US BANCORP \DE\ (Form: 10-Q, Received: 11/09/2004 14:04:45)

Number of U.S.

Bancorp Common

Social Security

AWARDED TO

Award Date

Shares

Number

xxx-xx-

Final Vesting Date

(FORM 10-Q)

(USBANCORP LOGO)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

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 and 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 October 31, 2004 1,867,157,587 shares

TABLE OF CONTENTS


Management’s Discussion and Analysis
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Shareholders’ Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)
Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)
Part II -- Other Information
Corporate Information
Form of Executive Officer Stock Option Agreement
Form of Executive Officer Stock Option Agreement with Annual Vesting
Form of Executive Officer Restricted Stock Award Agreement
Form of Director Stock Option Agreement
Form of Director Restricted Stock Unit Agreement
Form of Executive Officer Restricted Stock Unit Agreement
Restricted Stock Unit Award Agreement
Amendment No.2 of Employment Agreement

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	5
		c)	Balance Sheet Analysis	9
		d)	Accounting Changes	32
		e)	Critical Accounting Policies	32
		f)	Controls and Procedures (Item 4)	34
2)	Quantitative and Qualitative Disclosures About Market Risk / Corporate Risk Profile (Item 3)
		a)	Overview	11
		b)	Credit Risk Management	11
		c)	Residual Risk Management	17
		d)	Operational Risk Management	17
		e)	Interest Rate Risk Management	18
		f)	Market Risk Management	21
		g)	Liquidity Risk Management	21
		h)	Capital Management	23
3)	Line of Business Financial Review			24
4)	Financial Statements (Item 1)			36
Part II — Other Information
1)	Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			54
2)	Exhibits (Item 6)			54
3)	Signature			55
4)	Exhibits			56

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									Nine Months Ended
		September 30,									September 30,


								Percent									Percent
(Dollars and Shares in Millions, Except Per Share Data)		2004			2003			Change			2004			2003			Change

Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)		$	1,781.7		$	1,825.5			(2.4	)%	$	5,340.1		$	5,400.8			(1.1	)%
Noninterest income			1,436.7			1,286.3			11.7			4,168.4			3,771.5			10.5
Securities gains (losses), net			87.3			(108.9	)		*			(84.4	)		244.9			*

	Total net revenue		3,305.7			3,002.9			10.1			9,424.1			9,417.2			.1
Noninterest expense			1,519.0			1,253.3			21.2			4,206.5			4,254.5			(1.1	)
Provision for credit losses			165.1			310.0			(46.7	)		604.6			968.0			(37.5	)

	Income from continuing operations before taxes		1,621.6			1,439.6			12.6			4,613.0			4,194.7			10.0
Taxable-equivalent adjustment			7.1			7.0			1.4			21.3			21.0			1.4
Applicable income taxes			549.0			491.9			11.6			1,480.9			1,433.9			3.3

	Income from continuing operations		1,065.5			940.7			13.3			3,110.8			2,739.8			13.5
Discontinued operations (after-tax)			—			10.2			*			—			15.8			*

	Net income	$	1,065.5		$	950.9			12.1		$	3,110.8		$	2,755.6			12.9

Per Common Share
Earnings per share from continuing operations		$	.57		$	.49			16.3	%	$	1.64		$	1.43			14.7	%
Diluted earnings per share from continuing operations			.56			.48			16.7			1.62			1.42			14.1
Earnings per share			.57			.49			16.3			1.64			1.43			14.7
Diluted earnings per share			.56			.49			14.3			1.62			1.43			13.3
Dividends declared per share			.240			.205			17.1			.720			.615			17.1
Book value per share			10.48			10.26			2.1
Market value per share			28.90			23.99			20.5
Average common shares outstanding			1,877.0			1,926.0			(2.5	)		1,894.6			1,922.4			(1.4	)
Average common diluted shares outstanding			1,903.7			1,939.8			(1.9	)		1,919.4			1,932.4			(.7	)
Financial Ratios
Return on average assets			2.21	%		1.98	%					2.18	%		1.97	%
Return on average equity			21.9			19.5						21.5			19.2
Net interest margin (taxable-equivalent basis)			4.22			4.43						4.26			4.51
Efficiency ratio (b)			47.2			40.3						44.2			46.4
Average Balances
Loans		$	122,906		$	119,982			2.4	%	$	120,966		$	118,045			2.5	%
Loans held for sale			1,405			4,460			(68.5	)		1,611			4,078			(60.5	)
Investment securities			42,502			37,777			12.5			43,243			36,059			19.9
Earning assets			168,187			163,865			2.6			167,182			159,832			4.6
Assets			191,585			190,241			.7			190,563			187,015			1.9
Noninterest-bearing deposits			29,791			31,907			(6.6	)		29,807			32,412			(8.0	)
Deposits			115,316			117,956			(2.2	)		116,147			116,649			(.4	)
Short-term borrowings			15,382			11,850			29.8			14,706			10,024			46.7
Long-term debt and junior subordinated debentures			35,199			33,794			4.2			34,254			33,737			1.5
Total shareholders’ equity			19,387			19,360			.1			19,338			19,202			.7

		September 30, 2004			December 31, 2003

Period End Balances
Loans		$	124,826		$	118,235			5.6	%
Allowance for loan losses			2,184			2,184			—
Investment securities			39,654			43,334			(8.5	)
Assets			192,844			189,471			1.8
Deposits			115,567			119,052			(2.9	)
Long-term debt and junior subordinated debentures			38,004			33,816			12.4
Total shareholders’ equity			19,600			19,242			1.9
Regulatory capital ratios
	Tangible common equity		6.4	%		6.5	%
	Tier 1 capital		8.7			9.1
	Total risk-based capital		12.7			13.6
	Leverage		7.9			8.0


*		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 Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income of $1,065.5 million for the third quarter of 2004, or $.56 per diluted share, compared with $950.9 million, or $.49 per diluted share, for the third quarter of 2003. Return on average assets and return on average equity were 2.21 percent and 21.9 percent, respectively, for the third quarter of 2004, compared with returns of 1.98 percent and 19.5 percent, respectively, for the third quarter of 2003. The Company’s results for the third quarter of 2004 improved over the third quarter of 2003, primarily due to lower credit costs and growth in fee-based products and services. Included in the third quarter of 2004 were net gains on the sale of securities of $87.3 million, a net increase of $196.2 million over net securities losses realized in the third quarter of 2003. The third quarter of 2004 also included the recognition of $86.7 million of mortgage servicing rights (“MSR”) impairment, a $195.2 million unfavorable variance over the third quarter of 2003. Operating expenses for the third quarter of 2004 also reflected a reduction in pre-tax merger and restructuring-related items of $10.2 million ($6.7 million on an after-tax basis), compared with the third quarter of 2003. The $10.2 million decline in pre-tax merger and restructuring-related charges was primarily due to the completion in 2003 of integration activities associated with the acquisition of NOVA Corporation (“NOVA”) and other smaller acquisitions.

Total net revenue, on a taxable-equivalent basis, was $3,305.7 million for the third quarter of 2004, compared with $3,002.9 million for the third quarter of 2003, an increase of $302.8 million (10.1 percent) from a year ago. The increase in net revenue was comprised of a 29.4 percent increase in noninterest income and a 2.4 percent decline in net interest income. The 29.4 percent increase in noninterest income was driven by a net increase in gains (losses) on the sale of securities and growth in the majority of fee-based revenue categories. The growth in fee-based noninterest income included increases in payment services revenue, merchant processing services, mortgage banking revenue, deposit service charges, commercial products revenue, trust and investment management fees and other income. The expansion of the Company’s merchant acquiring business in Europe, including the purchase of the remaining 50 percent shareholder interest in EuroConex Technologies Ltd and the acquisitions of two European merchant acquiring businesses during the second quarter of 2004, accounted for approximately $24 million of the year-over-year change in fee-based income. The 2.4 percent decline in net interest income was driven by a lower net interest margin, partially offset by an increase in average earning assets. In the third quarter of 2004, average earning assets increased $4.3 billion (2.6 percent), compared with the same period in 2003, primarily due to growth in investment securities, retail loans and residential mortgages, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The net interest margin for the third quarter of 2004 was 4.22 percent, compared with 4.43 percent in the third quarter of 2003. The decline in the net interest margin primarily reflected tighter credit spreads, a modest increase in the percent of total earning assets funded by wholesale sources of funding and higher rates paid on wholesale funding due to the impact of rising rates.

Total noninterest expense was $1,519.0 million in the third quarter of 2004, compared with $1,253.3 million in the third quarter of 2003. The year-over-year increase in noninterest expense of $265.7 million (21.2 percent) was primarily driven by the unfavorable change in MSR intangible valuations of $195.2 million and operating expenses related to the expansion of the Company’s merchant acquiring business in Europe. The expense growth also reflected increases in compensation, employee benefits, marketing and business development, technology and communications and certain business integration costs. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 47.2 percent for the third quarter of 2004, compared with 40.3 percent for the third quarter of 2003.

The provision for credit losses was $165.1 million for the third quarter of 2004, and $310.0 million for the third quarter of 2003, a year-over-year decrease of $144.9 million (46.7 percent). Net charge-offs in the third quarter of 2004 were $165.1 million, compared with net charge-offs of $309.9 million during the third quarter of 2003. The decline in the provision from a year ago primarily reflected declining levels of nonperforming loans, collection efforts and higher commercial loan recoveries. Refer to the “Corporate Risk Profile” section for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the


U.S. Bancorp	3

Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Net income for the first nine months of 2004 was $3,110.8 million, or $1.62 per diluted share, compared with $2,755.6 million, or $1.43 per diluted share, for the first nine months of 2003. Return on average assets and return on average equity were 2.18 percent and 21.5 percent, respectively, for the first nine months of 2004, compared with returns of 1.97 percent and 19.2 percent, respectively, for the first nine months of 2003. The Company’s results for the first nine months of 2004 improved over the first nine months of 2003, primarily due to lower credit costs and growth in fee-based products and services. Included in the first nine months of 2004 were net losses on the sale of securities of $84.4 million, a net reduction of $329.3 million from net securities gains realized in the first nine months of 2003. The first nine months of 2004 also included a net $24.9 million impairment of MSR, a $183.8 million favorable variance over the first nine months of 2003. Net income for the first nine months of 2004 also included a $90.0 million reduction in income tax expense recognized in the first quarter of 2004 related to the resolution of federal tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999. In addition, operating results for the first nine months of 2004 included a $35.4 million debt prepayment charge recognized in the first quarter of 2004, partially offset by a reduction in pre-tax merger and restructuring-related items of $38.6 million ($25.4 million on an after-tax basis), compared with the first nine months of 2003.

Total net revenue, on a taxable-equivalent basis, was $9,424.1 million for the first nine months of 2004, compared with $9,417.2 million for the first nine months of 2003, an increase of $6.9 million (.1 percent) from a year ago. The increase in net revenue was comprised of a 1.7 percent increase in noninterest income and a 1.1 percent decline in net interest income. The 1.7 percent increase in noninterest income was driven by growth in fee-based products and services, partially offset by a net reduction in gains (losses) on the sale of securities of $329.3 million. The 1.1 percent decline in net interest income was driven by a lower net interest margin, partially offset by an increase in average earning assets. In the first nine months of 2004, average earning assets increased $7.4 billion (4.6 percent), compared with the same period in 2003, primarily due to increases in investment securities, retail loans and residential mortgages, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The net interest margin for the first nine months of 2004 was 4.26 percent, compared with 4.51 percent in the first nine months of 2003. The decline in the net interest margin primarily reflected tighter credit spreads, a modest increase in the percent of total earning assets funded by wholesale sources of funding and higher rates paid on wholesale funding due to the impact of rising rates. In addition, the net interest margin declined year-over-year as a result of consolidating high credit quality, low margin loans from Stellar, a commercial loan conduit, onto the Company’s balance sheet beginning in the third quarter of 2003.

Total noninterest expense was $4,206.5 million in the first nine months of 2004, compared with $4,254.5 million in the first nine months of 2003. The year-over-year decline in noninterest expense of $48.0 million (1.1 percent) was primarily driven by the favorable change in MSR intangible valuations of $183.8 million and a $38.6 million reduction in merger and restructuring-related charges. These positive variances were partially offset by increases in compensation, employee benefits, professional services, marketing and business development and other operating expense, as well as expenses related to the expansion of the merchant acquiring business in Europe. Other operating expense included a $38.6 million charge related to debt prepayment and expense associated with charge-back exposure related to the Company’s airline merchant portfolio that was recorded in the second quarter of 2004. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 44.2 percent for the first nine months of 2004, compared with 46.4 percent for the first nine months of 2003.

The provision for credit losses was $604.6 million for the first nine months of 2004, and $968.0 million for the first nine months of 2003, a year-over-year decrease of $363.4 million (37.5 percent). The decline in the provision from a year ago primarily reflected lower nonperforming assets and lower commercial and retail losses, which were the result of an improving credit risk profile, collection efforts and higher commercial loan recoveries. Net charge-offs in the first nine months of 2004 were $603.5 million, compared with net charge-offs of $966.6 million during the first nine months of 2003. Refer to the “Corporate Risk Profile” section 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.


4	U.S. Bancorp

On December 31, 2003, the Company completed the spin-off of Piper Jaffray Companies (“Piper Jaffray”). In connection with the spin-off, accounting rules require that the Company’s financial statements be restated for all prior periods. Accordingly, historical financial results related to Piper Jaffray have been segregated and accounted for in the Company’s financial statements as discontinued operations. Net income for the third quarter and first nine months of 2003 included after-tax income from the discontinued operations of Piper Jaffray of $10.2 million and $15.8 million, respectively, which had an impact on both periods of $.01 per diluted share. Refer to Note 3 of the Notes to Consolidated Financial Statements for additional information regarding discontinued operations.

STATEMENT OF INCOME ANALYSIS

Net Interest Income In the third quarter of 2004 net interest income, on a taxable-equivalent basis, was $1,781.7 million, compared with $1,825.5 million in the third quarter of 2003, which represented a $43.8 million (2.4 percent) decrease from 2003. Net interest income for the first nine months of 2004, on a taxable equivalent basis, was $5,340.1 million, compared with $5,400.8 million for the first nine months of 2003, which represented a $60.7 million (1.1 percent) decrease from a year ago. The decline in net interest income for the third quarter and first nine months reflected modest growth in average earning assets, more than offset by lower net interest margins. Average earning assets in the third quarter and first nine months of 2004 increased $4.3 billion (2.6 percent) and $7.4 billion (4.6 percent), respectively, over the comparable periods of 2003. The increase in average earning assets for the third quarter and first nine months of 2004, compared with the same periods of 2003, was primarily driven by increases in investment securities, retail loans and residential mortgages, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The net interest margin for the third quarter and first nine months of 2004 was 4.22 percent and 4.26 percent, respectively, compared with 4.43 percent and 4.51 percent for the comparable periods of 2003. The year-over-year decline in the net interest margin primarily reflected tighter credit spreads, a modest increase in the percent of total earning assets funded by wholesale sources of funding and higher rates paid on wholesale funding due to the impact of rising rates. The shift toward wholesale funding reflects, in part, asset/liability decisions to issue longer-term fixed-rate borrowings. In addition, the net interest margin declined for the first nine months of 2004 as a result of consolidating high credit quality, low margin loans from


Table 2		Analysis of Net Interest Income



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



(Dollars in Millions)		2004			2003			Change			2004			2003			Change

Components of net interest income
	Income on earning assets (taxable-equivalent basis) (a)	$	2,309.9		$	2,318.3		$	(8.4	)	$	6,818.4		$	6,991.3		$	(172.9	)
	Expense on interest-bearing liabilities		528.2			492.8			35.4			1,478.3			1,590.5			(112.2	)

Net interest income (taxable-equivalent basis)		$	1,781.7		$	1,825.5		$	(43.8	)	$	5,340.1		$	5,400.8		$	(60.7	)

Net interest income, as reported		$	1,774.6		$	1,818.5		$	(43.9	)	$	5,318.8		$	5,379.8		$	(61.0	)

Average yields and rates paid
	Earning assets yield (taxable-equivalent basis)		5.47	%		5.63	%		(.16	)%		5.44	%		5.84	%		(.40	)%
	Rate paid on interest-bearing liabilities		1.55			1.49			.06			1.46			1.66			(.20	)

Gross interest margin (taxable-equivalent basis)			3.92	%		4.14	%		(.22	)%		3.98	%		4.18	%		(.20	)%

Net interest margin (taxable-equivalent basis)			4.22	%		4.43	%		(.21	)%		4.26	%		4.51	%		(.25	)%

Average balances
	Investment securities	$	42,502		$	37,777		$	4,725		$	43,243		$	36,059		$	7,184
	Loans		122,906			119,982			2,924			120,966			118,045			2,921
	Earning assets		168,187			163,865			4,322			167,182			159,832			7,350
	Interest-bearing liabilities		136,106			131,693			4,413			135,300			127,998			7,302
	Net free funds (b)		32,081			32,172			(91	)		31,882			31,834			48


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


U.S. Bancorp	5

the Stellar commercial loan conduit onto the Company’s balance sheet beginning in the third quarter of 2003.

Total average loans for the third quarter of 2004 were $2.9 billion (2.4 percent) higher than the third quarter of 2003, and year-to-date average loans were $2.9 billion (2.5 percent) higher than the first nine months of 2003. During the third quarter and first nine months of 2004, total average loan growth was driven by growth in average residential mortgages of $2.3 billion (19.1 percent) and $2.9 billion (26.5 percent), respectively, and average retail loan growth of $3.5 billion (9.0 percent) and $2.6 billion (6.9 percent), respectively. Total average commercial loans declined by $2.7 billion (6.3 percent) and $2.7 billion (6.5 percent) during the third quarter and first nine months of 2004, respectively, while average commercial real estate loans decreased by $.2 billion (.7 percent) and increased by $48 million (.2 percent) over the same periods. Although the consolidation of loans from the Stellar commercial loan conduit had a positive impact on average loan balances year-over-year, excess liquidity and improving cash flows among corporate borrowers have led to the overall decrease in total commercial loans.

Average investment securities for the third quarter and first nine months of 2004 were higher by $4.7 billion (12.5 percent) and $7.2 billion (19.9 percent), respectively, compared with the same periods of 2003, reflecting the reinvestment of proceeds from declining average commercial loan balances and loans held for sale. The Company utilizes the investment portfolio as part of its overall asset/ liability management practices to minimize structural interest rate and market valuation risks associated with changes in interest rates. In connection with changing interest rates and its risk management activities, the Company made a decision to sell $2.6 billion of fixed-rate securities, classified as available-for-sale, recognizing an $87.3 million gain on the sale of securities. Also during the third quarter of 2004, the Company acquired $4.6 billion of securities, representing principally floating and shorter-term fixed-rate mortgage-backed securities, giving consideration to the Company’s overall asset/liability position. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of net interest income to changes in interest rates.

Average noninterest-bearing deposits for the third quarter and first nine months of 2004 were lower by $2.1 billion (6.6 percent) and $2.6 billion (8.0 percent), respectively, compared with the same periods of 2003. While average branch-based noninterest-bearing deposits increased by 4.9 percent from a year ago, mortgage-related escrow balances and business related noninterest-bearing deposits, including wholesale, mortgage banking and government deposits, declined. Average interest-bearing deposits were lower by $.5 billion (.6 percent) for the third quarter of 2004 and higher by $2.1 billion (2.5 percent) for the first nine months of 2004, compared with the same periods of 2003. The year-over-year decrease in average interest-bearing deposits during the third quarter of 2004 included a decrease in average savings product balances of $1.9 billion (3.1 percent) and time certificates of deposit less than $100,000 of $2.0 billion (13.2 percent), partially offset by an increase in time deposits greater than $100,000 of $3.3 billion (29.2 percent). The decrease in average savings deposits and time certificates of deposit less than $100,000 was primarily due to pricing decisions by management in connection with the Company’s overall funding and risk management activities. The year-over-year increase in average interest-bearing deposits during the first nine months of 2004 included increases in average savings deposits of $4.6 billion (8.3 percent) and time deposits greater than $100,000 of $.2 billion (1.9 percent), offset somewhat by a decrease in time certificates of deposit less than $100,000 of $2.8 billion (17.4 percent).

Refer to the Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 52 and 53 for further information on net interest margin.

