FIVE STAR SERVICE: UP CLOSE

2005 Annual Report and Form 10-K

 

At U.S. Bancorp, we are committed to delivering the best service possible — in every way. In this Annual Report, we share with you just some of the ways in 2005 that we made improvements, expanded capabilities, developed new services and delivered on our Five Star Service Guarantee, now in its 10th year. Let us show you Five Star Service up close...

CORPORATE PROFILE:

U.S. Bancorp, with total assets of $209 billion at year-end 2005, is the 6th largest financial holding company in the United States. Our company operates 2,419 banking offices and 5,003 bank-branded ATMs, and provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses, government entities and institutions.

Headquartered in Minneapolis, U.S. Bancorp is the parent company of U.S. Bank. Major lines of business provided by U.S. Bancorp through U.S. Bank and other subsidiaries include Wholesale Banking; Payment Services; Private Client, Trust & Asset Management; and Consumer Banking. More information about these lines of business can be found throughout this report.

Visit U.S. Bancorp on the web at usbank.com.

 

Specialized Services/Offices

Commercial Banking

Consumer Banking

Corporate Banking

Payment Services

Private Client, Trust & Asset Management

Technology and Operations Services

Payment Processing Nationally and in Europe

Metropolitan and Community Banking

2,419 banking offices in 24 states

24-Hour Banking

ATMs: 5,003

Internet: usbank.com

Telephone: 800-USBANKS

U.S. BANCORP: AT A GLANCE

Ranking		6th largest U.S. financial holding company
Asset size		$209 billion
Deposits		$125 billion
Loans		$138 billion
Earnings per share (diluted)		$2.42
Return on average assets		2.21%
Return on average equity		22.5%
Efficiency ratio		44.3%
Tangible efficiency ratio		40.8%
Customers		13.4 million
Primary banking region		24 states
Bank branches		2,419
ATMs		5,003
NYSE symbol		USB

At year-end 2005

C O N T E N T S :

Selected Financial Highlights			2
Financial Summary			3
Letter to Shareholders			4
Five Star Service Up Close			6
F I N A N C I A L S :
Management’s Discussion and Analysis			18
Consolidated Financial Statements			62
Notes to Consolidated Financial Statements			66
Reports of Management and Independent Accountants			101
Five-Year Consolidated Financial Statements			104
Quarterly Consolidated Financial Data			106
Supplemental Financial Data			107
Annual Report on Form 10-K			110
CEO and CFO Certifications			121
Executive Officers			124
Directors			126
Corporate Information		inside back cover

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This report 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 plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and many factors could cause actual results to differ materially from those anticipated, including changes in general business and economic conditions, changes in interest rates, legal and regulatory developments, increased competition from both banks and non-banks, changes in customer behavior and preferences, effects of mergers and acquisitions and related integration, and effects of critical accounting policies and judgments. These and other risks are described in detail on pages 112 to 116 of this report, which you should read carefully.

U.S. BANCORP  1

 

SELECTED FINANCIAL HIGHLIGHTS:

 

(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.

2  U.S. BANCORP

 

Standard & Poors Rating Services raises ratings on U.S. Bancorp

In January 2006, Standard & Poor’s (S&P) Ratings Services announced that it has raised the ratings on U.S. Bancorp, including its counterparty credit ratings, to AA-/A-1+ from A+/A-1.

S&P also raised its long-term counterparty credit ratings on U.S. Bancorp’s subsidiaries, U.S. Bank National Association and U.S. Bank National Association ND, to AA from AA-. This AA rating is currently the highest rating given by S&P to any domestic bank.

We are pleased that our performance and outlook allowed the rating agencies to make those ratings increases.

Managing this company in a way to make you proud of your investment

U.S. Bancorp was ranked as the second most respected banking company in the United States and the 50th most respected company in the world, according to a survey of institutional investors published in the September 12, 2005 edition of Barron’s. The survey ranked the world’s 100 largest companies by market capitalization. Six U.S. banking corporations made the list, with U.S. Bancorp one of only two to make the top 50 ranking.

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

Creating shareholder value is always our priority

In December 2005, U.S. Bancorp announced a 10 percent increase in the dividend rate on U.S. Bancorp common stock to $1.32 on an annualized basis, or $0.33 on a quarterly basis. The quarterly common stock dividend of $0.33 per common share was payable on January 16, 2006 to shareholders of record at the close of business on December 30, 2005.

That dividend action represents 34 consecutive years of increasing our dividend. Since 1993, our dividend has shown a compound annual growth rate of 19.6 percent. Our dividend program is an important part of our shareholders’ total return on their investment in U.S. Bancorp. U.S. Bancorp, since 1863 through its predecessor companies, has paid a dividend for 143 consecutive years.

In late 2003, our company made a commitment to return 80 percent of earnings to our shareholders in the form of dividends and share buybacks. In 2005, we returned 90 percent of earnings to our shareholders, and since we originally made that commitment, we have returned 98 percent of our earnings to shareholders. We expect to continue to return 80 plus percent in 2006.

