluding interest on deposits (4a + 4b)		400
	d. Interest on deposits		308

	e. Fixed charges including interest on deposits (4c + 4d)	$	708

5. Amortization of interest capitalized		$	—
6. Earnings excluding interest on deposits (3 + 4c + 5)			2,023
7. Earnings including interest on deposits (3 + 4e + 5)			2,331
8. Fixed charges excluding interest on deposits (4c)			400
9. Fixed charges including interest on deposits (4e)			708
Ratio of Earnings to Fixed Charges
10. Excluding interest on deposits (line 6/line 8)			5.06
11. Including interest on deposits (line 7/line 9)			3.29


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, Chief Executive Officer of U.S. Bancorp, a Delaware corporation, certify that:


(1)	I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp;

(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


	(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


	(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


	(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


(5)	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


	(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	/s/Jerry A. Grundhofer

	Jerry A. Grundhofer
	Chief Executive Officer

Dated: May 9, 2005


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, Chief Financial Officer of U.S. Bancorp, a Delaware corporation, certify that:


(1)	I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp;

(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


	(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


	(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


	(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


(5)	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


	(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	/s/David M. Moffett

	David M. Moffett
	Chief Financial Officer

Dated: May 9, 2005


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 March 31, 2005 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/Jerry A. Grundhofer		/s/David M. Moffett

Jerry A. Grundhofer		David M. Moffett
Chief Executive Officer		Chief Financial Officer

Dated: May 9, 2005


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 investor services program administrator, and maintains all shareholder records for the corporation. Inquiries related to shareholder records, stock transfers, changes of ownership, lost stock certificates, changes of address and dividend payment should be directed to the transfer agent at:

Mellon Investor Services

P.O. Box 3315

South Hackensack, NJ 07606-1915

Phone: 888-778-1311 or 201-329-8660

Internet: melloninvestor.com

For Registered or Certified Mail:

Mellon Investor Services

85 Challenger Road

Ridgefield Park, NJ 07660

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

Independent Auditors

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

Common Stock Listing and Trading

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

Dividends and Reinvestment Plan

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

Investment Community Contacts

Howell D. McCullough

Senior Vice President, Investor Relations

howell.mccullough@usbank.com

Phone: 612-303-0786

Judith T. Murphy

Vice President, Investor Relations

judith.murphy@usbank.com

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

Financial Information

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

Web site. For information about U.S. Bancorp, including news, financial results, annual reports and other documents filed with the Securities and Exchange Commission, access our home page on the Internet at usbank.com and click on Investor/Shareholder Information.

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

U.S. Bancorp Investor Relations

800 Nicollet Mall

Minneapolis, Minnesota 55402

corporaterelations@usbank.com

Phone: 612-303-0799 or 866-775-9668

Media Requests

Steven W. Dale

Senior Vice President, Media Relations

steve.dale@usbank.com

Phone: 612-303-0784

Privacy

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

Code of Ethics

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

Diversity

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

Equal Employment Opportunity/Affirmative Action

U.S. Bancorp and our subsidiaries are committed to providing Equal Employment Opportunity to all employees and applicants for employment. In keeping with this commitment, employment decisions are made based upon performance, skills and abilities, rather than race, color, religion, national origin or ancestry, gender, age, disability, veteran status, sexual orientation or any other factors protected by law. The corporation complies with municipal, state and federal fair employment laws, including regulations applying to federal contractors.

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

U.S. Bancorp

Member FDIC

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U.S. Bancorp (USB) 10-Q2005 Q1 Quarterly report

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