Provision for Credit Losses The provision for credit losses was $165.1 million and $310.0 million for the third quarter of 2004 and 2003, respectively, a year-over-year decrease of $144.9 million (46.7 percent). For the first nine months of 2004 and 2003, the provision for credit losses was $604.6 million and $968.0 million, respectively, a decrease of $363.4 million (37.5 percent). The decline from a year ago was primarily the result of lower nonperforming assets and lower retail and commercial loan losses, which were the result of an improving credit risk profile due to more favorable economic conditions, collection efforts and higher commercial loan recoveries. Refer to the “Corporate Risk Profile” section for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Noninterest Income Noninterest income during the third quarter of 2004 was $1,524.0 million, an increase of $346.6 million (29.4 percent) from the third quarter of 2003. Noninterest income during the first nine months of 2004 was $4,084.0 million, compared with $4,016.4 million for the first nine months of 2003, which represented an increase of $67.6 million


6	U.S. Bancorp

(1.7 percent). The increase in noninterest income in both periods was driven by growth in fee-based revenue experienced in most categories of noninterest income. Securities gains (losses) during the third quarter and first nine months of 2004 represented a net increase of $196.2 million and a net reduction of $329.3 million, compared with the same periods of 2003.

Credit and debit card revenue, corporate payment products revenue and ATM processing services revenue were higher in the third quarter and first nine months of 2004 by $43.4 million (15.8 percent) and $97.7 million (12.1 percent), respectively, compared with the same periods of 2003. Although credit and debit card revenue grew year-over-year, the growth was somewhat muted due to the impact of the settlement of the antitrust litigation brought against VISA USA and MasterCard by Wal-Mart Stores, Inc., Sears Roebuck & Co. and other retailers, which lowered interchange rates on signature debit transactions beginning in August 2003. The year-over-year impact of VISA’s settlement on debit card revenue for the third quarter and first nine months of 2004 was approximately $7.8 million and $23.4 million, respectively. This change in the interchange rate, in addition to higher customer loyalty rewards expenses, however, were more than offset by growth in transaction volumes and other rate changes. The corporate payment products revenue growth reflected growth in sales, card usage and rate changes. The favorable variance in ATM processing services revenue was due to increases in transaction volumes and sales. Merchant processing services revenue was higher in the third quarter and first nine months of 2004 by $41.2 million (28.2 percent) and $78.3 million (18.8 percent), respectively, compared with the same periods of 2003, reflecting an increase in transaction volume, higher merchant and equipment fees and the recent expansion of the Company’s merchant acquiring business in Europe. These acquisitions contributed approximately $26 million and $33 million of the increase for the third quarter and first nine months of 2004, respectively. Deposit service charges increased in the third quarter and first nine months of 2004 by $20.4 million (10.9 percent) and $65.5 million (12.4 percent), respectively, compared with the same periods of 2003, primarily due to account growth, revenue enhancement initiatives and transaction-related fees. Treasury management fees declined by $8.3 million (6.6 percent) in the third quarter of 2004, compared with the same period of 2003, and increased $6.9 million (2.0 percent) in the first nine months of 2004, compared with the same period of 2003. The decrease in treasury management fees during the third quarter was primarily due to higher fees in the third quarter of 2003 related to the change in the Federal government’s payment methodology for treasury management services from compensating balances, reflected in net interest income, to fees. During the third quarter and first nine months of 2004, year-over-year commercial products revenue increased $8.9 million (9.1 percent) and $22.5 million (7.5 percent), respectively, primarily due to growth in leasing revenue. Mortgage banking revenue increased $7.7 million (8.6 percent) and $26.1 million (9.5 percent) during the third quarter and first nine months of 2004, respectively, compared with the same periods of 2003, primarily due to higher loan servicing revenue. Investment products fees and commissions revenue increased in the third quarter and first nine months of


Table 3		Noninterest Income



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


							Percent								Percent
(Dollars in Millions)		2004		2003			Change			2004			2003		Change

Credit and debit card revenue		$	164.3	$	137.6			19.4	%	$	464.9		$	407.3		14.1	%
Corporate payment products revenue			108.5		95.7			13.4			306.0			272.6		12.3
ATM processing services			45.2		41.3			9.4			132.3			125.6		5.3
Merchant processing services			187.5		146.3			28.2			493.7			415.4		18.8
Trust and investment management fees			240.2		239.8			.2			740.5			707.3		4.7
Deposit service charges			207.4		187.0			10.9			594.7			529.2		12.4
Treasury management fees			117.9		126.2			(6.6	)		356.9			350.0		2.0
Commercial products revenue			106.7		97.8			9.1			324.5			302.0		7.5
Mortgage banking revenue			97.2		89.5			8.6			301.3			275.2		9.5
Investment products fees and commissions			37.1		35.5			4.5			118.6			108.7		9.1
Securities gains (losses), net			87.3		(108.9	)		*			(84.4	)		244.9		*
Other			124.7		89.6			39.2			335.0			278.2		20.4

	Total noninterest income	$	1,524.0	$	1,177.4			29.4	%	$	4,084.0		$	4,016.4		1.7	%


*		Not meaningful


U.S. Bancorp	7

2004 by $1.6 million (4.5 percent) and $9.9 million (9.1 percent), respectively, compared with the same periods of 2003, primarily due to higher sales activities in the Consumer Banking business line. Other income was higher year-over-year by $35.1 million (39.2 percent) and $56.8 million (20.4 percent), during the third quarter and first nine months of 2004, respectively, principally due to a residual value insurance recovery of $17.2 million during the third quarter of 2004 and a favorable change in retail lease residual gains (losses).

Noninterest Expense Third quarter of 2004 noninterest expense was $1,519.0 million, an increase of $265.7 million (21.2 percent) from the third quarter of 2003. For the first nine months of 2004, noninterest expense was $4,206.5 million, a reduction of $48.0 million (1.1 percent) from the first nine months of 2003. The year-over-year increase during the third quarter was primarily due to the unfavorable change in MSR valuations of $195.2 million, while the year-over-year decrease during the first nine months was primarily due to the favorable change in MSR valuations of $183.8 million. Refer to Note 6 of the Notes to Consolidated Financial Statements for a sensitivity analysis on the fair value of MSR to future changes in interest rates. The favorable variance in merger and restructuring-related charges in the third quarter and first nine months of 2004 of $10.2 million and $38.6 million, respectively, was primarily due to the completion of integration activities associated with NOVA and other smaller acquisitions in 2003. Included in these variances in the third quarter and first nine months of 2004, were increases in compensation, employee benefits, marketing and business development, technology and communications and operating expenses related to the expansion of the Company’s merchant acquiring business in Europe, including certain business integration costs. During the third quarter of 2004, expenses related to the expansion of the Company’s merchant acquiring business in Europe accounted for approximately $29 million of the year-over-year increase, including $6 million of business integration costs. Compensation expense increased during the third quarter and first nine months of 2004, compared with the same periods of 2003, due to an increase in salaries, primarily due to in-store branch expansion, and performance-based incentives. Employee benefits increased primarily as a result of higher pension expense and higher payroll taxes. Pension and retirement expense increased by $14.7 million and $22.0 million, during the third quarter and first nine months of 2004, respectively, compared with the same periods of 2003. Marketing and business development expense increased by $12.0 million (24.7 percent) in the third quarter of 2004 and $15.1 million (11.7 percent) in the first nine months of 2004, compared with the same periods of 2003, reflecting the increase and timing of marketing campaigns. Technology and communications expense was higher year-over-year by $7.7 million (7.5 percent) and $2.8 million (.9 percent), during the third quarter and first nine months of 2004, respectively, primarily due to outsourcing certain institutional trust participant record-keeping functions and capital expenditures for imaging and other electronic payment initiatives. Other expense increased $16.8 million (8.4 percent) and $71.3 million (12.6 percent) in the third quarter and first nine months of 2004, respectively, compared with the same periods of 2003. The year-over-year increase during the first nine months of 2004


Table 4		Noninterest Expense



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


								Percent									Percent
(Dollars in Millions)		2004			2003			Change			2004			2003			Change

Compensation		$	564.6		$	543.8			3.8	%	$	1,673.0		$	1,637.4			2.2	%
Employee benefits			100.0			75.8			31.9			291.4			247.1			17.9
Net occupancy and equipment			159.2			161.3			(1.3	)		468.3			482.1			(2.9	)
Professional services			37.2			39.9			(6.8	)		104.3			99.2			5.1
Marketing and business development			60.6			48.6			24.7			144.6			129.5			11.7
Technology and communications			109.8			102.1			7.5			313.9			311.1			.9
Postage, printing and supplies			61.4			61.6			(.3	)		183.5			183.8			(.2	)
Other intangibles			210.2			10.8			*			388.7			558.2			(30.4	)
Merger and restructuring-related charges			—			10.2			*			—			38.6			*
Other			216.0			199.2			8.4			638.8			567.5			12.6

	Total noninterest expense	$	1,519.0		$	1,253.3			21.2	%	$	4,206.5		$	4,254.5			(1.1	)%

Efficiency ratio (a)			47.2	%		40.3	%					44.2	%		46.4	%


*		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.


8	U.S. Bancorp

included $38.6 million of charges related to the prepayment of a portion of the Company’s long-term debt and charge-back exposure associated with the Company’s airline merchant portfolio that was recorded in the second quarter of 2004.

Income Tax Expense The provision for income taxes was $549.0 million (an effective rate of 34.0 percent) for the third quarter of 2004 and $1,480.9 million (an effective rate of 32.3 percent) for the first nine months of 2004, compared with $491.9 million (an effective rate of 34.3 percent) and $1,433.9 million (an effective rate of 34.4 percent) for the same periods of 2003. The improvement in the effective tax rate in the first nine months of 2004 primarily reflected a $90.0 million reduction in income tax expense in the first quarter of 2004 related to the resolution of federal tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999.

Refer to Note 12 of the Notes to Consolidated Financial Statements for further discussion on income taxes.

BALANCE SHEET ANALYSIS

Loans The Company’s total loan portfolio was $124.8 billion at September 30, 2004, compared with $118.2 billion at December 31, 2003, an increase of $6.6 billion (5.6 percent). The increase in total loans was driven by growth in retail loans, commercial loans and residential mortgages. Commercial loans, including lease financing, totaled $40.2 billion at September 30, 2004, compared with $38.5 billion at December 31, 2003, an increase of $1.6 billion (4.2 percent). The increase in commercial loans was driven by new customer relationships, increased utilization under lines of credit by commercial customers and increases in corporate card balances. The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction loans, was $27.4 billion at September 30, 2004, compared with $27.2 billion at December 31, 2003.

Residential mortgages held in the loan portfolio were $14.7 billion at September 30, 2004, compared with $13.5 billion at December 31, 2003, an increase of $1.3 billion (9.5 percent). The increase in residential mortgages was primarily the result of 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 $42.5 billion at September 30, 2004, compared with $39.0 billion at December 31, 2003. The $3.5 billion (9.0 percent) increase was driven by an increase in home equity lines of credit, retail leasing, automobile loans and leases and installment loans.

Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary markets, were $1,372 million at September 30, 2004, compared with $1,433 million at December 31, 2003. The decrease of $61 million (4.3 percent) was primarily due to the timing of loan originations and sales during the first nine months of 2004. Mortgage loan production is highly correlated to changes in interest rates with declines in balances during a period of rising interest rates.

Investment Securities At September 30, 2004, investment securities, both available-for-sale and held-to-maturity, totaled $39.7 billion, compared with $43.3 billion at December 31, 2003. The $3.7 billion (8.5 percent) decrease primarily reflected the sale of $6.4 billion of fixed-rate securities, along with maturities and prepayments, partially offset by purchases of primarily floating-rate securities. At September 30, 2004, approximately 35.9 percent of the investment securities portfolio represented adjustable-rate financial instruments, compared with 22.2 percent as of December 31, 2003. Adjustable-rate financial instruments include variable-rate collateralized mortgage obligations, mortgage-backed securities, agency securities, adjustable-rate money market accounts and asset-backed securities.

Deposits Total deposits were $115.6 billion at September 30, 2004, compared with $119.1 billion at December 31, 2003, a decrease of $3.5 billion (2.9 percent). The decrease in total deposits was primarily the result of decreases in noninterest-bearing deposits, interest checking, money market accounts and time certificates of deposit less than $100,000, partially offset by increases in time deposits greater than $100,000.

Noninterest-bearing deposits were $31.6 billion at September 30, 2004, compared with $32.5 billion at December 31, 2003, a decrease of $.9 billion (2.7 percent), primarily due to lower government banking and mortgage related deposits and seasonality of corporate trust deposits.

Interest-bearing deposits totaled $84.0 billion at September 30, 2004, compared with $86.6 billion at December 31, 2003, a decrease of $2.6 billion (3.0 percent). The decrease in interest-bearing deposits included decreases in money market accounts of


U.S. Bancorp	9

$3.1 billion (9.2 percent), time certificates of deposits less than $100,000 of $1.1 billion (8.0 percent) and interest checking of $.7 billion (3.3 percent). These decreases were partially offset by an increase in time deposits greater than $100,000 of $2.1 billion (18.1 percent), along with a 3.8 percent increase in savings 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 declines in interest-bearing deposits were primarily related to pricing decisions by management in connection with overall funding activities.

Borrowings The Company utilizes both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings,


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
September 30, 2004 (Dollars in Millions)			Cost		Value		Years		Yield			Cost		Value		Years		Yield

U.S. Treasury and agencies
	Maturing in one year or less		$	64	$	64		.55		3.35	%	$	—	$	—		—		—	%
	Maturing after one year through five years			160		165		2.13		4.52			—		—		—		—
	Maturing after five years through ten years			229		223		8.52		4.01			—		—		—		—
	Maturing after ten years			1,150		1,114		18.76		3.07			—		—		—		—

		Total	$	1,603	$	1,566		14.91		3.36	%	$	—	$	—		—		—	%

Mortgage-backed securities
	Maturing in one year or less		$	1,842	$	1,851		.60		3.46	%	$	—	$	—		—		—	%
	Maturing after one year through five years			20,711		20,713		3.66		4.27			12		12		3.07		5.30
	Maturing after five years through ten years			13,509		13,429		6.34		4.57			—		—		—		—
	Maturing after ten years			694		703		15.04		2.78			—		—		—		—

		Total	$	36,756	$	36,696		4.71		4.31	%	$	12	$	12		3.07		5.30	%

Asset-backed securities
	Maturing in one year or less		$	47	$	48		.83		5.61	%	$	—	$	—		—		—	%
	Maturing after one year through five years			37		37		2.25		5.36			—		—		—		—
	Maturing after five years through ten years			—		—		—		—			—		—		—		—
	Maturing after ten years			—		—		—		—			—		—		—		—

		Total	$	84	$	85		1.46		5.50	%	$	—	$	—		—		—	%

Obligations of state and political subdivisions
	Maturing in one year or less		$	118	$	120		.34		7.49	%	$	10	$	10		.32		5.85	%
	Maturing after one year through five years			120		126		2.45		7.26			37		39		2.72		6.49
	Maturing after five years through ten years			10		10		6.00		8.04			22		24		7.06		6.43
	Maturing after ten years			—		—		—		—			39		41		14.00		6.55

		Total	$	248	$	256		1.58		7.40	%	$	108	$	114		7.42		6.44	%

Other debt securities:
	Maturing in one year or less		$	3	$	4		.58		8.87	%	$	—	$	—		—		—	%
	Maturing after one year through five years			111		111		2.33		10.05			—		—		—		—
	Maturing after five years through ten years			5		5		5.63		2.73			—		—		—		—
	Maturing after ten years			499		492		22.60		2.46			—		—		—		—

		Total	$	618	$	612		18.70		3.86	%	$	—	$	—		—		—	%

Other investments			$	317	$	319		—		—	%	$	—	$	—		—		—	%

Total investment securities			$	39,626	$	39,534		5.32		4.29	%	$	120	$	126		7.00		6.33	%

Note:

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

The weighted-average maturity of the available-for-sale investment securities was 5.32 years at September 30, 2004, compared with 5.12 years at December 31, 2003. The corresponding weighted-average yields were 4.29% and 4.27%, respectively. The weighted-average maturity of the held-to-maturity investment securities was 7.00 years at September 30, 2004, compared with 6.16 years at December 31, 2003. The corresponding weighted-averaged yields were 6.33% and 6.05%, respectively.



		September 30, 2004					December 31, 2003


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

U.S. Treasury and agencies		$	1,603		4.0	%	$	1,634		3.7	%
Mortgage-backed securities			36,768		92.5			40,243		92.3
Asset-backed securities			84		.2			250		.6
Obligations of state and political subdivisions			356		.9			473		1.1
Other securities and investments			935		2.4			993		2.3

	Total investment securities	$	39,746		100.0	%	$	43,593		100.0	%


10	U.S. Bancorp

which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $12.6 billion at September 30, 2004, compared with $10.9 billion at December 31, 2003. Short-term funding is managed to levels deemed appropriate given alternative funding sources. The increase of $1.8 billion (16.6 percent) in short-term borrowings reflected wholesale funding associated with the Company’s modest earning asset growth. Long-term debt was $35.3 billion at September 30, 2004, an increase of $4.1 billion (13.2 percent), compared with $31.2 billion at December 31, 2003. The increase in long-term debt during the first nine months of 2004 was primarily driven by the issuance of $11.2 billion of bank notes, partially offset by maturities of $5.3 billion and prepayments of $2.2 billion of Federal Home Loan Bank (“FHLB”) advances. The prepayment of FHLB advances during the first quarter of 2004 and the issuance of predominantly fixed-rate funding was done in connection with asset/liability management activities. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

CORPORATE RISK PROFILE

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

Credit Risk Management The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans experiencing deterioration of credit quality. The credit risk management strategy also includes a credit risk assessment process completely independent of Company management 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 independently to Credit Administration 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 the adequacy of the allowance for 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 these 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


U.S. Bancorp	11

and are used to evaluate underwriting and collection and determine the adequacy of the allowance for credit losses for these products. 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 and macroeconomic factors. Economic conditions during the third quarter of 2004 have improved somewhat from the third quarter of


Table 6		Nonperforming Assets (a)



				September 30,			December 31,
(Dollars in Millions)				2004			2003

Commercial
	Commercial			$	347.7		$	623.5
	Lease financing				91.3			113.3

		Total commercial			439.0			736.8
Commercial real estate
	Commercial mortgages				165.7			177.6
	Construction and development				35.3			39.9

		Total commercial real estate			201.0			217.5
Residential mortgages					45.3			40.5
Retail
	Retail leasing				.1			.4
	Other retail				17.1			24.8

		Total retail			17.2			25.2

			Total nonperforming loans		702.5			1,020.0
Other real estate					68.7			72.6
Other assets					33.4			55.5

			Total nonperforming assets	$	804.6		$	1,148.1

Restructured loans accruing interest (b)				$	3.7		$	18.0
Accruing loans 90 days or more past due				$	291.8		$	329.4
Nonperforming loans to total loans					.56	%		.86	%
Nonperforming assets to total loans plus other real estate					.64	%		.97	%

Changes in Nonperforming Assets



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

Balance December 31, 2003					$	1,082.4		$	65.7		$	1,148.1
	Additions to nonperforming assets
		New nonaccrual loans and foreclosed properties				513.4			35.1			548.5
		Advances on loans				30.2			—			30.2

			Total additions			543.6			35.1			578.7
	Reductions in nonperforming assets
		Paydowns, payoffs				(404.3	)		(20.8	)		(425.1	)
		Net sales				(110.7	)		—			(110.7	)
		Return to performing status				(78.8	)		(13.5	)		(92.3	)
		Charge-offs (c)				(287.4	)		(6.7	)		(294.1	)

			Total reductions			(881.2	)		(41.0	)		(922.2	)

				Net reductions in nonperforming assets		(337.6	)		(5.9	)		(343.5	)

Balance September 30, 2004					$	744.8		$	59.8		$	804.6


(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.


12	U.S. Bancorp

2003, as reflected in higher levels of employment, stronger corporate earnings and lower credit delinquencies and business bankruptcies.

Analysis of Nonperforming Assets Nonperforming assets represent a key 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 on nonperforming assets are typically applied against the principal balance and not recorded as income. At September 30, 2004, total nonperforming assets were $804.6 million, compared with $1,148.1 million at December 31, 2003. The ratio of total nonperforming assets to total loans and other real estate decreased to .64 percent at September 30, 2004, compared with .97 percent at December 31, 2003. The improvement in credit quality has been broad-based across most industry categories reflecting continued improvement in economic conditions. While nonperforming assets are expected to continue to decline slightly during the next few quarters, the ongoing level of nonperforming assets is expected to stabilize in mid-2005.

The Company had restructured loans of $70.6 million as of September 30, 2004, compared with $58.5 million as of December 31, 2003. Commitments to lend additional funds under restructured loans were $8.7 million as of September 30, 2004, compared with $8.2 million as of December 31, 2003. Restructured loans performing under the restructured terms beyond a specific timeframe may be reported as accruing. Of the Company’s total restructured loans at September 30, 2004, $3.7 million were reported as accruing.