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

Jerry A. Grundhofer
Chairman and Chief Executive Officer
U.S. Bancorp

March 7, 2006

U.S. BANCORP  5

 

WHOLESALE BANKING:

New one-stop treasury management
product enhances efficiency

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

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

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

KEY BUSINESS UNITS:

Middle Market Commercial Banking

Commercial Real Estate

National Corporate Banking

Correspondent Banking

Dealer Commercial Services

Community Banking

Equipment Leasing

Foreign Exchange

Government Banking

International Banking

Specialized Industries

Specialty Lending

Treasury Management

6  U.S. BANCORP

 

U.S. Bank provides our wholesale banking customers with the expert knowledge, flexible products and comprehensive service they need to execute their financial strategies.

Large corporations, middle market businesses, financial institutions, private sector customers and government entities drive growth in our economy, and we proudly serve as their financial partner. We’re continually improving our lending, depository, treasury management and other financial offerings to exceed our wholesale banking customers’ service expectations.

Above: In 2005, U.S. Bank launched SinglePoint, which was created from the perspective of our wholesale banking customer.

Left: We worked closely with treasurers, cash managers, controllers and other users through interviews and test-runs to identify the features and functionality most important to them, and then incorporated that feedback            into the SinglePoint design.

U.S. BANCORP  7

 

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

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

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

 

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

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

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

U.S. BANCORP  11

 

U.S. BANCORP  13

 

U.S. BANCORP  15

 

COMMUNITY DEVELOPMENT:

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

 

Through the U.S. Bancorp Foundation, we provide cash contributions to nonprofit organizations in support of affordable housing, economic opportunities, education and artistic and cultural enrichment. In 2005, total charitable contributions from the U.S. Bancorp Foundation exceeded $21 million.   U.S. Bancorp provides superior, competitive products to every customer we serve. In addition, we help customers and businesses overcome challenging financial situations through customized financial solutions. U.S. Bancorp provides loans and investments to help build, rehabilitate and finance affordable housing units throughout our corporate footprint.

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

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

 

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

16  U.S. BANCORP

 

Significant Acquisitions

STATEMENT OF INCOME ANALYSIS

Net Interest Income Net interest income, on a taxable-equivalent basis, was $7.1 billion in 2005, $7.1 billion in 2004 and $7.2 billion in 2003. Net interest income declined $52 million in 2005, reflecting growth in average earning assets, more than offset by lower net interest margins. Average earning assets were $178.4 billion for 2005, compared with $168.1 billion and $160.8 billion for 2004 and 2003, respectively. The $10.3 billion (6.1 percent) increase in average earning assets for 2005, compared with 2004, was primarily driven by increases in residential mortgages, commercial loans and retail loans. The net interest margin in 2005 was 3.97 percent, compared with 4.25 percent and 4.49 percent in 2004 and 2003, respectively. The 28 basis point decline in the 2005 net interest margin, compared with 2004, reflected the current competitive lending environment, asset/ liability management decisions and the impact of changes in the yield curve from a year ago. Compared with 2004, credit spreads have tightened by approximately 19 basis points in 2005 across most lending products due to competitive pricing and a change in mix due to growth in lower-spread, fixed-rate credit products. The net interest margin also declined due to the impact of share repurchases, funding incremental growth of earning assets with higher cost wholesale funding, and asset/ liability management decisions designed to minimize the Company’s rate sensitivity position, including issuing longer-term fixed-rate debt and a reduction in the Company’s net receive-fixed interest rate swap position of 18.3 percent since December 31, 2004.

Provision for Credit Losses The provision for credit losses is recorded to bring the allowance for credit losses to a level deemed appropriate by management based on factors discussed in the “Analysis and Determination of Allowance for Credit Losses” section. The provision for credit losses was $666 million in 2005, compared with $669 million and $1,254 million in 2004 and 2003, respectively.

Noninterest Income Noninterest income in 2005 was $6.0 billion, compared with $5.5 billion in 2004 and $5.3 billion in 2003. The $526 million (9.5 percent) increase in 2005 over 2004 was driven by strong organic growth in the majority of fee income categories, particularly payment processing revenues and deposit service charges.

Noninterest Expense Noninterest expense in 2005 was $5.9 billion, compared with $5.8 billion and $5.6 billion in 2004 and 2003, respectively. The $78 million (1.3 percent) increase in noninterest expenses in 2005, compared with 2004, was primarily driven by production-based incentives and expenses related to business initiatives, including acquisitions investments, acquired businesses, and production-based, offset by a $110 million favorable change in the MSR valuation and a $101 million decrease in debt prepayment charges. Compensation expense was higher by 5.8 percent year-over-year principally due to business expansion, including in-store branches, expanding the Company’s payment processing businesses and other product sales initiatives. Employee benefits increased 10.8 percent, year-over-year, primarily as a result of higher pension expense, medical costs, payroll taxes and other benefits. Professional services expense was higher by 11.4 percent due to increases in legal and other professional services related to business initiatives, technology development and integration costs of specific payment processing businesses. Marketing and business development expense increased 21.1 percent principally related to brand awareness, credit card and prepaid gift card programs. Technology and communications expense was higher in 2005 by 8.4 percent, reflecting depreciation of technology investments, network costs associated with the expansion of the payment processing businesses, and higher outside data processing expense associated with expanding a prepaid gift card program. Other expense declined 1.7 percent primarily due to lower operating and fraud losses and insurance costs, partially offset by increased investments in affordable housing and other tax-advantaged projects and higher merchant processing costs due to the expansion of the payment processing businesses relative to 2004.