Accruing loans 90 days or more past due totaled $291.8 million at September 30, 2004, compared with $329.4 million at December 31, 2003. 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 90 days or more past due and accruing to total loans declined to .23 percent at September 30, 2004, compared with .28 percent at December 31, 2003. Improving economic conditions and the Company’s continued focus on the credit process are the primary factors for the favorable change from December 31, 2003. Given the relative level of loans 90 days or more past due, the Company does not anticipate significant reductions in future periods.


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



				September 30,			December 31,
90 days or more past due excluding nonperforming loans				2004			2003

Commercial
	Commercial				.06	%		.06	%
	Lease financing				—			.04

		Total commercial			.05			.06
Commercial real estate
	Commercial mortgages				.01			.02
	Construction and development				.01			.03

		Total commercial real estate			.01			.02
Residential mortgages					.46			.61
Retail
	Credit card				1.76			1.68
	Retail leasing				.08			.14
	Other retail				.29			.41

		Total retail			.47			.56

			Total loans		.23	%		.28	%


		September 30,			December 31,
90 days or more past due including nonperforming loans		2004			2003

Commercial			1.14	%		1.97	%
Commercial real estate			.75			.82
Residential mortgages			.77			.91
Retail			.51			.62

	Total loans		.80	%		1.14	%


U.S. Bancorp	13

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

The decline in residential mortgage delinquencies at September 30, 2004, compared with December 31, 2003, reflected the general improvement in economic conditions, collection efforts and the effect of portfolio growth on delinquency ratios reported on a concurrent basis. The decline in retail loan delinquencies as of September 30, 2004, compared with December 31, 2003, reflected improving economic conditions as well as ongoing collection efforts, risk management actions taken by the Company and the effect of portfolio growth on delinquency ratios reported on a concurrent basis.

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



								As a Percent of Ending
				Amount				Loan Balances


				September 30,		December 31,		September 30,			December 31,
(Dollars in Millions)				2004		2003		2004			2003

Residential Mortgages
		30-89 days		$	100.6	$	102.9		.68	%		.76	%
		90 days or more			68.2		82.5		.46			.61
		Nonperforming			45.3		40.5		.31			.30

			Total	$	214.1	$	225.9		1.45	%		1.68	%

Retail
	Credit Card
		30-89 days		$	134.9	$	150.9		2.17	%		2.54	%
		90 days or more			109.4		99.5		1.76			1.68
		Nonperforming			—		—		—			—

			Total	$	244.3	$	250.4		3.93	%		4.22	%
	Retail Leasing
		30-89 days		$	66.0	$	78.8		.95	%		1.31	%
		90 days or more			5.9		8.2		.08			.14
		Nonperforming			.1		.4		—			.01

			Total	$	72.0	$	87.4		1.03	%		1.45	%
	Other Retail
		30-89 days		$	251.7	$	311.9		.86	%		1.15	%
		90 days or more			84.6		110.2		.29			.41
		Nonperforming			17.1		24.8		.06			.09

			Total	$	353.4	$	446.9		1.21	%		1.65	%

Analysis of Net Loan Charge-offs Total loan net charge-offs were $165.1 million and $603.5 million during the third quarter and first nine months of 2004, respectively, compared with net charge-offs of $309.9 million and $966.6 million, respectively, for the same periods of 2003. The ratio of total loan net charge-offs to average loans in the third quarter and first nine months of 2004 was .53 percent and .67 percent, respectively, compared with 1.02 percent and 1.09 percent, respectively, for the same periods of 2003. The overall level of net charge-offs in the third quarter and first nine months of 2004 reflected the Company’s ongoing efforts to reduce the overall risk profile of the organization, improved economic conditions, higher commercial loan recoveries in the third quarter of 2004, refinancings by customers and higher asset valuations. Net charge-offs are expected to increase modestly as commercial loan recoveries return to more normal levels in future periods.

Commercial and commercial real estate loan net charge-offs for the third quarter of 2004 were $26.1 million (.16 percent of average loans outstanding), compared with $153.6 million (.88 percent of average loans outstanding) for the third quarter of 2003. Commercial and commercial real estate loan net charge-offs for the first nine months of 2004 were $167.4 million (.34 percent of average loans outstanding), compared with $480.0 million (.93 percent of average loans outstanding) for the first nine months of 2003. The year-over-year decline in commercial loan net charge-offs of $122.2 million during the third quarter of 2004 continues to be broad-based across most industries within the commercial loan portfolio and was favorably influenced by higher levels of commercial loan recoveries in the third quarter of 2004. Higher levels of commercial loan recoveries are not expected to continue into 2005.

Retail loan net charge-offs for the third quarter of 2004 were $132.3 million (1.26 percent of average loans outstanding), compared with $149.0 million (1.54 percent of average loans outstanding) for the third quarter of 2003. Retail loan net charge-offs for the first nine months of 2004 were $414.8 million (1.36 percent of average loans outstanding), compared with


14	U.S. Bancorp

$466.9 million (1.64 percent of average loans outstanding) for the same period in 2003. Lower levels of retail loan net charge-offs principally reflected changes by the Company in underwriting, ongoing collection efforts and other risk management activities. The decline also reflected lower delinquency ratios from a year ago as the economy continues to improve.

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



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



		Average Loan				Percent of						Average Loan				Percent of
		Balance				Average Loans						Balance				Average Loans


(Dollars in Millions)		2004		2003		2004			2003			2004		2003		2004			2003

Consumer Finance (a)
	Residential mortgages	$	4,708	$	3,669		.46	%		.40	%	$	4,432	$	3,312		.45	%		.46	%
	Home equity and second mortgages		2,527		2,259		1.93			2.50			2,322		2,408		2.20			2.40
	Other retail		426		379		4.42			4.52			414		349		4.70			4.48
Traditional Branch
	Residential mortgages	$	9,861	$	8,565		.05	%		.17	%	$	9,647	$	7,819		.09	%		.14	%
	Home equity and second mortgages		11,761		10,834		.22			.33			11,493		10,883		.23			.36
	Other retail		14,125		13,487		.99			1.47			13,946		13,189		1.16			1.54
Total Company
	Residential mortgages	$	14,569	$	12,234		.18	%		.24	%	$	14,079	$	11,131		.20	%		.24	%
	Home equity and second mortgages		14,288		13,093		.52			.70			13,815		13,291		.56			.73
	Other retail		14,551		13,866		1.09			1.55			14,360		13,538		1.26			1.61


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


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



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



				2004			2003			2004			2003

Commercial
	Commercial				.03	%		1.33	%		.36	%		1.40	%
	Lease financing				1.49			1.52			1.60			1.80

		Total commercial			.21			1.35			.51			1.45
Commercial real estate
	Commercial mortgages				.05			.12			.06			.12
	Construction and development				.14			.25			.16			.16

		Total commercial real estate			.08			.15			.08			.13
Residential mortgages					.18			.24			.20			.24
Retail
	Credit card				4.16			4.20			4.24			4.71
	Retail leasing				.56			.83			.62			.90
	Home equity and second mortgages				.52			.70			.56			.73
	Other retail				1.09			1.55			1.26			1.61

		Total retail			1.26			1.54			1.36			1.64

			Total loans		.53	%		1.02	%		.67	%		1.09	%


U.S. Bancorp	15

Table 9 Summary of Allowance for Credit Losses



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



(Dollars in Millions)					2004			2003			2004		2003

Balance at beginning of period					$	2,369.7		$	2,367.6		$	2,368.6	$	2,422.0
Charge-offs
	Commercial
		Commercial				55.9			146.6			204.2		429.8
		Lease financing				29.1			31.6			89.6		111.4

			Total commercial			85.0			178.2			293.8		541.2
	Commercial real estate
		Commercial mortgages				5.0			9.6			18.9		27.8
		Construction and development				3.6			4.7			9.9		9.8

			Total commercial real estate			8.6			14.3			28.8		37.6
	Residential mortgages					7.9			8.3			24.5		22.4
	Retail
		Credit card				71.5			67.7			212.7		213.9
		Retail leasing				12.3			14.0			37.0		43.7
		Home equity and second mortgages				22.1			26.4			68.0		81.0
		Other retail				52.1			64.7			173.8		202.0

			Total retail			158.0			172.8			491.5		540.6

				Total charge-offs		259.5			373.6			838.6		1,141.8
Recoveries
	Commercial
		Commercial				53.2			22.7			112.2		45.1
		Lease financing				10.9			12.4			31.2		42.3

			Total commercial			64.1			35.1			143.4		87.4
	Commercial real estate
		Commercial mortgages				2.3			3.7			9.8		9.7
		Construction and development				1.1			.1			2.0		1.7

			Total commercial real estate			3.4			3.8			11.8		11.4
	Residential mortgages					1.2			1.0			3.2		2.7
	Retail
		Credit card				7.2			8.4			22.3		21.4
		Retail leasing				2.7			1.8			6.6		5.0
		Home equity and second mortgages				3.4			3.2			9.6		8.5
		Other retail				12.4			10.4			38.2		38.8

			Total retail			25.7			23.8			76.7		73.7

				Total recoveries		94.4			63.7			235.1		175.2
Net Charge-offs
	Commercial
		Commercial				2.7			123.9			92.0		384.7
		Lease financing				18.2			19.2			58.4		69.1

			Total commercial			20.9			143.1			150.4		453.8
	Commercial real estate
		Commercial mortgages				2.7			5.9			9.1		18.1
		Construction and development				2.5			4.6			7.9		8.1

			Total commercial real estate			5.2			10.5			17.0		26.2
	Residential mortgages					6.7			7.3			21.3		19.7
	Retail
		Credit card				64.3			59.3			190.4		192.5
		Retail leasing				9.6			12.2			30.4		38.7
		Home equity and second mortgages				18.7			23.2			58.4		72.5
		Other retail				39.7			54.3			135.6		163.2

			Total retail			132.3			149.0			414.8		466.9

				Total net charge-offs		165.1			309.9			603.5		966.6

Provision for credit losses						165.1			310.0			604.6		968.0
Acquisitions and other changes						—			—			—		(55.7	)

Balance at end of period					$	2,369.7		$	2,367.7		$	2,369.7	$	2,367.7

Components
	Allowance for loan losses				$	2,184.0		$	2,184.0
	Liability for unfunded credit commitments (a)					185.7			183.7

		Total allowance for credit losses			$	2,369.7		$	2,367.7

Allowance for credit losses as a percentage of
	Period-end loans					1.90	%		1.98	%
	Nonperforming loans					337			202
	Nonperforming assets					295			180
	Annualized net charge-offs					361			193


(a)		During the first quarter of 2004, the Company reclassified the portion of its allowance for credit losses related to commercial off-balance sheet loan commitments and letters of credit to a separate liability account. Amounts for periods presented in 2003 represent estimates.


16	U.S. Bancorp

Analysis and Determination of the Allowance for Credit Losses The allowance for credit 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 inherent losses. The evaluation of each element and the overall allowance is based on a continuing assessment of problem loans and related off-balance sheet items, recent loss experience and other factors, including regulatory guidance and economic conditions.

At September 30, 2004, the allowance for credit losses was $2,369.7 million (1.90 percent of loans), compared with an allowance of $2,368.6 million (2.00 percent of loans) at December 31, 2003. The ratio of the allowance for credit losses to nonperforming loans was 337 percent at September 30, 2004, compared with 232 percent at December 31, 2003. The ratio of the allowance for credit losses to annualized loan net charge-offs was 361 percent at September 30, 2004, compared with 189 percent at December 31, 2003.

Several factors were taken into consideration in evaluating the allowance for credit losses at September 30, 2004, 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 the lease financing, commercial real estate, residential mortgages and retail delinquency categories relative to December 31, 2003. Management also considered the uncertainty related to certain industry sectors, including the transportation sector, the extent of credit exposure to highly leveraged enterprise-value borrowers within the portfolio, concentration risks associated with commercial real estate and the fact that nonperforming assets remain at somewhat elevated levels despite recent improvements. Finally, the Company considered the improving economic trends, including improving corporate earnings, changes in unemployment rates, the level of bankruptcies and general economic indicators.

Residual Risk Management The 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 individually 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 $3.9 billion of retail leasing residuals at September 30, 2004, compared with $3.3 billion at December 31, 2003. At September 30, 2004, the commercial leasing portfolio had $784 million of residuals, compared with $816 million at December 31, 2003. No significant change in the concentration of the portfolios has occurred since December 31, 2003.

Operational Risk Management Operational 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


U.S. Bancorp	17

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 employees’ improper actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation.

The Company manages operational risk through a risk management framework and its internal control processes. The framework involves the business lines, corporate risk management personnel and executive management. Under this framework, business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risk. Clear structures and processes with defined responsibilities are in place. Business managers maintain a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, safeguarding of assets from misuse or theft, and ensuring the reliability of financial and other data. Business managers ensure that the controls are appropriate and are implemented as designed.

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

Customer-related business conditions may also increase operational risk or the level of operational losses in certain transaction processing business units, including merchant processing activities. Ongoing risk monitoring of customer activities and their financial condition and operational processes serve to mitigate customer-related operational risk. Refer to Note 13 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 Management In the banking industry, a significant risk exists related to changes in interest rates. 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 Analysis One 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


18	U.S. Bancorp

5.0 percent of forecasted interest rate sensitive income over the succeeding 12 months.

The table below summarizes the interest rate risk of net interest income and rate sensitive income based on forecasts over the succeeding 12 months. At September 30, 2004, the Company’s overall interest rate risk position was substantially neutral 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 September 30, 2004, and December 31, 2003, the Company was within its policy guidelines.

Sensitivity of Net Interest Income and Rate Sensitive Income:



	September 30, 2004												December 31, 2003

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

Net interest income		(.80)	%		.31	%		*	%		(.04)	%		1.30	%		.19%		*	%		(.02	)%
Rate sensitive income		(.69)	%		.13	%		*	%		(.56)	%		.74	%		.01%		*	%		(.54	)%


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

Market Value of Equity Modeling The Company also utilizes the market value of equity as a measurement tool in managing interest rate sensitivity. The market value of equity measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. ALPC guidelines limit the change in market value of equity in a 200 basis point parallel rate shock to 15 percent of the market value of equity assuming interest rates at September 30, 2004. Given the low level of current interest rates, the down 200 basis point scenario cannot be computed. The up 200 basis point scenario resulted in a 1.9 percent decrease in the market value of equity at September 30, 2004, compared with a 3.1 percent decrease at December 31, 2003. ALPC reviews other down rate scenarios to evaluate the impact of falling interest rates. The down 100 basis point scenario resulted in a 1.4 percent decrease at September 30, 2004, and a 1.3 percent increase at December 31, 2003. At September 30, 2004, and December 31, 2003, the Company was within its policy guidelines.

The valuation analysis is dependent upon certain key assumptions about the nature of indeterminate maturity of assets and liabilities. 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 September 30, 2004, were well within policy guidelines. The Company also uses duration of equity as a measure of interest rate risk. The duration of equity is a measure of the net market value sensitivity of the assets, liabilities and derivative positions of the Company. The duration of assets was 1.68 years at September 30, 2004, compared with 1.91 years at December 31, 2003. The duration of liabilities was 2.15 years at September 30, 2004, compared with 2.18 years at December 31, 2003. After giving effect to the Company’s derivative positions, the estimated duration of equity at September 30, 2004 was .99 years, compared with 1.35 years at December 31, 2003. The duration of equity measure shows that sensitivity of the market value of equity of the Company was relatively neutral to changes in interest rates.

Use of Derivatives to Manage Interest Rate and Foreign Currency Risk In 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


U.S. Bancorp	19

of customers. The Company minimizes its market and liquidity risks by taking similar offsetting positions.

All interest rate derivatives that qualify for hedge accounting are recorded at fair value as other assets or liabilities on the balance sheet and are designated as either “fair value” or “cash flow” hedges. The Company performs an assessment, both at inception and quarterly thereafter, when required, to determine whether these derivatives are highly effective in offsetting changes in the value of the hedged items. Hedge ineffectiveness for both cash flow and fair value hedges is immediately 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 $32.3 billion of total notional amount of asset and liability management derivative positions at September 30, 2004, $29.2 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, subordinated obligations and deposit obligations. In addition, the Company uses forward commitments to sell residential mortgage loans to hedge its interest rate risk related to residential mortgage loans held for sale. The Company commits to sell the loans at specified prices in a future period, typically within 90 days. The Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market. 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 September 30, 2004, the Company had $174.6 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 2004 and the next 12 months is $22.5 million and $84.8 million, respectively.

Gains or losses on customer-related derivative positions were not material for the third quarter and first nine months of 2004. The change in fair value of forward commitments attributed to hedge ineffectiveness recorded in noninterest income was a decrease of $4.9 million and $9.5 million for the third quarter and first nine months of 2004, respectively. The change in the fair value of all other asset and liability management derivative positions attributed to hedge ineffectiveness was not material for the third quarter and first nine months of 2004.

Beginning in the second quarter of 2004, the Company entered into derivatives to protect its net investment in certain foreign operations. The Company uses forward commitments to sell specified amounts of certain foreign currencies to hedge its capital volatility risk associated with fluctuations in foreign currency exchange rates. The net amount of gains or losses included in the cumulative translation adjustment for the third quarter and the first nine months of 2004 was not material.


20	U.S. Bancorp

Table 10 summarizes information on the Company’s derivative positions at September 30, 2004.

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

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 September 30, 2004, compared with $40 million at December 31, 2003. The market valuation risk inherent in its customer-based derivative trading, mortgage banking pipeline and foreign exchange, as estimated by the VaR analysis, was $2.7 million at September 30, 2004, compared with $1.5 million at December 31, 2003.

Liquidity Risk Management ALPC establishes policies, as well as analyzes and manages liquidity, to ensure that


Table 10		Derivative Positions


									Weighted-
									Average
									Remaining
				Notional		Fair			Maturity
September 30, 2004 (Dollars in Millions)				Amount		Value			In Years


Asset and Liability Management Positions

	Interest rate contracts
		Receive fixed/pay floating swaps		$	19,520	$	536			5.33
		Pay fixed/receive floating swaps			8,275		10			1.33
		Futures and forwards			2,660		(14	)		.12
		Options
			Written		1,514		(1	)		.15
	Foreign exchange forward contracts				272		1			.08
	Equity contracts				48		1			4.55

Customer-related Positions

	Interest rate contracts
		Receive fixed/pay floating swaps		$	6,364	$	126			4.50
		Pay fixed/receive floating swaps			6,364		(93	)		4.50
		Options
			Purchased		882		9			3.33
			Written		882		(8	)		3.33
	Risk participation agreements (a)
		Purchased			138		—			7.36
		Written			72		—			2.86
	Foreign exchange rate contracts
		Forwards, spots and swaps
			Buy		2,151		59			.42
			Sell		2,110		(57	)		.43
		Options
			Purchased		3		—			.11
			Written		3		—			.11


(a)		At September 30, 2004, the credit equivalent amount was $1 million and $5 million for purchased and written risk participation agreements, respectively.


U.S. Bancorp	21

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 that could arise as a result of 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 FHLBs that provide a source of funding through FHLB advances. The Company maintains a Grand Cayman branch for issuing eurodollar time deposits. The Company also establishes relationships with dealers to issue national market retail and institutional savings certificates and short- and medium-term bank notes. Also, the Company’s subsidiary banks 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.

The Company’s ability to raise negotiated funding at competitive prices is influenced by rating agencies’ views on the Company’s credit quality, liquidity, capital and earnings. On September 27, 2004, Fitch Ratings upgraded the Company’s senior long-term debt ratings to “AA -” and raised the Company’s short-term debt ratings to “F-1+”.

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 September 30, 2004, parent company long-term debt outstanding was $4.5 billion, compared with $5.2 billion at December 31, 2003. The change in long-term debt in the first nine months of 2004 was driven by medium-term note maturities of $.6 billion and fixed-rate subordinated note prepayments of $.1 billion. Total parent company debt scheduled to mature in the remainder of 2004 is $250 million. 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 was approximately $1.7 billion at September 30, 2004.

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

In the ordinary course of business, the Company enters into an array of commitments to extend credit, letters of credit, 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 13 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. 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


22	U.S. Bancorp

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 $6.1 billion at September 30, 2004, and $7.3 billion at December 31, 2003. 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 $6.1 billion at September 30, 2004, and $7.3 billion at December 31, 2003.

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 $35.3 million at September 30, 2004 and $47.3 million at December 31, 2003. In addition, the Company recorded at fair value its retained residual interest in the investment securities conduit of $65.0 million at September 30, 2004, and $89.5 million at December 31, 2003.

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 $405.8 million at September 30, 2004, of which the Company retained $91.9 million of subordinated securities, transferor’s interests of $10.2 million and a residual interest-only strip of $36.9 million. This compared with $497.5 million in assets at December 31, 2003, of which the Company retained $112.4 million of subordinated securities, transferor’s interests of $12.4 million and a residual interest-only strip of $34.4 million. The securitization trust issued asset-backed variable funding notes in various tranches. The Company provides credit enhancement in the form of subordinated securities and reserve accounts. The Company’s risk, primarily from losses in the underlying assets, was considered in determining the fair value of the Company’s retained interests in this securitization. The Company recognized income from subordinated securities, an interest-only strip and servicing fees from this securitization of $9.2 million and $24.1 million during the third quarter and first nine months of 2004, respectively, and $6.6 million and $23.9 million, respectively, during the same periods of 2003. The unsecured small business credit securitization held average assets of $423.1 million and $550.0 million in the third quarter of 2004 and 2003, respectively.

The Company has relationships with certain special purpose entities. Because the Company’s investment securities conduit and the asset-backed securitizations are Qualifying Special Purpose Entities (“QSPEs”), which are exempt from consolidation under the provisions of the Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”), the Company does not believe that FIN 46 requires the consolidation of the conduit or securitizations in its financial statements. With respect to other interests in entities subject to FIN 46, the adoption of FIN 46 did not have a material impact on the Company’s financial statements.

Capital Management The Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. The Company has targeted returning 80 percent of earnings to our shareholders through a combination of dividends and share repurchases. In keeping with this target, the Company returned 94 percent of earnings and 110 percent of earnings during the third quarter and first nine months of 2004, respectively. Total shareholders’ equity was $19.6 billion at September 30, 2004, compared with $19.2 billion at December 31, 2003. The increase was the result of corporate earnings offset by dividends and share repurchases.


Table 11		Capital Ratios



		September 30,			December 31,
(Dollars in Millions)		2004			2003

Tangible common equity		$	11,819		$	11,858
	As a percent of tangible assets		6.4	%		6.5	%
Tier 1 capital		$	14,589		$	14,623
	As a percent of risk-weighted assets		8.7	%		9.1	%
	As a percent of adjusted quarterly average assets (leverage ratio)		7.9	%		8.0	%
Total risk-based capital		$	21,428		$	21,710
	As a percent of risk-weighted assets		12.7	%		13.6	%


U.S. Bancorp	23

Tangible common equity to assets was 6.4 percent at September 30, 2004, compared with 6.5 percent at December 31, 2003. The Tier 1 capital ratio was 8.7 percent at September 30, 2004, compared with 9.1 percent at December 31, 2003. The total risk-based capital ratio was 12.7 percent at September 30, 2004, compared with 13.6 percent at December 31, 2003. The leverage ratio was 7.9 percent at September 30, 2004, compared with 8.0 percent at December 31, 2003. All regulatory ratios continue to be in excess of stated “well capitalized” requirements.

On December 16, 2003, the Board of Directors approved an authorization to repurchase 150 million shares of outstanding common stock over the following 24 months. The following table provides a detailed analysis of all shares repurchased under this authorization during the third quarter of 2004:


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


July		6,335,701	$	28.14		81,055,584
August		7,321,514		28.72		73,734,070
September		5,802,388		29.13		67,931,682

Total		19,459,603	$	28.65		67,931,682


(a)		All shares purchased during the third quarter of 2004 were purchased under the publicly announced December 16, 2003 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 Presentation Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. 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. Certain expenses, including charges for potential litigation and liabilities for certain guarantees, are included in the line of business results upon final resolution. 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. These allocated expenses are reported as net shared services expense. Certain corporate activities that do not directly support the operations of the lines of business are not charged to the lines of business. Goodwill and other intangible assets are assigned to the lines of business based on the mix of business of the acquired entity. The provision for credit losses within the Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management and Payment Services lines of business is based on net charge-offs, while Treasury and Corporate Support reflects the residual component of the Company’s total consolidated provision for credit losses determined in accordance with accounting principles generally accepted in the United States. Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support. Merger and restructuring-related charges, discontinued operations and cumulative effects of changes in accounting principles are not identified by or allocated to lines of business. Within the Company, capital levels are evaluated and managed centrally; however, capital is allocated to the operating segments to support evaluation of business performance. Capital allocations to the business lines are based on the amount of goodwill and other intangibles, the extent of off-balance sheet managed assets and lending commitments and the ratio of on-balance sheet assets relative to the total Company. Certain lines of business, such as Trust and Asset Management, have no significant balance sheet components. For these business units, capital is allocated taking into consideration fiduciary and operational risk, capital levels of


24	U.S. Bancorp

independent organizations operating similar businesses, and regulatory requirements.

Designations, assignments and allocations may change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to our diverse customer base. During 2004, certain organization and methodology changes were made and, accordingly, 2003 results were restated and presented on a comparable basis.

Wholesale Banking offers lending, depository, treasury management and other financial services to middle market, large corporate and public sector clients. Wholesale Banking contributed $278.0 million of the Company’s operating earnings for the third quarter of 2004 and $795.1 million for the first nine months of 2004, increases of $64.8 million (30.4 percent) and $157.8 million (24.8 percent), respectively, compared with the same periods of 2003. The increase in operating earnings in the third quarter of 2004 and the first nine months of 2004, compared with the same periods of 2003, was driven by reductions in the provision for credit losses and total noninterest expense, partially offset by a decline in total net revenue.

Total net revenue decreased $26.4 million (4.3 percent) in the third quarter of 2004 and $83.2 million (4.5 percent) in the first nine months of 2004, compared with the same periods of 2003. Net interest income, on a taxable-equivalent basis, decreased 4.4 percent and 5.5 percent, respectively, compared with the third quarter of 2003 and the first nine months of 2003, as average loans decreased $3.0 billion (6.5 percent) and $2.7 billion (5.9 percent) over the same periods. The decline in average loans was driven, in part, by soft customer loan demand through early 2004, in addition to the Company’s decisions to tighten credit availability to certain types of lending products, industries and customers and reductions due to asset workout activities. The decline in average loans was partially offset by the consolidation of the commercial loan conduit onto the Company’s balance sheet during the third quarter of 2003. While average total deposits decreased 5.9 percent during the third quarter of 2004, compared with the same period of a year ago, due to reductions in government and mortgage-related deposits, the net interest spread on deposits increased due to the funding benefit associated with the impact of rising interest rates over the last several quarters. Although average total deposits increased 1.1 percent during the first nine months of 2004, compared with the same period of a year ago, the net interest spread from deposits declined due to a shift in the mix of deposits from lower cost noninterest-bearing deposits balances (a 16.8 percent decline) into interest-bearing deposit balances. The decrease in noninterest-bearing deposits year-over-year was primarily driven by declines in mortgage-related and government deposits, primarily due to a decision by the Federal government to pay fees for treasury management services rather than maintain compensating balances.

Noninterest income decreased $8.2 million (4.3 percent) and $14.0 million (2.4 percent) in the third quarter of 2004 and the first nine months of 2004, respectively, compared with the same periods of 2003. The decrease in noninterest income in the third quarter of 2004 was primarily due to lower treasury management-related fees and commercial products revenue, partially offset by higher other fee revenue. The decrease in treasury management-related fees was primarily driven by a change in the Federal government’s payment methodology for services from compensating balances, reflected in net interest income, to fees, during the third quarter of 2003. The decrease in commercial products revenue is primarily attributable to lower syndication and other commercial loan fees, and the consolidation of the commercial loan conduit onto the Company’s balance sheet in the third quarter of 2003. The decrease in noninterest income in the first nine months of 2004 was primarily due to declines in commercial products revenue resulting from the consolidation of the commercial loan conduit onto the Company’s balance sheet, as well as lower trust and investment management fees and other fee revenue. These declines were partially offset by growth in treasury management-related fees, commercial leasing, international banking, foreign exchange and syndication fees, compared with the same periods of 2003.

Total noninterest expense was $158.1 million in the third quarter of 2004 and $480.3 million in the first nine months of 2004, compared with $169.4 million in the third quarter of 2003 and $510.8 million in the first nine months of 2003, representing declines of $11.3 million (6.7 percent) and $30.5 million (6.0 percent), respectively. The $11.3 million decrease (6.7 percent) in the third quarter of 2004, compared with the same period of 2003, was primarily due to cost savings initiatives that reduced personnel-related costs, lower software expenses and other expenses. Loan workout expenses declined in the third quarter of 2004, compared with the third quarter of 2003, as the credit quality of the loan portfolio has improved. Net shared services costs decreased in the third quarter of 2004,


U.S. Bancorp	25

Table 12 Line of Business Financial Performance



		Wholesale								Consumer
		Banking								Banking


							Percent								Percent
Three Months Ended September 30 (Dollars in Millions)		2004			2003		Change			2004		2003			Change

Condensed Income Statement
Net interest income (taxable-equivalent basis)		$	399.4		$	417.6		(4.4	)%	$	919.8	$	922.6			(.3	)%
Noninterest income			182.5			191.3		(4.6	)		462.7		392.1			18.0
Securities gains (losses), net			.6			—		*			86.9		(108.7	)		*

	Total net revenue		582.5			608.9		(4.3	)		1,469.4		1,206.0			21.8
Noninterest expense			153.6			164.6		(6.7	)		588.9		594.1			(.9	)
Other intangibles			4.5			4.8		(6.3	)		148.7		(52.0	)		*

	Total noninterest expense		158.1			169.4		(6.7	)		737.6		542.1			36.1

Operating earnings before provision and income taxes			424.4			439.5		(3.4	)		731.8		663.9			10.2
Provision for credit losses			(12.7	)		104.4		*			88.1		105.5			(16.5	)

Operating earnings before income taxes			437.1			335.1		30.4			643.7		558.4			15.3
Income taxes and taxable-equivalent adjustment			159.1			121.9		30.5			234.2		203.2			15.3

Operating earnings		$	278.0		$	213.2		30.4		$	409.5	$	355.2			15.3

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

Average Balance Sheet Data
Commercial		$	26,616		$	28,771		(7.5	)%	$	7,813	$	8,227			(5.0	)%
Commercial real estate			15,789			16,574		(4.7	)		10,668		10,090			5.7
Residential mortgages			77			102		(24.5	)		14,139		11,855			19.3
Retail			55			45		22.2			31,844		29,149			9.2

	Total loans		42,537			45,492		(6.5	)		64,464		59,321			8.7
Goodwill			1,225			1,225		—			2,243		2,243			—
Other intangible assets			85			104		(18.3	)		1,143		853			34.0
Assets			48,815			52,577		(7.2	)		72,243		70,264			2.8
Noninterest-bearing deposits			12,574			14,510		(13.3	)		14,242		14,169			.5
Savings products			8,563			12,709		(32.6	)		41,663		40,873			1.9
Time deposits			8,364			4,131		*			15,840		17,784			(10.9	)

	Total deposits		29,501			31,350		(5.9	)		71,745		72,826			(1.5	)
Shareholders’ equity			5,004			5,009		(.1	)		6,155		5,922			3.9



		Wholesale							Consumer
		Banking							Banking


						Percent								Percent
Nine Months Ended September 30 (Dollars in Millions)		2004		2003		Change			2004			2003		Change

Condensed Income Statement
Net interest income (taxable-equivalent basis)		$	1,194.9	$	1,264.1		(5.5	)%	$	2,679.8		$	2,686.1		(.2	)%
Noninterest income			563.9		579.4		(2.7	)		1,341.4			1,163.7		15.3
Securities gains (losses), net			1.5		—		*			(84.2	)		193.4		*

	Total net revenue		1,760.3		1,843.5		(4.5	)		3,937.0			4,043.2		(2.6	)
Noninterest expense			466.4		496.2		(6.0	)		1,750.5			1,777.5		(1.5	)
Other intangibles			13.9		14.6		(4.8	)		211.0			372.0		(43.3	)

	Total noninterest expense		480.3		510.8		(6.0	)		1,961.5			2,149.5		(8.7	)

Operating earnings before provision and income taxes			1,280.0		1,332.7		(4.0	)		1,975.5			1,893.7		4.3
Provision for credit losses			29.9		330.8		(91.0	)		288.6			322.7		(10.6	)

Operating earnings before income taxes			1,250.1		1,001.9		24.8			1,686.9			1,571.0		7.4
Income taxes and taxable-equivalent adjustment			455.0		364.6		24.8			613.8			571.7		7.4

Operating earnings		$	795.1	$	637.3		24.8		$	1,073.1		$	999.3		7.4

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

Average Balance Sheet Data
Commercial		$	26,485	$	28,543		(7.2	)%	$	7,780		$	8,318		(6.5	)%
Commercial real estate			15,865		16,419		(3.4	)		10,524			9,887		6.4
Residential mortgages			72		125		(42.4	)		13,690			10,750		27.3
Retail			52		51		2.0			30,913			28,953		6.8

	Total loans		42,474		45,138		(5.9	)		62,907			57,908		8.6
Goodwill			1,225		1,227		(.2	)		2,242			2,242		—
Other intangible assets			89		109		(18.3	)		1,063			922		15.3
Assets			48,934		52,296		(6.4	)		70,739			68,235		3.7
Noninterest-bearing deposits			12,831		15,422		(16.8	)		13,980			13,715		1.9
Savings products			10,266		10,346		(.8	)		41,878			39,657		5.6
Time deposits			6,729		3,742		79.8			16,028			19,012		(15.7	)

	Total deposits		29,826		29,510		1.1			71,886			72,384		(.7	)
Shareholders’ equity			5,047		5,034		.3			6,180			5,805		6.5


*		Not meaningful


26	U.S. Bancorp



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


				Percent							Percent									Percent								Percent
2004		2003		Change			2004		2003		Change			2004			2003			Change			2004		2003			Change

$	94.8	$	79.8		18.8	%	$	138.1	$	149.1		(7.4	)%	$	229.6		$	256.4			(10.5	)%	$	1,781.7	$	1,825.5			(2.4	)%
	240.1		241.8		(.7	)		496.0		409.3		21.2			55.4			51.8			6.9			1,436.7		1,286.3			11.7
	—		—		—			—		—		—			(.2	)		(.2	)		—			87.3		(108.9	)		*

	334.9		321.6		4.1			634.1		558.4		13.6			284.8			308.0			(7.5	)		3,305.7		3,002.9			10.1
	143.5		145.8		(1.6	)		214.0		178.9		19.6			208.8			148.9			40.2			1,308.8		1,232.3			6.2
	16.0		16.5		(3.0	)		39.6		39.8		(.5	)		1.4			1.7			(17.6	)		210.2		10.8			*

	159.5		162.3		(1.7	)		253.6		218.7		16.0			210.2			150.6			39.6			1,519.0		1,243.1			22.2

	175.4		159.3		10.1			380.5		339.7		12.0			74.6			157.4			(52.6	)		1,786.7		1,759.8			1.5
	1.2		3.2		(62.5	)		89.6		98.3		(8.9	)		(1.1	)		(1.4	)		(21.4	)		165.1		310.0			(46.7	)

	174.2		156.1		11.6			290.9		241.4		20.5			75.7			158.8			(52.3	)		1,621.6		1,449.8			11.8
	63.4		56.8		11.6			105.9		87.8		20.6			(6.5	)		32.7			*			556.1		502.4			10.7

$	110.8	$	99.3		11.6		$	185.0	$	153.6		20.4		$	82.2		$	126.1			(34.8	)		1,065.5		947.4			12.5

																								—		(6.7	)
																								—		10.2

																							$	1,065.5	$	950.9

$	1,592	$	1,857		(14.3	)%	$	3,085	$	2,909		6.1	%	$	211		$	216			(2.3	)%	$	39,317	$	41,980			(6.3	)%
	610		567		7.6			—		—		—			127			166			(23.5	)		27,194		27,397			(.7	)
	344		265		29.8			—		—		—			9			12			(25.0	)		14,569		12,234			19.1
	2,278		1,960		16.2			7,590		7,169		5.9			59			48			22.9			41,826		38,371			9.0

	4,824		4,649		3.8			10,675		10,078		5.9			406			442			(8.1	)		122,906		119,982			2.4
	845		741		14.0			1,915		1,813		5.6			—			306			*			6,228		6,328			(1.6	)
	362		389		(6.9	)		855		671		27.4			7			12			(41.7	)		2,452		2,029			20.8
	6,580		6,464		1.8			14,081		13,667		3.0			49,866			47,269			5.5			191,585		190,241			.7
	3,127		3,223		(3.0	)		115		178		(35.4	)		(267	)		(173	)		54.3			29,791		31,907			(6.6	)
	7,854		6,390		22.9			12		10		20.0			29			(8	)		*			58,121		59,974			(3.1	)
	568		471		20.6			—		—		—			2,632			3,689			(28.7	)		27,404		26,075			5.1

	11,549		10,084		14.5			127		188		(32.4	)		2,394			3,508			(31.8	)		115,316		117,956			(2.2	)
	2,296		1,995		15.1			3,320		3,007		10.4			2,612			3,427			(23.8	)		19,387		19,360			.1



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


				Percent							Percent									Percent									Percent
2004		2003		Change			2004		2003		Change			2004			2003			Change			2004			2003			Change

$	265.8	$	231.2		15.0	%	$	428.3	$	453.9		(5.6	)%	$	771.3		$	765.5			.8	%	$	5,340.1		$	5,400.8			(1.1	)%
	743.2		710.0		4.7			1,370.8		1,186.6		15.5			149.1			131.8			13.1			4,168.4			3,771.5			10.5
	—		—		—			—		—		—			(1.7	)		51.5			*			(84.4	)		244.9			*

	1,009.0		941.2		7.2			1,799.1		1,640.5		9.7			918.7			948.8			(3.2	)		9,424.1			9,417.2			.1
	433.2		439.0		(1.3	)		584.1		531.7		9.9			583.6			413.3			41.2			3,817.8			3,657.7			4.4
	46.1		49.6		(7.1	)		113.5		117.4		(3.3	)		4.2			4.6			(8.7	)		388.7			558.2			(30.4	)

	479.3		488.6		(1.9	)		697.6		649.1		7.5			587.8			417.9			40.7			4,206.5			4,215.9			(.2	)

	529.7		452.6		17.0			1,101.5		991.4		11.1			330.9			530.9			(37.7	)		5,217.6			5,201.3			.3
	10.9		5.1		*			277.0		311.6		(11.1	)		(1.8	)		(2.2	)		(18.2	)		604.6			968.0			(37.5	)

	518.8		447.5		15.9			824.5		679.8		21.3			332.7			533.1			(37.6	)		4,613.0			4,233.3			9.0
	188.8		162.8		16.0			300.0		247.3		21.3			(55.4	)		121.7			*			1,502.2			1,468.1			2.3

$	330.0	$	284.7		15.9		$	524.5	$	432.5		21.3		$	388.1		$	411.4			(5.7	)		3,110.8			2,765.2			12.5

																								—			(25.4	)
																								—			15.8

																							$	3,110.8		$	2,755.6

$	1,637	$	1,828		(10.4	)%	$	2,985	$	2,852		4.7	%	$	173		$	217			(20.3	)%	$	39,060		$	41,758			(6.5	)%
	606		577		5.0			—		—		—			145			209			(30.6	)		27,140			27,092			.2
	307		243		26.3			—		—		—			10			13			(23.1	)		14,079			11,131			26.5
	2,197		1,951		12.6			7,473		7,059		5.9			52			50			4.0			40,687			38,064			6.9

	4,747		4,599		3.2			10,458		9,911		5.5			380			489			(22.3	)		120,966			118,045			2.5
	809		740		9.3			1,852		1,814		2.1			—			306			*			6,128			6,329			(3.2	)
	354		407		(13.0	)		756		680		11.2			8			13			(38.5	)		2,270			2,131			6.5
	6,491		6,383		1.7			13,523		13,262		2.0			50,876			46,839			8.6			190,563			187,015			1.9
	3,124		2,997		4.2			113		330		(65.8	)		(241	)		(52	)		*			29,807			32,412			(8.0	)
	7,911		5,450		45.2			11		9		22.2			21			3			*			60,087			55,465			8.3
	536		462		16.0			—		—		—			2,960			5,556			(46.7	)		26,253			28,772			(8.8	)

	11,571		8,909		29.9			124		339		(63.4	)		2,740			5,507			(50.2	)		116,147			116,649			(.4	)
	2,220		1,980		12.1			3,152		2,994		5.3			2,739			3,389			(19.2	)		19,338			19,202			.7


U.S. Bancorp	27

compared with the third quarter of 2003, due to lower transaction processing costs. The $30.5 million decrease (6.0 percent) for the first nine months of 2004 was primarily driven by lower personnel-related costs, loan workout expenses, software expenses and net shared services expense.

The provision for credit losses was a net recovery of $12.7 million in the third quarter of 2004 and a net loss of $29.9 million for the first nine months of 2004, compared with net losses of $104.4 million and $330.8 million for the same periods of 2003, representing declines of $117.1 million (112.2 percent) and $300.9 million (91.0 percent) year-over-year. The favorable change in the provision for credit losses for the Wholesale Banking business segment was due to improving net charge-offs, resulting in a net recovery of .12 percent of average loans in the third quarter of 2004, compared with a net charge-off of .91 percent of average loans in the third quarter of 2003. The reduction in net charge-offs was attributable to strong commercial loan recoveries, in addition to improvements in credit quality driven by the initiatives taken by the Company during the past three years, including asset workout activities and reductions in commitments to certain industries and customers. Commercial loan recoveries are expected to return to more normal levels during future periods. Nonperforming assets within Wholesale Banking were $435.1 million at September 30, 2004, compared with $523.8 million at June 30, 2004, and $933.3 million at September 30, 2003. Nonperforming assets as a percentage of end-of-period loans were 1.01 percent, 1.21 percent and 2.10 percent as of September 30, 2004, June 30, 2004, and September 30, 2003, respectively. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.

Consumer Banking delivers products and services to the broad consumer market and small businesses through banking offices, telemarketing, on-line services, direct mail and automated teller machines (“ATMs”). It encompasses community banking, metropolitan banking, branch ATM 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 $409.5 million of the Company’s operating earnings for the third quarter of 2004 and $1,073.1 million for the first nine months of 2004, an increase of $54.3 million (15.3 percent) and $73.8 million (7.4 percent), respectively, compared with the same periods of 2003. Within Consumer Banking, the retail banking business grew operating earnings by 26.2 percent in the third quarter of 2004 and 21.4 percent in the first nine months of 2004, offset somewhat by lower contribution from the mortgage banking business, compared with the same periods of 2003.

Total net revenue increased $263.4 million (21.8 percent) in the third quarter of 2004 and decreased $106.2 million (2.6 percent) in the first nine months of 2004, compared with the same periods of 2003. The increase in the third quarter of 2004 was due to higher net securities gains (losses) and fee-based revenue growth, offset by a reduction in net interest income, while the decrease in the first nine months of 2004 was due to declines in net securities gains (losses) and net interest income, partially offset by growth in fee-based revenues. Net interest income, on a taxable-equivalent basis, decreased $2.8 million (.3 percent) and $6.3 million (.2 percent) in the third quarter of 2004 and the first nine months of 2004, respectively, compared with the same periods of 2003. Fee-based revenue increased $70.6 million (18.0 percent) and net securities gains (losses) increased $195.6 million in the third quarter of 2004, while fee-based revenue increased $177.7 million (15.3 percent) and net securities gains (losses) decreased $277.6 million in the first nine months of 2004, compared with the same periods of 2003.

The decrease in net interest income for the third quarter of 2004 and the first nine months of 2004, compared with the same periods of 2003, was due to the reduction in average mortgage loans held for sale and commercial loans (5.0 percent and 6.5 percent, respectively), attributable to the changing interest rate environment, resulting in lower mortgage refinance activity and lower prepayment fees. Partially offsetting these decreases were changes in the mix of average deposit balances and their related funding benefit due to rising interest rates in addition to improved spreads on commercial loans. The increase in the average loan balances of 8.7 percent for the third quarter of 2004 reflected retail loan growth of 9.2 percent and growth in residential mortgages of 19.3 percent, compared with the third quarter of 2003. Included within the retail loan category are second-lien home equity loans which had a growth rate of 8.5 percent. The category of residential mortgages includes first-lien home equity loans, which had a growth rate of 6.4 percent in the third quarter of 2004, compared with the third quarter of 2003. On a combined basis, first and second-lien home equity products increased $1.4 billion, or 7.9 percent, compared with a year ago. The


28	U.S. Bancorp

year-over-year growth of traditional residential mortgages was 29.5 percent. Commercial real estate loan balances increased 5.7 percent, while commercial loan balances decreased 5.0 percent during the third quarter of 2004, compared with the third quarter of 2003. Average deposits included growth in noninterest-bearing, interest checking and savings account balances, offset by a reduction in balances associated with money market accounts and time deposits in the third quarter of 2004, compared with the third quarter of 2003. The decline in lower margin time deposits primarily reflected a shift in product mix towards savings products.

Fee-based noninterest income was $462.7 million in the third quarter of 2004 and $1,341.4 million in the first nine months of 2004, an increase of $70.6 million (18.0 percent) and $177.7 million (15.3 percent), respectively, compared with the same periods of 2003. This growth was driven by deposit service charges, commercial products revenue, mortgage banking revenue, investment products fees and commissions and other revenue. The third quarter 2004 growth in fee-based revenue was attributable to new deposit account growth, pricing enhancements, increased sales, higher mortgage servicing revenue, lower end-of-term lease losses and a residual value insurance recovery.

Total noninterest expense was $737.6 million in the third quarter of 2004 and $1,961.5 million in the first nine months of 2004, compared with $542.1 million and $2,149.5 million for the same periods of 2003, an increase of $195.5 million (36.1 percent) in the third quarter of 2004 and a decrease of $188.0 million (8.7 percent) in the first nine months of 2004, respectively. The increase in noninterest expense was primarily attributable to a decrease in MSR values during the third quarter of 2004 resulting in a MSR impairment of $86.7 million, compared with a MSR reparation of $108.5 million in 2003. In addition to the net increase in MSR impairments of $195.2 million, compensation and occupancy costs increased related to new in-store branch expansion along with higher amortization costs from growth in the mortgage servicing portfolio, partially offset by reductions in net shared services and loan origination costs. Noninterest expense included MSR impairment of $24.9 million in the first nine months of 2004 compared with $208.7 million in the first nine months of 2003. The change in MSR valuations was driven by rising interest rates and slower prepayment speeds in the second quarter of 2004, compared with the declining interest rates and refinancing activities in the first nine months of 2003 and the first quarter and third quarter of 2004.

The provision for credit losses decreased $17.4 million (16.5 percent) and $34.1 million (10.6 percent) in the third quarter of 2004 and the first nine months of 2004, respectively, compared with the same periods of 2003. The improvement in the provision for credit losses in the third quarter of 2004 and the first nine months of 2004, compared with the same periods of 2003, was primarily attributable to lower retail loan and commercial loan net charge-offs. As a percentage of average loans, net charge-offs declined to .54 percent in the third quarter of 2004, compared with .71 percent in the third quarter of 2003. Retail loan net charge-offs continued to decline, primarily a result of ongoing collection efforts and risk management. Nonperforming assets within Consumer Banking were $362.3 million at September 30, 2004, compared with $377.6 million at June 30, 2004, and $374.2 million at September 30, 2003. The decrease in nonperforming assets in the third quarter of 2004 was a result of declines in nonperforming loans associated with small business and community banking-based borrowers. Nonperforming assets as a percentage of end-of-period loans were .59 percent, .63 percent and .66 percent as of September 30, 2004, June 30, 2004, and September 30, 2003, respectively. 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 Management provides trust, private banking, financial advisory, investment management and mutual fund and alternative investment product services 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 $110.8 million of the Company’s operating earnings for the third quarter of 2004 and $330.0 million for the first nine months of 2004, increases of 11.6 percent and 15.9 percent, respectively, compared with the same periods of 2003. The period-over-period increases for the third quarter of 2004 and first nine months of 2004 were attributable to growth in total net revenue (4.1 percent and 7.2 percent, respectively) and a reduction in noninterest expense (1.7 percent and 1.9 percent, respectively), partially offset by an increase in the provision for credit losses for the first nine months of 2004.

Total net revenue was $334.9 million in the third quarter of 2004 and $1,009.0 million in the first nine months of 2004, increases of 4.1 percent and 7.2 percent, respectively, compared with the same periods of 2003. Net interest income, on a taxable-equivalent basis, increased $15.0 million (18.8 percent) in the third quarter of 2004 and $34.6 million


U.S. Bancorp	29

(15.0 percent) in the first nine months of 2004, compared with the same periods of 2003. The increase in net interest income in the third quarter of 2004 was due to growth in total deposits of 14.5 percent, attributable to growth in savings products and time deposits, in addition to the favorable impact of rising interest rates on the funding benefit of deposits. Noninterest income decreased $1.7 million (.7 percent) in the third quarter of 2004 and increased $33.2 million (4.7 percent) in the first nine months of 2004, compared with the same periods of 2003. The year-over-year increase in noninterest income for the first nine months of 2004 was primarily attributable to improvement in equity capital market conditions and related fees.

Total noninterest expense decreased $2.8 million (1.7 percent) in the third quarter of 2004 and $9.3 million (1.9 percent) in the first nine months of 2004, compared with the same periods of 2003, primarily due to reductions in intangible amortization and net shared services expense.

The provision for credit losses decreased $2.0 million in the third quarter of 2004 and increased $5.8 million in the first nine months of 2004, compared with the same periods of 2003. The $5.8 million increase year-over-year in the provision for credit losses was due to abnormally higher commercial and retail loan net charge-offs during the second quarter of 2004. Net charge-offs as a percentage of average loans were .10 percent in the third quarter of 2004, compared with .27 percent in the third quarter of 2003.

Payment Services includes consumer and business credit cards, debit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. Payment Services contributed $185.0 million of the Company’s operating earnings for the third quarter of 2004 and $524.5 million for the first nine months of 2004, a 20.4 percent and 21.3 percent increase, respectively, over the same periods of 2003. The increases were due to growth in total net revenue and reductions in provision for credit losses, partially offset by increases in total noninterest expense.

In the second quarter of 2004, the Company entered into a definitive agreement to purchase the remaining 50 percent ownership interest of EuroConex Technologies Ltd (“EuroConex”) from the Bank of Ireland. In addition, the Company completed two separate transactions to acquire merchant processing businesses in Poland and the United Kingdom. In connection with these transactions, EuroConex and its affiliates will provide debit and credit card processing services to merchants, directly and through alliances with banking partners in these European markets. The buyout from the Bank of Ireland closed on June 29, 2004.

Total net revenue was $634.1 million in the third quarter of 2004 and $1,799.1 million in the first nine months of 2004, increases of $75.7 million (13.6 percent) and $158.6 million (9.7 percent), respectively, compared with the same periods of 2003. Net interest income decreased $11.0 million (7.4 percent) and $25.6 million (5.6 percent) in the third quarter and the first nine months of 2004, respectively, compared with the same periods of 2003, primarily due to reductions in customer fees, higher corporate card rebates and lower revolve rates. These declines were partially offset by total average loan growth of 5.9 percent and 5.5 percent for the third quarter of 2004 and the first nine months of 2004, respectively, compared with the same periods of a year ago. Noninterest income increased $86.7 million (21.2 percent) in the third quarter of 2004 and $184.2 million (15.5 percent) in the first nine months of 2004, compared with the same periods of 2003. The increase in fee-based revenue in the third quarter of 2004 was driven by strong growth in credit card and debit card revenue (19.4 percent), corporate payment products revenue (13.4 percent), ATM processing services revenue (13.5 percent) and merchant processing revenue (28.2 percent). The growth in credit card and debit card revenue was muted somewhat by the impact of the debit card antitrust settlement by VISA USA and MasterCard, which lowered interchange rates on signature debit transactions commencing in the third quarter of 2003. Credit card and debit card revenue increased $26.5 million due to strong growth in sales volumes. Corporate payment products revenue increased $12.8 million due to increases in sales volumes and pricing enhancements. ATM processing services revenue increased $3.6 million due to transaction growth and new sales. Merchant processing revenue increased $41.2 million due to an increase in sales and transaction processing volumes and the expansion of the merchant acquiring business in Europe which accounted for approximately $26.0 million of the revenue growth.

Total noninterest expense was $253.6 million in the third quarter of 2004 and $697.6 million in the first nine months of 2004, increases of $34.9 million (16.0 percent) and $48.5 million (7.5 percent), respectively, compared with the same periods of 2003. The noninterest expense increase was primarily attributable to higher compensation and employee benefit costs for processing associated with increased corporate payment products and merchant processing sales volumes, in addition to higher merchant acquiring


30	U.S. Bancorp

costs resulting from the expansion of the merchant acquiring business in Europe, which accounted for approximately $23.1 million and $32.6 million of the increase in the third quarter of 2004 and the first nine months of 2004, respectively.

The provision for credit losses was $89.6 million in the third quarter of 2004 and $277.0 million in the first nine months of 2004, decreases of $8.7 million (8.9 percent) and $34.6 million (11.1 percent), respectively, compared with the same periods of 2003, due to lower net charge-offs. Net charge-offs were 3.34 percent of average loans in the third quarter of 2004, compared with 3.87 percent in the third quarter of 2003. The favorable change in credit losses was due to improvements in ongoing collection efforts and risk management, as well as an improvement in economic conditions from a year ago.

Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management and asset securitization activities, interest rate risk management, the net effect of transfer pricing related to average balances and the residual aggregate of expenses associated with business activities managed on a corporate basis, including enterprise-wide operations and administrative support functions. Operational expenses incurred by Treasury and Corporate Support on behalf of the other business lines are allocated back primarily based on customer transaction volume and account activities to the appropriate business unit and are identified as net shared services expense. Treasury and Corporate Support recorded operating earnings of $82.2 million for the third quarter of 2004 and $388.1 million for the first nine months of 2004, a decrease of $43.9 million (34.8 percent) and $23.3 million (5.7 percent), respectively, compared with the same periods of 2003.

Total net revenue was $284.8 million and $918.7 million in the third quarter and first nine months of 2004, respectively, compared with total net revenue of $308.0 million and $948.8 million for the same periods of 2003. The decline of $23.2 million (7.5 percent) in total net revenue in the third quarter of 2004 was attributable to reductions in net interest income of $26.8 million (10.5 percent), partially offset by increases in noninterest income of $3.6 million (6.9 percent). The decrease in net interest income was primarily attributable to the Company’s asset/liability management decisions to invest in lower-yield floating-rate securities, higher-cost fixed funding and repositioning of the balance sheet for changes in the interest rate environment. Investment securities increased $4.9 billion in the third quarter of 2004 compared with the third quarter of 2003, partially reflecting the reinvestment of proceeds from declines in commercial loan balances and loans held for sale. The decline of $30.1 million (3.2 percent) in total net revenue in the first nine months of 2004 was attributable to decreases in net securities gains (losses) of $53.2 million, partially offset by increases in net interest income of $5.8 million (.8 percent) and noninterest income of $17.3 million (13.1 percent). The increase in net interest income was primarily attributable to an increase in the investment portfolio of $7.3 billion, partially offset by a reduction in fees charged to business units for customer-related loan prepayments, the net effect of transfer pricing related to changes in the average balance sheet and interest rates and changes in funding mix.

Noninterest expense was $210.2 million in the third quarter of 2004 and $587.8 million in the first nine months of 2004, compared with $150.6 million and $417.9 million for the same periods of 2003, respectively. The $59.6 million (39.6 percent) increase in the third quarter of 2004 and the $169.9 million (40.7 percent) increase in the first nine months of 2004, compared with the same periods of 2003, reflected higher costs associated with incentives, stock-based compensation, pension benefits, corporate insurance, software expense and the unfavorable variance in net shared services. In addition, the first nine months of 2004 included $38.6 million of charges associated with the prepayment of the Company’s long-term debt and a charge associated with future-delivery charge-back exposure within the Company’s airline merchant processing portfolio.

The provision for credit losses for this business unit represents the residual aggregate of the net credit losses allocated to the reportable business units and the Company’s recorded provision determined in accordance with accounting principles generally accepted in the United States. The provision for credit losses was a net recovery of $1.1 million in the third quarter of 2004 and $1.8 million in the first nine months of 2004, compared with a net recovery of $1.4 million and $2.2 million for the same periods of 2003, respectively. 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


U.S. Bancorp	31

quarter of 2004 reflected a $90.0 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.

ACCOUNTING CHANGES

Note 2 of the Notes to Consolidated Financial Statements discusses new accounting policies adopted by the Company during 2004 and the expected impact of accounting policies recently issued but not yet required to be adopted. 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 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.

Significant accounting policies are discussed in detail in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Those policies considered to be critical accounting policies are described below.

Allowance for Credit Losses The allowance for credit losses is established to provide for probable losses inherent in the Company’s credit portfolio. The methods utilized to estimate the allowance for credit losses, key assumptions and quantitative and qualitative information considered by management in determining the adequacy of the allowance for credit losses are discussed in the “Credit Risk Management” section.

Management’s evaluation of the adequacy of the allowance for credit losses is often the most critical of accounting estimates for a banking institution. It is a highly subjective process impacted by many factors as discussed throughout the Management’s Discussion and Analysis section of the Annual Report. Although risk management practices, methodologies and other tools are utilized to determine each element of the allowance, degrees of imprecision exist in these measurement tools due in part to subjective judgments involved and an inherent lagging of credit quality measurements relative to the stage of the business cycle. Even determining the stage of the business cycle is highly subjective. As discussed in the “Analysis and Determination of the Allowance for Credit Losses” section, management considers the effect of imprecision and many other factors in determining the allowance for credit losses by establishing an “allowance for other factors” that is not specifically allocated to a category of loans. If not considered, inherent losses in the portfolio related to imprecision and other subjective factors could have a dramatic adverse impact on the liquidity and financial viability of a bank.

Given the many subjective factors affecting the credit portfolio, changes in the allowance for other factors may not directly coincide with changes in the risk ratings of the credit portfolio reflected in the risk rating process. This is in part due to the timing of the risk rating process in relation to changes in the business cycle, the exposure and mix of loans within risk rating categories, levels of nonperforming loans and the timing of charge-offs and recoveries. For example, the amount of loans within specific risk ratings may change, providing a leading indicator of improving credit quality, while nonperforming loans and net charge-offs continue at elevated levels. Because the allowance specifically allocated to commercial loans is primarily driven by risk ratings and loss ratios determined through migration analysis and historical performance, the amount of the allowance for commercial and commercial real estate loans might decline. However, it


32	U.S. Bancorp

is likely that management would maintain an adequate allowance for credit losses by increasing the allowance for other factors at a stage in the business cycle that is uncertain and when nonperforming asset levels remain elevated.

Sensitivity analysis to the many factors impacting the allowance for credit losses is difficult. Some factors are quantifiable while other factors require qualitative judgment. Management conducts analysis with respect to the accuracy of risk ratings and the volatility of inherent losses, and utilizes this analysis along with qualitative factors including uncertainty in the economy from changes in unemployment rates, the level of bankruptcies, concentration risks, including risks associated with the transportation sector and highly leveraged enterprise-value credits, in determining the overall level of the allowance for credit losses. Refer to the “Analysis and Determination of the Allowance for Credit Losses” section for further information.

Asset Impairment In the ordinary course of business, the Company evaluates the carrying value of its assets for potential impairment. Generally, potential impairment is determined based on a comparison of fair value to the carrying value. The determination of fair value can be highly subjective, especially for assets that are not actively traded or when market-based prices are not available. The Company estimates fair value based on the present value of estimated future cash flows. The initial valuation and subsequent impairment tests may require the use of significant management estimates. Additionally, determining the amount, if any, of an impairment may require an assessment of whether or not a decline in an asset’s estimated fair value below the recorded value is temporary in nature. While impairment assessments impact most asset categories, the following areas are considered to be critical accounting matters in relation to the financial statements.

Mortgage Servicing Rights MSRs are capitalized as separate assets when loans are sold and servicing is retained. The total cost of loans sold is allocated between the loans sold and the servicing assets retained based on their relative fair values. MSRs that are purchased from others are initially recorded at cost. The carrying value of the MSRs is amortized in proportion to and over the period of estimated net servicing revenue and recorded in noninterest expense as amortization of intangible assets. The carrying value of these assets is periodically reviewed for impairment using a lower of carrying value or fair value methodology. For purposes of measuring impairment, the servicing rights are stratified based on the underlying loan type and note rate and the carrying value for each stratum is compared to fair value based on a discounted cash flow analysis, utilizing current prepayment speeds and discount rates. Events that may significantly affect the estimates used are changes in interest rates and the related impact on mortgage loan prepayment speeds and the payment performance of the underlying loans. If the carrying value is greater than fair value, impairment is recognized through a valuation allowance for each impaired stratum and recorded as amortization of intangible assets. The reduction in the fair value of MSRs at September 30, 2004, to immediate 25 and 50 basis point adverse changes in interest rates would be approximately $115 million and $239 million, respectively. An upward movement in interest rates at September 30, 2004, of 25 and 50 basis points would increase the value of the MSRs by approximately $99 million and $172 million, respectively. Refer to Note 6 of the Notes to Consolidated Financial Statements for additional information regarding MSRs.

Goodwill and Other Intangibles The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by Statement of Financial Accounting Standards No. 141, “Goodwill and Other Intangible Assets.” Goodwill and indefinite-lived assets are no longer amortized but are subject, at a minimum, to annual tests for impairment. Under certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting segment below its carrying amount. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.

The initial recognition of goodwill and other intangible assets and subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired assets will perform in the future using valuation methods including discounted cash flow analysis. Additionally, estimated cash flows may extend beyond ten years and, by their nature, are difficult to determine over an extended timeframe. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. In determining the reasonableness of cash flow estimates, the Company reviews historical


U.S. Bancorp	33

performance of the underlying assets or similar assets in an effort to assess and validate assumptions utilized in its estimates.

In assessing the fair value of reporting units, the Company may consider the stage of the current business cycle and potential changes in market conditions in estimating the timing and extent of future cash flows. Also, management often utilizes other information to validate the reasonableness of its valuations including public market comparables, and multiples of recent mergers and acquisitions of similar businesses. Valuation multiples may be based on revenue, price-to-earnings and tangible capital ratios of comparable public companies and business segments. These multiples may be adjusted to consider competitive differences including size, operating leverage and other factors. The carrying amount of a reporting unit is determined based on the capital required to support the reporting unit’s activities including its tangible and intangible assets. The determination of a reporting unit’s capital allocation requires management judgment and considers many factors including the regulatory capital regulations and capital characteristics of comparable public companies in relevant industry sectors. In certain circumstances, management will engage a third-party to independently validate its assessment of the fair value of its business segments.

The Company’s annual assessment of potential goodwill impairment was completed during the second quarter of 2004. Based on the results of this assessment, no goodwill impairment was recognized.

CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

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.


34	U.S. Bancorp

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U.S. Bancorp	35

U.S. Bancorp

Consolidated Balance Sheet


				September 30,			December 31,
(Dollars in Millions)				2004			2003


				(Unaudited)
Assets
Cash and due from banks				$	6,969		$	8,630
Investment securities
	Held-to-maturity (fair value $126 and $161, respectively)				120			152
	Available-for-sale				39,534			43,182
Loans held for sale					1,372			1,433
Loans
	Commercial				40,151			38,526
	Commercial real estate				27,414			27,242
	Residential mortgages				14,741			13,457
	Retail				42,520			39,010

		Total loans			124,826			118,235
			Less allowance for loan losses		(2,184	)		(2,184	)

			Net loans		122,642			116,051
Premises and equipment					1,894			1,957
Customers’ liability on acceptances					146			121
Goodwill					6,226			6,025
Other intangible assets					2,419			2,124
Other assets					11,522			9,796

		Total assets		$	192,844		$	189,471

Liabilities and Shareholders’ Equity
Deposits
	Noninterest-bearing			$	31,585		$	32,470
	Interest-bearing				70,011			74,749
	Time deposits greater than $100,000				13,971			11,833

		Total deposits			115,567			119,052
Short-term borrowings					12,648			10,850
Long-term debt					35,328			31,215
Junior subordinated debentures					2,676			2,601
Acceptances outstanding					146			121
Other liabilities					6,879			6,390

		Total liabilities			173,244			170,229
Shareholders’ equity
	Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares issued: 09/30/04 and 12/31/03 — 1,972,643,007 shares				20			20
	Capital surplus				5,868			5,851
	Retained earnings				16,260			14,508
	Less cost of common stock in treasury: 09/30/04 — 101,801,460 shares; 12/31/03 — 49,722,856 shares				(2,710	)		(1,205	)
	Other comprehensive income				162			68

		Total shareholders’ equity			19,600			19,242

		Total liabilities and shareholders’ equity		$	192,844		$	189,471

See Notes to Consolidated Financial Statements.


36	U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Income



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

(Dollars and Shares in Millions, Except Per Share Data)
(Unaudited)			2004		2003			2004			2003

Interest Income
Loans			$	1,802.8	$	1,818.3		$	5,289.8		$	5,476.0
Loans held for sale				21.1		59.5			68.3			170.9
Investment securities
	Taxable			448.8		403.6			1,351.5			1,222.1
	Non-taxable			4.4		6.7			14.4			23.1
Other interest income				25.7		23.2			73.1			78.2

		Total interest income		2,302.8		2,311.3			6,797.1			6,970.3
Interest Expense
Deposits				221.4		256.4			653.7			851.5
Short-term borrowings				74.5		44.9			183.3			123.3
Long-term debt				205.3		167.9			566.0			536.2
Junior subordinated debentures				27.0		23.6			75.3			79.5

		Total interest expense		528.2		492.8			1,478.3			1,590.5

Net interest income				1,774.6		1,818.5			5,318.8			5,379.8
Provision for credit losses				165.1		310.0			604.6			968.0

Net interest income after provision for credit losses				1,609.5		1,508.5			4,714.2			4,411.8
Noninterest Income
Credit and debit card revenue				164.3		137.6			464.9			407.3
Corporate payment products revenue				108.5		95.7			306.0			272.6
ATM processing services				45.2		41.3			132.3			125.6
Merchant processing services				187.5		146.3			493.7			415.4
Trust and investment management fees				240.2		239.8			740.5			707.3
Deposit service charges				207.4		187.0			594.7			529.2
Treasury management fees				117.9		126.2			356.9			350.0
Commercial products revenue				106.7		97.8			324.5			302.0
Mortgage banking revenue				97.2		89.5			301.3			275.2
Investment products fees and commissions				37.1		35.5			118.6			108.7
Securities gains (losses), net				87.3		(108.9	)		(84.4	)		244.9
Other				124.7		89.6			335.0			278.2

		Total noninterest income		1,524.0		1,177.4			4,084.0			4,016.4
Noninterest Expense
Compensation				564.6		543.8			1,673.0			1,637.4
Employee benefits				100.0		75.8			291.4			247.1
Net occupancy and equipment				159.2		161.3			468.3			482.1
Professional services				37.2		39.9			104.3			99.2
Marketing and business development				60.6		48.6			144.6			129.5
Technology and communications				109.8		102.1			313.9			311.1
Postage, printing and supplies				61.4		61.6			183.5			183.8
Other intangibles				210.2		10.8			388.7			558.2
Merger and restructuring-related charges				—		10.2			—			38.6
Other				216.0		199.2			638.8			567.5

		Total noninterest expense		1,519.0		1,253.3			4,206.5			4,254.5

Income from continuing operations before income taxes				1,614.5		1,432.6			4,591.7			4,173.7
Applicable income taxes				549.0		491.9			1,480.9			1,433.9

Income from continuing operations				1,065.5		940.7			3,110.8			2,739.8
Income from discontinued operations (after-tax)				—		10.2			—			15.8

Net income			$	1,065.5	$	950.9		$	3,110.8		$	2,755.6

Earnings Per Share
	Income from continuing operations		$	.57	$	.49		$	1.64		$	1.43
	Discontinued operations			—		—			—			—

	Net income		$	.57	$	.49		$	1.64		$	1.43

Diluted Earnings Per Share
	Income from continuing operations		$	.56	$	.48		$	1.62		$	1.42
	Discontinued operations			—		.01			—			.01

	Net income		$	.56	$	.49		$	1.62		$	1.43

Dividends declared per share			$	.240	$	.205		$	.720		$	.615

Average common shares outstanding				1,877.0		1,926.0			1,894.6			1,922.4
Average diluted common shares outstanding				1,903.7		1,939.8			1,919.4			1,932.4

See Notes to Consolidated Financial Statements.


U.S. Bancorp	37

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, 2002			1,916,956,560			$20	$	5,799		$	13,105		$	(1,272	)		$784		$	18,436
Net income											2,756									2,756
Unrealized loss on securities available for sale																	(521	)		(521	)
Unrealized loss on derivatives																	(273	)		(273	)
Foreign currency translation adjustment																	17			17
Realized gain on derivatives																	199			199
Reclassification adjustment for gains realized in net income																	(279	)		(279	)
Income taxes																	325			325

	Total comprehensive income																			2,224
Cash dividends declared on common stock											(1,184	)								(1,184	)
Issuance of common and treasury stock			11,195,691					(52	)					258						206
Stock option and restricted stock grants								114												114
Shares reserved to meet deferred compensation obligations			(755,215	)				(8	)					(17	)					(25	)

Balance September 30, 2003			1,927,397,036			$20	$	5,853		$	14,677		$	(1,031	)		$252		$	19,771

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

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

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

See Notes to Consolidated Financial Statements.


38	U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Cash Flows



		Nine Months Ended
		September 30,

(Dollars in Millions)
(Unaudited)		2004			2003


Operating Activities
	Net cash provided by (used in) operating activities	$	4,257.3		$	4,534.9
Investing Activities
Proceeds from sales of available-for-sale investment securities			5,559.2			17,097.6
Proceeds from maturities of investment securities			9,322.8			15,873.1
Purchases of investment securities			(12,497.2	)		(40,018.8	)
Net (increase) decrease in loans outstanding			(6,545.3	)		(5,674.4	)
Proceeds from sales of loans			1,284.4			1,715.5
Purchases of loans			(1,800.4	)		(554.5	)
Proceeds from sales of premises and equipment			43.1			33.2
Purchases of premises and equipment			(129.3	)		(603.8	)
Acquisitions, net of cash acquired			(301.6	)		—
Other, net			(331.2	)		(192.9	)

	Net cash provided by (used in) investing activities		(5,395.5	)		(12,325.0	)
Financing Activities
Net increase (decrease) in deposits			(3,485.2	)		(490.9	)
Net increase (decrease) in short-term borrowings			1,798.0			5,057.3
Principal payments on long-term debt			(7,458.3	)		(5,362.0	)
Proceeds from issuance of long-term debt			11,674.4			8,449.5
Redemption of Company-obligated mandatorily redeemable preferred securities			—			(350.0	)
Proceeds from issuance of common stock			443.6			179.0
Repurchase of common stock			(2,115.0	)		—
Cash dividends paid			(1,371.2	)		(1,161.7	)

	Net cash provided by (used in) financing activities		(513.7	)		6,321.2
	Change in cash and cash equivalents		(1,651.9	)		(1,468.9	)
Cash and cash equivalents at beginning of period			8,782.2			11,192.1

	Cash and cash equivalents at end of period	$	7,130.3		$	9,723.2

See Notes to Consolidated Financial Statements.


U.S. Bancorp	39

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, 2003. 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 Commitments On March 9, 2004, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No. 105 (“SAB 105”), “Application of Accounting Principles to Loan Commitments,” which provides guidance regarding loan commitments accounted for as derivative instruments and is effective for commitments entered into after March 31, 2004. The guidance clarifies that expected future cash flows related to the servicing of the loan may be recognized only when the servicing asset has been contractually separated from the underlying loan by sale with servicing retained. The adoption of SAB 105 did not have a material impact on the Company’s financial statements.


Note 3		Discontinued Operations

On December 31, 2003, the Company completed the distribution of all of the outstanding shares of common stock of Piper Jaffray Companies to its shareholders. This non-cash distribution was tax-free to the Company, its shareholders and Piper Jaffray Companies. In connection with the December 31, 2003, distribution, the results of Piper Jaffray Companies for 2003 are reported in the Company’s Consolidated Statement of Income separately as discontinued operations.

The following table represents the condensed results of operations for discontinued operations for the third quarter and first nine months of 2003:



		Three Months Ended		Nine Months Ended
(Dollars in Millions)		September 30, 2003		September 30, 2003


Revenue		$	210.6		$584.9
Noninterest expense			188.2		552.2

Income from discontinued operations			22.4		32.7
Costs of disposal			5.3		7.4
Income taxes			6.9		9.5

	Discontinued operations, net of tax	$	10.2		$ 15.8

Following the distribution, the Company’s wholly-owned subsidiary, USB Holdings, Inc. holds a $180 million subordinated debt facility with Piper Jaffray & Co., a broker-dealer subsidiary of Piper Jaffray Companies. In addition, the Company provides an indemnification in an amount up to $17.5 million with respect to certain specified liabilities primarily resulting from third-party claims relating to research analyst independence and from certain regulatory investigations, as defined in the separation and distribution agreement entered into with Piper


40	U.S. Bancorp

Jaffray Companies at the time of the distribution. Through September 30, 2004, the Company has paid approximately $2.8 million to Piper Jaffray Companies under this indemnification agreement.


Note 4		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:



			September 30, 2004									December 31, 2003



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


Held-to-maturity (a)
	Mortgage-backed securities		$	12	$	—	$	—		$	12	$	14	$	—	$	—		$	14
	Obligations of state and political subdivisions			108		9		(3	)		114		138		11		(2	)		147

		Total held-to-maturity securities	$	120	$	9	$	(3	)	$	126	$	152	$	11	$	(2	)	$	161

Available-for-sale (b)
	U.S. Treasury and agencies		$	1,603	$	7	$	(44	)	$	1,566	$	1,634	$	10	$	(69	)	$	1,575
	Mortgage-backed securities			36,756		145		(205	)		36,696		40,229		203		(407	)		40,025
	Asset-backed securities			84		1		—			85		250		5		(3	)		252
	Obligations of state and political subdivisions			248		8		—			256		335		13		—			348
	Other securities and investments			935		9		(13	)		931		993		9		(20	)		982

		Total available-for-sale securities	$	39,626	$	170	$	(262	)	$	39,534	$	43,441	$	240	$	(499	)	$	43,182


(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 $6.8 billion with unrealized losses of $173.0 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 $14.0 billion and have been in an unrealized loss position for less than 12 months and represent both fixed-rate securities and floating-rate securities containing caps 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 5.32 years at September 30, 2004, compared with 5.12 years at December 31, 2003. The corresponding weighted average yields were 4.29% and 4.27%, respectively. The weighted average maturity of the held-to-maturity investment securities was 7.00 years at September 30, 2004, compared with 6.16 years at December 31, 2003.

Securities carried at $27.8 billion at September 30, 2004, and $31.0 billion at December 31, 2003, 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 and securities purchased under agreements to resell with an amortized cost of $4.0 billion and $3.6 billion at September 30, 2004 and December 31, 2003, respectively.

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						Nine Months Ended
		September 30,						September 30,



(Dollars in Millions)		2004			2003			2004			2003


Realized gains		$	87.8		$	.4		$	89.1		$	362.7
Realized losses			(.5	)		(109.3	)		(173.5	)		(117.8	)

	Net realized gains (losses)	$	87.3		$	(108.9	)	$	(84.4	)	$	244.9

Income tax (benefit) on realized gains (losses)		$	33.2		$	(41.4	)	$	(32.1	)	$	93.1


U.S. Bancorp	41

For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale securities outstanding at September 30, 2004, refer to Table 5 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.


Note 5		Loans

The composition of the loan portfolio was as follows:



				September 30, 2004					December 31, 2003


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


Commercial
	Commercial			$	35,286		28.3	%	$	33,536		28.4	%
	Lease financing				4,865		3.9			4,990		4.2

		Total commercial			40,151		32.2			38,526		32.6
Commercial real estate
	Commercial mortgages				20,232		16.2			20,624		17.4
	Construction and development				7,182		5.7			6,618		5.6

		Total commercial real estate			27,414		21.9			27,242		23.0
Residential mortgages
	Residential mortgages				8,955		7.2			7,332		6.2
	Home equity loans, first liens				5,786		4.6			6,125		5.2

		Total residential mortgages			14,741		11.8			13,457		11.4
Retail
	Credit card				6,216		5.0			5,933		5.0
	Retail leasing				7,004		5.6			6,029		5.1
	Home equity and second mortgages				14,548		11.7			13,210		11.2
	Other retail
		Revolving credit			2,555		2.1			2,540		2.1
		Installment			2,790		2.2			2,380		2.0
		Automobile			7,481		6.0			7,165		6.1
		Student			1,926		1.5			1,753		1.5

			Total other retail		14,752		11.8			13,838		11.7

		Total retail			42,520		34.1			39,010		33.0

			Total loans	$	124,826		100.0	%	$	118,235		100.0	%

Loans are presented net of unearned interest and deferred fees and costs, which amounted to $1.4 billion and $1.5 billion at September 30, 2004, and December 31, 2003, respectively.

During the first quarter of 2004, the Company reclassified the portion of its allowance for credit losses related to commercial off-balance sheet loan commitments and letters of credit to a separate liability account.


Note 6		Mortgage Servicing Rights

The Company’s portfolio of residential mortgages serviced for others was $63.2 billion and $53.9 billion at September 30, 2004, and December 31, 2003, respectively.

The net carrying value of capitalized mortgage servicing rights was as follows:



		September 30,			December 31,
(Dollars in Millions)		2004			2003


Initial carrying value, net of amortization		$	1,021		$	830
Impairment valuation allowance			(156	)		(160	)

	Net carrying value	$	865		$	670


42	U.S. Bancorp

Changes in capitalized mortgage servicing rights are summarized as follows:


		Nine Months Ended			Year Ended
(Dollars in Millions)		September 30, 2004			December 31, 2003


Balance at beginning of period			$670		$	642
	Rights purchased		143			55
	Rights capitalized		217			338
	Amortization		(140	)		(156	)
	Rights sold		—			—
	Impairment (a)		(25	)		(209	)

Balance at end of period			$865		$	670


(a)		Mortgage servicing rights impairment of $86.7 million and reparation of $108.5 million were recognized during the third quarter of 2004 and 2003, respectively.

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



	September 30,		December 31,
(Dollars in Millions)	2004		2003


Fair value		$869		$670
Expected weighted-average life (in years)		5.7		5.2
Discount rate		9.5%		9.9%

The estimated sensitivity of the fair value of the mortgage servicing rights portfolio to changes in interest rates at September 30, 2004, was as follows:



	Down Scenario						Up Scenario


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


Fair value	$	(239	)	$	(115	)		$99	$	172

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.

A summary of the Company’s mortgage servicing rights and related characteristics by portfolio as of September 30, 2004, was as follows:


(Dollars in Millions)	MRBP			Government			Conventional			Total


Servicing portfolio	$	7,503		$	8,805		$	46,900		$	63,208
Fair market value	$	115		$	135		$	619		$	869
Value (bps)		153			153			132			137
Weighted-average servicing fees (bps)		43			46			33			36
Multiple (value/servicing fees)		3.56			3.33			4.00			3.81
Weighted-average note rate		6.30	%		6.06	%		5.71	%		5.83	%
Age (in years)		3.6			2.3			1.4			1.8
Expected life (in years)		6.0			5.4			5.7			5.7
Discount rate		10.0	%		10.9	%		9.1	%		9.5	%


U.S. Bancorp	43


Note 7		Intangible Assets

The following table reflects the changes in the carrying value of goodwill for the nine months ended September 30, 2004:


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


Balance at December 31, 2003		$	1,225	$	2,242	$	742	$	1,816		$6,025
	Goodwill acquired		—		—		103		97		200
	Other (a)		—		—		—		1		1

Balance at September 30, 2004		$	1,225	$	2,242	$	845	$	1,914		$6,226


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

Intangible assets consisted of the following:



		Estimated		Amortization		September 30,		December 31,
(Dollars in Millions)		Life (a)		Method (b)		2004		2003


Goodwill			—		—	$	6,226		$6,025
Merchant processing contracts			8 years		AC		713		552
Core deposit benefits			10 years/6 years		SL/AC		356		417
Mortgage servicing rights			6 years		AC		865		670
Trust relationships			15 years/9 years		SL/AC		309		311
Other identified intangibles			8 years/9 years		SL/AC		176		174

	Total					$	8,645		$8,149


(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 and impairment expense consisted of the following:



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



(Dollars in Millions)		2004		2003			2004		2003


Merchant processing contracts		$	32.3	$	33.4		$	92.5	$	98.1
Core deposit benefits			19.8		22.0			61.0		66.2
Mortgage servicing rights (a)			133.5		(68.8	)		164.4		321.4
Trust relationships			12.9		13.3			36.6		39.9
Other identified intangibles			11.7		10.9			34.2		32.6

	Total	$	210.2	$	10.8		$	388.7	$	558.2


(a)		Includes mortgage servicing rights impairment of $86.7 million and reparation of $108.5 million for the three months ended September 30, 2004 and 2003, respectively, and impairment of $24.9 million and $208.7 million for the nine months ended September 30, 2004 and 2003, respectively.

Below is the estimated amortization expense for the years ending:


(Dollars in Millions)


Remaining	2004	$	124.8
	2005		446.2
	2006		375.4
	2007		322.3
	2008		264.1


44	U.S. Bancorp


Note 8		Junior Subordinated Debentures Issued to Unconsolidated Subsidiary Trusts

The following table is a summary of the debt obligations relating to unconsolidated subsidiary trusts holding junior subordinated debentures of the Company as of September 30, 2004:

Trust

Preferred

Earliest

Issuance

Securities

Debentures

Rate

Redemption

Issuance Trust (Dollars in Millions)

Date

Amount

Amount (a)

Type (b)

Rate

Maturity Date

Date

Retail

USB Capital V

December 2001

300

309

Fixed

7.25

December 2031

December 7, 2006

USB Capital IV

November 2001

500

515

Fixed

7.35

November 2031

November 1, 2006

USB Capital III

May 2001

700

722

Fixed

7.75

May 2031

May 4, 2006

Institutional

Star Capital I

June 1997

150

155

Variable

2.65

June 2027

June 15, 2007

Mercantile Capital Trust I

February 1997

150

155

Variable

2.54

February 2027

February 1, 2007

USB Capital I

December 1996

300

309

Fixed

8.27

December 2026

December 15, 2006

Firstar Capital Trust I

December 1996

150

155

Fixed

8.32

December 2026

December 15, 2006

FBS Capital I

November 1996

300

309

Fixed

8.09

November 2026

November 15, 2006


(a)		Junior subordinated debentures issued to unconsolidated subsidiary trusts that are designated in fair value hedges at September 30, 2004, are recorded on the balance sheet at fair value. Carrying value includes a fair value adjustment of $50 million related to hedges on certain junior subordinated debentures, as well as prepaid issuance fees of $(3) million.
(b)		The variable-rate Trust Preferred Securities and Debentures reprice quarterly based on three-month LIBOR.


Note 9		Shareholders’ Equity

At September 30, 2004, and December 31, 2003, the Company had authority to issue 4 billion shares of common stock and 10 million shares of preferred stock. The Company had 1,870.8 million and 1,922.9 million shares of common stock outstanding at September 30, 2004, and December 31, 2003, respectively.

On December 18, 2001, the Board of Directors approved an authorization to repurchase 100 million shares of outstanding common stock throughout 2003. In 2003, the Company repurchased 7.0 million shares of common stock under the plan, which expired in December of 2003. On December 16, 2003, the Board of Directors approved an authorization to repurchase 150 million shares of common stock during the following 24 months. The Company purchased 19.5 million and 74.1 million shares under the December 2003 plan in the third quarter and first nine months of 2004, respectively. As of September 30, 2004, there were approximately 68 million shares remaining to be repurchased under the current authorization.


U.S. Bancorp	45


Note 10		Earnings Per Share

The components of earnings per share were:



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



(Dollars and Shares in Millions, Except Per Share Data)			2004		2003		2004		2003


Income from continuing operations			$	1,065.5	$	940.7	$	3,110.8	$	2,739.8
Income from discontinued operations (after-tax)				—		10.2		—		15.8

	Net income		$	1,065.5	$	950.9	$	3,110.8	$	2,755.6

Average common shares outstanding				1,877.0		1,926.0		1,894.6		1,922.4
Net effect of the assumed purchase of stock based on the treasury stock method for options and stock plans				26.7		13.8		24.8		10.0

Average diluted common shares outstanding				1,903.7		1,939.8		1,919.4		1,932.4

Earnings per share
	Income from continuing operations		$	.57	$	.49	$	1.64	$	1.43
	Discontinued operations			—		—		—		—

		Net income	$	.57	$	.49	$	1.64	$	1.43

Diluted earnings per share
	Income from continuing operations		$	.56	$	.48	$	1.62	$	1.42
	Discontinued operations			—		.01		—		.01

		Net income	$	.56	$	.49	$	1.62	$	1.43

For the three months ended September 30, 2004 and 2003, options to purchase 29 million and 56 million shares, respectively, and 38 million and 92 million shares for the nine months ended 2004 and 2003, respectively, were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.


Note 11		Employee Benefits

Retirement Plans The following table sets forth the components of net periodic benefit cost (income) for the retirement plans:



		Three Months Ended						Nine Months Ended
		September 30, 2004						September 30, 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	$	14.7		$	1.0		$	44.0		$	2.9
	Interest cost		27.6			4.1			81.3			13.7
	Expected return on plan assets		(50.7	)		(.3	)		(152.3	)		(1.0	)
	Net amortization and deferral		(1.5	)		—			(4.7	)		(.1	)
	Recognized actuarial loss		17.9			.3			33.0			2.1

Net periodic benefit cost (income)		$	8.0		$	5.1		$	1.3		$	17.6

The information for the components of the net periodic benefit cost (income) for the three and nine months ended September 30, 2003, was not readily available.


46	U.S. Bancorp


Note 12		Income Taxes

The components of income tax expense were:



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



(Dollars in Millions)		2004		2003		2004		2003


Federal
Current		$	430.4	$	380.9	$	1,126.5	$	1,121.3
Deferred			63.0		57.2		196.3		165.6

	Federal income tax		493.4		438.1		1,322.8		1,286.9
State
Current			43.4		40.4		121.5		107.0
Deferred			12.2		13.4		36.6		40.0

	State income tax		55.6		53.8		158.1		147.0

	Total income tax provision	$	549.0	$	491.9	$	1,480.9	$	1,433.9

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



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


(Dollars in Millions)		2004			2003			2004			2003


Tax at statutory rate (35%)		$	565.1		$	501.4		$	1,607.1		$	1,460.8
State income tax, at statutory rates, net of federal tax benefit			36.2			36.6			102.8			98.7
Tax effect of
	Resolution of federal income tax examinations		—			—			(90.0	)		—
	Tax credits		(35.7	)		(27.1	)		(98.8	)		(80.9	)
	Tax-exempt interest, net		(5.3	)		(6.3	)		(16.2	)		(17.3	)
	Other items		(11.3	)		(12.7	)		(24.0	)		(27.4	)

Applicable income taxes		$	549.0		$	491.9		$	1,480.9		$	1,433.9

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 $1,953.8 million at September 30, 2004, and $1,556.4 million at December 31, 2003.


Note 13		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.


U.S. Bancorp	47

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 September 30, 2004, were approximately $10.3 billion with a weighted- average term of approximately 23 months. The estimated fair value of standby letters of credit was approximately $72.7 million at September 30, 2004.

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. The estimated fair value of guarantees, other than standby letters of credit, was approximately $133 million at September 30, 2004.

Third-Party Borrowing Arrangements The 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 2007. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $1.4 billion at September 30, 2004. The Company’s recorded liabilities as of September 30, 2004, included $33.0 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 Lending The Company participates in securities lending activities by acting as the customer’s agent involving the loan or sale 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 $17.3 billion at September 30, 2004, and represented the market value of the securities lent to third-parties. At September 30, 2004, the Company held assets with a market value of $17.9 billion as collateral for these arrangements.

Asset Sales The 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 $554.4 million at September 30, 2004, 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.


48	U.S. Bancorp

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

A cardholder, through its issuing bank, generally has until the latter of up to four months after the date the transaction is processed or the receipt of the product or service to present a charge-back to the Company as the merchant processor. The absolute maximum potential liability is estimated to be the total volume of credit card transactions that meet the associations’ requirements to be valid charge-back transactions at any given time. Management estimates that the maximum potential exposure for charge-backs would approximate the total amount of merchant transactions processed through the credit card associations for the last four months. For the last four months this amount totaled approximately $51.8 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 September 30, 2004, the Company held $40.5 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 September 30, 2004, the value of future delivery airline tickets purchased was approximately $2.0 billion, and the Company held collateral of $243.2 million in escrow deposits and lines of credit related to airline customer transactions.

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 September 30, 2004, the Company had a recorded liability for estimated losses of $32.4 million. In addition, the Company had a $58.2 million liability for guaranty obligations associated with its airline processing business.

Other Guarantees The 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 $6.1 billion at September 30, 2004. The recorded fair value of the Company’s liability for the credit enhancement recourse obligation and liquidity facilities was $35.3 million at September 30, 2004, and was included in other liabilities.

The Company guarantees payments to certain certificate holders of Company-sponsored investment trusts with varying termination dates extending through December 2004. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $31.9 million at September 30, 2004. At September 30, 2004, the Company had a recorded liability of $31.9 million, held $15.2 million in cash collateral and had other contractual sources of recourse available to it, including guarantees from third-parties and the underlying assets held by the investment trusts.

OTHER CONTINGENT LIABILITIES

In connection with the spin-off of Piper Jaffray Companies, the Company has agreed to indemnify Piper Jaffray Companies against losses that may result from third-party claims relating to certain specified matters. The Company’s indemnification obligation related to these specified matters is capped at $17.5 million and can be terminated by the Company if there is a change in control event for Piper Jaffray Companies. Through


U.S. Bancorp	49

September 30, 2004, the Company has paid approximately $2.8 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.


Note 14		Supplemental Disclosures to the Consolidated Financial Statements

Consolidated Statement of Cash Flows Listed below are supplemental disclosures to the Consolidated Statement of Cash Flows:



			Nine Months Ended
			September 30,


(Dollars in Millions)			2004			2003


Acquisitions and divestitures
	Assets acquired		$	413.1		$	—
	Liabilities assumed			(110.6	)		—

		Net	$	302.5		$	—

Money Market Investments Money market investments are included with cash and due from banks as part of cash and cash equivalents. Money market investments consisted of the following:


	September 30,		December 31,
(Dollars in Millions)	2004		2003


Interest-bearing deposits		$ 6		$ 4
Federal funds sold		155		109
Securities purchased under agreements to resell		—		39


Total money market investments		$161		$152


50	U.S. Bancorp

(This page intentionally left blank)


U.S. Bancorp	51

U.S. Bancorp

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



			For the Three Months Ended September 30,

			2004								2003


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


Assets
Taxable securities			$	42,142		$	448.8		4.26	%	$	37,221		$	403.6		4.34	%		13.2	%
Non-taxable securities				360			6.4		7.11			556			9.7		7.00			(35.3	)
Loans held for sale				1,405			21.1		6.00			4,460			59.5		5.34			(68.5	)
Loans (b)
	Commercial			39,317			556.5		5.64			41,980			579.7		5.49			(6.3	)
	Commercial real estate			27,194			386.8		5.66			27,397			391.5		5.67			(.7	)
	Residential mortgages			14,569			204.5		5.60			12,234			181.5		5.91			19.1
	Retail			41,826			660.2		6.28			38,371			669.5		6.92			9.0

		Total loans		122,906			1,808.0		5.86			119,982			1,822.2		6.03			2.4
Other earning assets				1,374			25.6		7.45			1,646			23.3		5.60			(16.5	)

		Total earning assets		168,187			2,309.9		5.47			163,865			2,318.3		5.63			2.6
Allowance for loan losses				(2,287	)							(2,451	)							(6.7	)
Unrealized gain (loss) on available-for-sale securities				(492	)							(544	)							(9.6	)
Other assets (c)				26,177								29,371								(10.9	)

		Total assets	$	191,585							$	190,241								.7

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits			$	29,791							$	31,907								(6.6	)
Interest-bearing deposits
	Interest checking			20,413			16.0		.31			20,148			20.3		.40			1.3
	Money market accounts			31,854			53.3		.67			33,980			78.9		.92			(6.3	)
	Savings accounts			5,854			3.6		.25			5,846			5.2		.36			.1
	Time certificates of deposit less than $100,000			12,869			83.1		2.57			14,824			105.1		2.81			(13.2	)
	Time deposits greater than $100,000			14,535			65.4		1.79			11,251			46.9		1.66			29.2

		Total interest-bearing deposits		85,525			221.4		1.03			86,049			256.4		1.18			(.6	)
Short-term borrowings				15,382			74.5		1.93			11,850			44.9		1.50			29.8
Long-term debt				32,525			205.3		2.51			31,218			167.9		2.14			4.2
Junior subordinated debentures				2,674			27.0		4.04			2,576			23.6		3.65			3.8

		Total interest-bearing liabilities		136,106			528.2		1.55			131,693			492.8		1.49			3.4
Other liabilities (d)				6,301								7,281								(13.5	)
Shareholders’ equity				19,387								19,360								.1

		Total liabilities and shareholders’ equity	$	191,585							$	190,241								.7	%

Net interest income						$	1,781.7							$	1,825.5

Gross interest margin									3.92	%							4.14	%

Gross interest margin without taxable-equivalent increments									3.90								4.12

Percent of Earning Assets
Interest income									5.47	%							5.63	%
Interest expense									1.25								1.20

Net interest margin									4.22	%							4.43	%

Net interest margin without taxable-equivalent increments									4.20	%							4.41	%


(a)		Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent.
(b)		Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
(c)		Includes approximately $1,300 million of earning assets from discontinued operations in third quarter 2003.
(d)		Includes approximately $949 million of interest-bearing liabilities from discontinued operations in third quarter 2003.


52	U.S. Bancorp

U.S. Bancorp

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



			For the Nine Months Ended September 30,

			2004								2003


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


Assets
Taxable securities			$	42,848		$	1,351.5		4.21	%	$	35,429		$	1,222.1		4.60	%		20.9	%
Non-taxable securities				395			21.0		7.10			630			33.1		7.00			(37.3	)
Loans held for sale				1,611			68.3		5.65			4,078			170.9		5.59			(60.5	)
Loans (b)
	Commercial			39,060			1,644.1		5.62			41,758			1,752.6		5.61			(6.5	)
	Commercial real estate			27,140			1,133.5		5.58			27,092			1,192.5		5.89			.2
	Residential mortgages			14,079			601.5		5.70			11,131			516.0		6.19			26.5
	Retail			40,687			1,925.3		6.32			38,064			2,025.8		7.12			6.9

		Total loans		120,966			5,304.4		5.86			118,045			5,486.9		6.21			2.5
Other earning assets				1,362			73.2		7.18			1,650			78.3		6.34			(17.5	)

		Total earning assets		167,182			6,818.4		5.44			159,832			6,991.3		5.84			4.6
Allowance for loan losses				(2,335	)							(2,476	)							(5.7	)
Unrealized gain (loss) on available-for-sale securities				(412	)							250								*
Other assets (c)				26,128								29,409								(11.2	)

		Total assets	$	190,563							$	187,015								1.9

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits			$	29,807							$	32,412								(8.0	)
Interest-bearing deposits
	Interest checking			20,699			49.3		.32			18,601			64.4		.46			11.3
	Money market accounts			33,492			177.5		.71			31,285			238.4		1.02			7.1
	Savings accounts			5,896			11.7		.26			5,579			16.5		.40			5.7
	Time certificates of deposit less than $100,000			13,168			257.2		2.61			15,936			353.3		2.96			(17.4	)
	Time deposits greater than $100,000			13,085			158.0		1.61			12,836			178.9		1.86			1.9

		Total interest-bearing deposits		86,340			653.7		1.01			84,237			851.5		1.35			2.5
Short-term borrowings				14,706			183.3		1.67			10,024			123.3		1.64			46.7
Long-term debt				31,605			566.0		2.39			30,999			536.2		2.31			2.0
Junior subordinated debentures				2,649			75.3		3.79			2,738			79.5		3.87			(3.3	)

		Total interest-bearing liabilities		135,300			1,478.3		1.46			127,998			1,590.5		1.66			5.7
Other liabilities (d)				6,118								7,403								(17.4	)
Shareholders’ equity				19,338								19,202								.7

		Total liabilities and shareholders’ equity	$	190,563							$	187,015								1.9	%

Net interest income						$	5,340.1							$	5,400.8

Gross interest margin									3.98	%							4.18	%

Gross interest margin without taxable-equivalent increments									3.96								4.16

Percent of Earning Assets
Interest income									5.44	%							5.84	%
Interest expense									1.18								1.33

Net interest margin									4.26	%							4.51	%

Net interest margin without taxable-equivalent increments									4.24	%							4.49	%


*		Not meaningful
(a)		Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent.
(b)		Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
(c)		Includes approximately $1,453 million of earning assets from discontinued operations in 2003.
(d)		Includes approximately $1,045 million of interest-bearing liabilities from discontinued operations in 2003.


U.S. Bancorp	53

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 third quarter of 2004.

Item 6. Exhibits


10.1		Form of Executive Officer Stock Option Agreement with cliff and performance vesting under U.S. Bancorp 2001 Stock Incentive Plan.
10.2		Form of Executive Officer Stock Option Agreement with annual vesting under U.S. Bancorp 2001 Stock Incentive Plan.
10.3		Form of Executive Officer Restricted Stock Award Agreement under U.S. Bancorp 2001 Stock Incentive Plan.
10.4		Form of Director Stock Option Agreement under U.S. Bancorp 2001 Stock Incentive Plan.
10.5		Form of Director Restricted Stock Unit Agreement under U.S. Bancorp 2001 Stock Incentive Plan.
10.6		Form of Executive Officer Restricted Stock Unit Agreement under U.S. Bancorp 2001 Stock Incentive Plan.
10.7		Restricted Stock Unit Award Agreement with Jerry A. Grundhofer dated January 2, 2002.
10.8		Amendment No. 2 of Employment Agreement with Jerry A. Grundhofer.
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.


54	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: November 9, 2004


U.S. Bancorp	55

EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges



			Three Months Ended		Nine Months Ended
(Dollars in Millions)			September 30, 2004		September 30, 2004


Earnings
1.	Net income		$	1,065.5	$	3,110.8
2.	Applicable income taxes			549.0		1,480.9

3.	Income before income taxes (1 + 2)		$	1,614.5	$	4,591.7

4.	Fixed charges:
	a.	Interest expense excluding interest on deposits	$	306.8	$	824.6
	b.	Portion of rents representative of interest and amortization of debt expense		16.8		51.1

	c.	Fixed charges excluding interest on deposits (4a + 4b)		323.6		875.7
	d.	Interest on deposits		221.4		653.7

	e.	Fixed charges including interest on deposits (4c + 4d)	$	545.0	$	1,529.4

5.	Amortization of interest capitalized		$	—	$	—
6.	Earnings excluding interest on deposits (3 + 4c + 5)			1,938.1		5,467.4
7.	Earnings including interest on deposits (3 + 4e + 5)			2,159.5		6,121.1
8.	Fixed charges excluding interest on deposits (4c)			323.6		875.7
9.	Fixed charges including interest on deposits (4e)			545.0		1,529.4

Ratio of Earnings to Fixed Charges
10.	Excluding interest on deposits (line 6/ line 8)			5.99		6.24
11.	Including interest on deposits (line 7/ line 9)			3.96		4.00


56	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)) 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) 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

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

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

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ JERRY A. GRUNDHOFER

Jerry A. Grundhofer

Chief Executive Officer

Dated: November 9, 2004


U.S. Bancorp	57

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:

/s/ DAVID M. MOFFETT

David M. Moffett

Chief Financial Officer

Dated: November 9, 2004


58	U.S. Bancorp

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Chief Executive Officer and Chief Financial Officer of U.S. Bancorp, a Delaware corporation (the “Company”), do hereby certify that:

(1) The Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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


/s/ JERRY A. GRUNDHOFER		/s/ DAVID M. MOFFETT

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

Dated: November 9, 2004


U.S. Bancorp	59



	First Class
	U.S. Postage
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	Minneapolis, MN

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

LOGO

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.

LOGO

U.S. Bancorp

Member FDIC

This report has been produced on recycled paper. (RECYCLING LOGO)

EXHIBIT 10.1

U.S. BANCORP
NON-QUALIFIED STOCK OPTION AGREEMENT

Number of

Option

Social

U.S. Bancorp Common

Price Per

Security

GRANTED TO

Grant Date

Shares

Share ($)

Number

Expiration Date

To accept receipt of the Option and to agree to the terms and conditions of the Plan and this Agreement, take no action. To reject receipt of the Option and the terms and conditions of the Plan and this Agreement, please notify Karen Bulman, Stock Option Administration in Human Resources at U.S. Bancorp, 5065 Wooster Road, CN-OH-L2HR, Cincinnati, OH 45226, in writing within 30 calendar days of the day you receive this document. Failure to notify in a timely manner will result in your acceptance of the Option and the terms and conditions of the Plan and this Agreement. Please read all of the terms and conditions of this Agreement.

THIS AGREEMENT is made as of the date in the box above labeled “Grant Date” (the “Grant Date”) by and between U.S. Bancorp, a Delaware corporation (the “Company”), and the individual named in the box above labeled “Granted To” (the “Optionee”).

WHEREAS , the Company pursuant to its 2001 Stock Incentive Plan (the “Plan”) wishes to grant a stock option for the purchase of Common Stock of the Company, $0.01 par value (the “Common Stock”), to the Optionee on the terms and conditions contained in this Agreement and the Plan. In consideration of the mutual covenants contained in this Agreement, the parties agree as follows:

1. Grant of Option .

The Company grants Optionee the right and option (the “Option”) to purchase all or any part of an aggregate of the number of shares of the Company’s Common Stock set forth in the box above labeled “Number of U.S. Bancorp Common Shares” at the exercise price set forth in the box above labeled “Exercise Price Per Share” on the terms and conditions of this Agreement. The Option is not intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).

2. Vesting of Exercise Rights .

(a) Subject to the terms and conditions of this Agreement, the Option may be exercised by Optionee in whole on the fifth anniversary of the Grant Date, with the opportunity for 25% of the award to have accelerated vesting approximately 1, 2, 3, and 4 years on February 1 following the Grant Date, respectively, only if the company’s TSR performance for that year is at or above median TSR of the regional banks in our peer group, as determined by U.S. Bancorp in its sole discretion. The Option shall terminate at the close of business on the date in the box above labeled “Expiration Date,” or on such earlier date as described in this Agreement.

(b) Notwithstanding the vesting provision contained in Section 2(a) above, but subject to the other terms and conditions of this Agreement, the Option may be exercised in full immediately upon a “Qualifying Termination.” For purposes of this Agreement, the following terms shall have the following definitions:

(i) “Affiliate” shall be defined as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(ii) “Announcement Date” shall mean the date of the public announcement of the transaction, event or course of action that results in a Change in Control.

(iii) “Cause” shall mean (A) the continued failure by Optionee to substantially perform Optionee’s duties with the Company or any Affiliate (other than any such failure resulting from Optionee’s Disability (as defined in Section 3(c))), after a demand for substantial performance is delivered to Optionee that specifically identifies the manner in which the Company believes that Optionee has not substantially performed Optionee’s duties, and Optionee has failed to resume substantial performance of Optionee’s duties on a continuous basis, (B) gross and willful misconduct during the course of employment (regardless of whether the misconduct occurs on the Company’s premises), including, but not limited to, theft, assault, battery, malicious destruction of property, arson, sabotage, embezzlement, harassment, acts or omissions which violate the Company’s rules or policies (such as breaches of confidentiality), or other conduct which demonstrates a willful or reckless disregard of the interests of the Company or its Affiliates or (C) Optionee’s conviction of a crime (including, without limitation, a misdemeanor offense) which impairs Optionee’s ability substantially to perform Optionee’s duties with the Company.

(iv) “Change in Control” shall mean any of the following occurring after the date of this Agreement:

(A) The acquisition by any Person (as defined in Section 2(b)(vi)) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (1) the then outstanding shares of Common Stock (the “Outstanding Company Common Stock”) or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that, for purposes of this clause (A), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by a subsidiary of the

Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or a subsidiary of the Company (a “Company Entity”) or (iv) any acquisition by any corporation pursuant to a transaction which complies with clause (i), (ii) or (iii) of this clause (A); or

(B) Individuals who, as of the date, constitute the Company’s Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors (except as a result of the death, retirement or disability of one or more members of the Incumbent Board); provided, however, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, (1) any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board, (2) any director designated by or on behalf of a Person who has entered into an agreement with the Company (or which is contemplating entering into an agreement) to effect a Business Combination (as defined in Section 2(b)(iv)(C)) with one or more entities that are not Company Entities or (3) any director who serves in connection with the act of the Board of Directors of increasing the number of directors and filling vacancies in connection with, or in contemplation of, any such Business Combination; or

(C) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (1) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding any Company Entity or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (3) at least a majority of the members of the board of directors of the

corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or

(D) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

(v) “Notice of Termination” shall mean a written notice which sets forth the date of termination of Optionee’s employment.

(vi) “Person” shall be defined as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.

(vii) “Qualifying Termination” shall mean a termination of Optionee’s employment with the Company or its Affiliates by the Company for any reason other than Cause within 12 months following a Change in Control; provided, however, that any such termination shall not be a Qualifying Termination if Optionee has been notified in writing more than 30 days prior to the Announcement Date that Optionee’s employment with the Company is not expected to continue for more than 12 months following the date of such notification; provided that such exclusion from Qualifying Termination shall only apply if Optionee’s employment with the Company is terminated within such 12 month period; and provided, further, that any such termination shall not be a Qualifying Termination if Optionee has announced in writing, prior to the date the Company provides Notice of Termination to Optionee, the intention to terminate employment or retire, subject to the condition that any such termination by the Company prior to Optionee’s stated termination or retirement date shall be deemed to be termination or retirement by Optionee on such stated date unless termination by the Company is for Participant’s gross and willful misconduct.

3. Effect of Termination of Employment

(a) The Option shall terminate and may no longer be exercised if Optionee ceases to be employed by the Company or any Affiliate, except that:

(i) If Optionee’s employment shall be terminated for any reason other than Cause, death, Disability, Retirement (as defined in Section 3(c)) or Early Retirement (as defined in Section 3(c)), Optionee may at any time within a period of 90 days after such termination, but not after the termination date of the Option, exercise the option to the extent that Option was exercisable by Optionee on the date of the termination of employment.

(ii) If Optionee’s employment shall be terminated by reason of Cause, the Option shall be terminated as of the date of the misconduct.

(iii) If Optionee shall die while in the employ of the Company or any Affiliate or within 90 days after termination of employment for any reason other than Cause, the Option will be fully exercisable in whole or in part, notwithstanding the vesting provisions contained in Section 2(a) or Section 2(b), at any time up to the last day of the three year period commencing on the date of Optionee’s termination of employment (or, if earlier, the termination date of the Option), by the personal representatives or administrators of Optionee or by any Person or Persons to whom the Option has been transferred by will or the applicable laws of descent and distribution.

(iv) If Optionee’s employment shall be terminated by reason of Disability, the Optionee may exercise the Option in accordance with the terms as though such termination had never occurred. If Optionee shall die following a termination of employment by reason of Disability, the Option may be exercised in accordance with its terms by the personal representatives or administrators of Optionee or by any Person or Persons to whom the Option has been transferred by will or the applicable laws of descent and distribution.

(v) If Optionee’s employment shall be terminated by reason of Retirement, the Optionee may exercise the Option in accordance with the terms as though such termination had never occurred, so long as the Optionee has at all times that an Option is outstanding under this Agreement complied with the terms of a properly executed Confidentiality and Nonsolicitation Agreement between U.S. Bank and the Participant. In all other cases, this Option shall terminate upon Retirement. If Optionee shall die following a termination of employment by reason of Retirement but prior to the termination date of the Option, the Option may be exercised in accordance with its terms by the personal representatives or administrators of Optionee or by any Person or Persons to whom the Option has been transferred by will or the applicable laws of descent and distribution.

(vi) If Optionee’s employment shall be terminated by reason of Early Retirement, Optionee may at any time within a three year period after such termination, but not after the termination of the Option, exercise the Option to the extent that it was exercisable by Optionee on the date of the termination of employment so long as the Optionee has at all times that an Option is outstanding under this Agreement complied with the terms of a properly executed Confidentiality and Nonsolicitation Agreement between U.S. Bank and the Participant. In all other cases, this Option shall terminate upon Early Retirement. If Optionee shall die following a termination of employment by reason of Early Retirement but prior to the termination date of the Option, the Option may be exercised in accordance with its terms by the personal representatives or administrators of Optionee or by any Person or Persons to whom the Option has been transferred by will or the applicable laws of descent and distribution.

(b) Notwithstanding the provisions contained in Section 3(a), but subject to the other terms and conditions of this Agreement, in the event that Optionee’s employment is terminated pursuant to a Qualifying Termination, Optionee shall have the right to exercise the Option in whole or in part at any time within a one year period after such termination of employment; provided that no provision of this paragraph shall shorten the period in which the Option may be exercised in the event of death, Disability, Retirement or Early Retirement; and, provided further, that no Option shall be exercisable after the expiration of the term of the Option.

(c) For purposes of this Agreement, (A) “Retirement” means termination of employment (other than for gross and willful misconduct) by a Person who is age 59 1/2 or older and has 10 or more years of employment with the Company or its Affiliates (based on the Person’s latest date of hire by the Company or its Affiliates), (B) “Early Retirement” means termination of employment (other than for gross and willful misconduct) by a Person who is age 55 or older and has 10 or more years of employment with the Company or its Affiliates (based on the Person’s latest date of hire by the Company or its Affiliates) and (C) “Disability” means leaving active employment and qualifying for and receiving disability benefits under the Company’s long-term disability programs as in effect from time to time.

4. Securities Law Compliance

The exercise of all or any portion of this Option shall only be effective at such time that the sale of Common Stock issued pursuant to such exercise will not violate any state or federal securities or other laws. The Company is under no obligation to effect any registration of the stock subject to the Option under the Securities Act of 1933 or to effect any state registration or qualification of such Common Stock. The Company may, in its sole discretion, defer the effectiveness of any full or partial exercise of the Option in order to ensure that the issuance of stock upon exercise will be in compliance with federal or state securities laws and the rules of the New York Stock Exchange or any other exchange upon which the Company’s Common Stock is traded.

5. Method of Exercise of Option

Subject to the foregoing, the Option may be exercised in whole or part from time to time by serving written notice of exercise on the Company at its principal executive offices, to the attention of the Company’s Executive Compensation Department or to its properly designated agent serving from time to time. The notice shall state the number of shares as to which the Option is being exercised and be accompanied by payment of the purchase price. Optionee may, at Optionee’s election, pay the purchase price (a) by check payable to the Company, (b) in previously owned shares of the Company’s Common Stock or (c) in any combination of the two, in each case having a Fair Market Value (as defined in the Plan) on the exercise date equal to the applicable exercise price. Optionee may, at Optionee’s election, exercise the Option, in whole or in part, by providing the Company with an attestation that such previously owned shares of the Company’s Common Stock are owned by Optionee, in which case the number of previously owned shares having a Fair Market Value equal to the exercise price (or appropriate portion of the exercise price) will be withheld from the number of shares issued to Optionee pursuant to the exercise of the Option. Previously owned shares used as provided in the two immediately preceding sentences must have been owned by Optionee for a minimum of six months prior to the date of exercise of the Option for this method of payment to apply.

6. Income Tax Withholding

To provide the Company with the opportunity to claim the benefit of any income tax deduction which may be available to it upon the exercise of the Option, and to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of Optionee, are withheld or collected from Optionee. The Optionee may, at Optionee’s election, satisfy applicable tax withholding obligations by (i) electing to have the Company withhold a portion of the shares of Common Stock otherwise to be delivered upon exercise of such Option having a Fair Market Value equal to the amount of such taxes or (ii) delivering to the Company shares of Common Stock other than the shares issuable upon exercise of such Option having a Fair Market Value equal to the amount of such taxes. The election must be made on or before the date that the amount of tax to be withheld is determined.

7. Miscellaneous

(a) This Agreement shall not give Optionee any right with respect to continuance of employment with the Company or any Affiliate, nor will it interfere in any way with the right of the Company or any Affiliate to terminate such employment at any time. In addition, the Company or any Affiliate may at any time dismiss Optionee from employment, free from any liability or claim under the Plan. The holder of the Option will not be deemed to be the holder of any shares subject to the Option unless and until the Option has been exercised and the purchase price of the shares purchased has been paid.

(b) Except pursuant to terms approved by the Compensation Committee of the Board of Directors (the “Committee”), the Option may not be transferred, except by will or the laws of descent and distribution to the extent provided in Section 3(a)(iii) or Section 3(a)(iv) , and during Optionee’s lifetime the Option is exercisable only by Optionee (or by Optionee’s guardian or legal representative in the case of Disability).

(c) In the event that any dividend or other distribution (whether in the form of cash, shares of Common Stock, or other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Common Stock or other securities of the Company or other similar corporate transaction or event affecting the stock subject to the Option would be reasonably likely to result in the diminution or enlargement of any of the benefits or potential benefits intended to be made available under the Option (including, without limitation, the benefits or potential benefits of provisions relating to the term, vesting or exercisability of the Option, and any “change in control” provision), the Committee shall, in such manner as it shall deem equitable or appropriate in order to prevent such diminution or enlargement of any such benefits or potential benefits, adjust any or all of (i) the number and type of shares (or other securities or other property) subject to the Option and (ii) the exercise price with respect to the Option; provided, however, that the number of shares covered by the Option shall always be a whole number. Without limiting the foregoing, if any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of the Company’s assets to another corporation, shall be effected in such a way that holders of the Company’s Common Stock shall be entitled to receive stock, securities, cash or other assets with respect to or in exchange for such shares, Optionee shall have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Agreement and in lieu of the shares of the Common Stock of the Company immediately available for purchase and receivable upon the exercise of the Option, with appropriate adjustments to prevent diminution or enlargement of benefits or potential benefits intended to be made available under the Option, such shares of stock, other securities, cash or other assets as would have been issued or delivered to Optionee if Optionee had exercised the Option and had received such shares of Common Stock prior to such reorganization, reclassification, consolidation, merger or sale. The Company shall not effect any such consolidation, merger or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument the obligation to deliver to Optionee such shares of stock, securities, cash or other assets as, in accordance with the foregoing provisions, Optionee may be entitled to purchase or receive.

(d) The Company shall at all times during the term of the Option reserve and keep available such number of shares of the Company’s Common Stock as will be sufficient to satisfy the requirements of this Agreement.

(e) This Option is issued under the Plan and is subject to its terms. The Plan is available for inspection on the intranet and during business hours at the principal offices of the Company.

8. Governing Law

This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota.

IN WITNESS WHEREOF , the parties have caused this Agreement to be executed as of the day and year first written above.

U.S. BANCORP

By: Karen Bulman
Its: Vice President

EXHIBIT 10.2

U.S. BANCORP
NON-QUALIFIED STOCK OPTION AGREEMENT


		Number of	Option	Social
		U.S. Bancorp	Price Per	Security
GRANTED TO	Grant Date	Common Shares	Share ($)	Number
	Expiration Date

1. Grant of Option .

The Company grants Optionee the right and option (the “Option”) to purchase all or any part of an aggregate of the number of shares of the Company’s Common Stock set forth in the box above labeled “Number of U.S. Bancorp Common Shares” at the exercise price set forth in the box above labeled “Exercise Price Per Share” on the terms and conditions of this Agreement. The Option is not intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).

2. Vesting of Exercise Rights .

(a) Subject to the terms and conditions of this Agreement, the Option may be exercised by Optionee in cumulative installments not in excess of 25% on or after the first anniversary of the Grant Date, 25% on or after the second anniversary of the Grant Date, 25% on or after the third anniversary of the Grant Date and 25% on or after the fourth anniversary of the Grant Date. If the full amount of stock available for purchase in any of the foregoing periods is not purchased during such period, the shares not purchased shall be available for purchase in any subsequent period during the term of the Option. The Option shall terminate at the close of business on the date in the box above labeled “Expiration Date,” or on such earlier date as described in this Agreement.

acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by a subsidiary of the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or a subsidiary of the Company (a “Company Entity”) or (iv) any acquisition by any corporation pursuant to a transaction which complies with clause (i), (ii) or (iii) of this clause (A); or

of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or

(D) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

3. Effect of Termination of Employment

(a) The Option shall terminate and may no longer be exercised if Optionee ceases to be employed by the Company or any Affiliate, except that:

(b) Notwithstanding the provisions contained in Section 3(a), but subject to the other terms and conditions of this Agreement, in the event that Optionee’s employment is terminated pursuant to a Qualifying Termination, Optionee shall have the right to exercise the Option in whole or in part at any time within a one year period after such termination of employment; provided that no provision of this paragraph shall shorten the period in which the Option may be exercised in the event of death, Disability, Retirement or Early Retirement; and, provided further, that no Option shall be exercisable after the expiration of the term of the Option.

(c) For purposes of this Agreement, (A) “Retirement” means termination of employment (other than for gross and willful misconduct) by a Person who is age 59 1/2 or older and has 10 or more years of employment with the Company or its Affiliates, (B) “Early Retirement” means termination of employment (other than for gross and willful misconduct) by a Person who is age 55 or older and has 10 or more years of employment with the Company or its Affiliates and (C) “Disability” means leaving active employment and qualifying for and receiving disability benefits under the Company’s long-term disability programs as in effect from time to time.

4. Securities Law Compliance

5. Method of Exercise of Option

6. Income Tax Withholding

7. Miscellaneous

8. Governing Law

This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota.

IN WITNESS WHEREOF , the parties have caused this Agreement to be executed as of the day and year first written above.

U.S. BANCORP

By: Karen Bulman
Its: Vice President

EXHIBIT 10.3

U.S. BANCORP
RESTRICTED STOCK AWARD AGREEMENT

To accept receipt of the Common Stock and to agree to the terms and conditions of the Plan and this Agreement, take no action. To reject receipt of the Common Stock and the terms and conditions of the Plan and this Agreement, please notify Karen Bulman, Stock Option Administration in Human Resources at U.S. Bancorp, 5065 Wooster Road, CN-OH-L2HR, Cincinnati, OH 45226, in writing within 30 calendar days of the day you receive this document. Failure to notify in a timely manner will result in your acceptance of the Common Stock and the terms and conditions of the Plan and this Agreement.

THIS AGREEMENT is made as of the date in the box above labeled “Award Date” (the “Award Date”) by and between U.S. Bancorp, a Delaware corporation (the “Company”), and the individual named in the box above labeled “Awarded To” (the “Participant”).

WHEREAS , the Company pursuant to its 2001 Stock Incentive Plan (the “Plan”) wishes to award to Participant shares of Common Stock of the Company, $.01 par value (the “Common Stock”), subject to certain restrictions and on the terms and conditions contained in this Agreement and the Plan;

In consideration of the mutual covenants contained in this Agreement, the parties agree as follows:

1. Award

The Company, effective as of the date of this Agreement, grants to Participant a restricted stock award of the number of shares of the Company’s Common Stock set forth in the box above labeled “Number of U.S. Bancorp Common Shares” (the “Shares”) subject to the terms and conditions of this Agreement.

2. Vesting

(a) Subject to the terms and conditions of this Agreement, the Shares shall fully vest on the fifth anniversary date of this award, unless the company’s TSR performance for the 3-calendar year period following award date is at or above median TSR of the regional banks in our peer group, in which case vesting would accelerate to February 1 of the year following the third anniversary date of this award, as determined by U.S. Bancorp in its sole discretion.

(b) Notwithstanding the vesting provision contained in Section 2(a) above, but subject to the other terms and conditions of this Agreement, the Option may be exercised in full immediately upon a “Qualifying Termination.” For purposes of this Agreement, the following terms shall have the following definitions:

(i) “Affiliate” shall be defined as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(ii) “Announcement Date” shall mean the date of the public announcement of the transaction, event or course of action that results in a Change in Control.

(iii) “Cause” shall mean (A) the continued failure by Participant to substantially perform Participant’s duties with the Company or any Affiliate (other than any such failure resulting from Participant’s Disability (as defined in Section 3(c))), after a demand for substantial performance is delivered to Participant that specifically identifies the manner in which the Company believes that Participant has not substantially performed Participant’s duties, and Participant has failed to resume substantial performance of Participant’s duties on a continuous basis, (B) gross and willful misconduct during the course of employment (regardless of whether the misconduct occurs on the Company’s premises), including, but not limited to, theft, assault, battery, malicious destruction of property, arson, sabotage, embezzlement, harassment, acts or omissions which violate the Company’s rules or policies (such as breaches of confidentiality), or other conduct which demonstrates a willful or reckless disregard of the interests of the Company or its Affiliates or (C) Participant’s conviction of a crime (including, without limitation, a misdemeanor offense) which impairs Participant’s ability substantially to perform Participant’s duties with the Company.

(iv) “Change in Control” shall mean any of the following occurring after the date of this Agreement:

or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or

(D) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

(v) “Notice of Termination” shall mean a written notice which sets forth the date of termination of Participant’s employment.

(vi) “Person” shall be defined as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.

(vii) “Qualifying Termination” shall mean a termination of Participant’s employment with the Company or its Affiliates by the Company for any reason other than Cause within 12 months following a Change in Control; provided, however, that any such termination shall not be a Qualifying Termination if Participant has been notified in writing more than 30 days prior to the Announcement Date that Participant’s employment with the Company is not expected to continue for more than 12 months following the date of such notification; provided that such exclusion from Qualifying Termination shall only apply if Participant’s employment with the Company is terminated within such 12 month period; and provided, further, that any such termination shall not be a Qualifying Termination if Participant has announced in writing, prior to the date the Company provides Notice of Termination to Participant, the intention to terminate employment or retire, subject to the condition that any such termination by the Company prior to Participant’s stated termination or retirement date shall be deemed to be termination or retirement by Participant on such stated date unless termination by the Company is for Participant’s gross and willful misconduct.

3. Restriction on Transfer

Until the Shares vest pursuant to Section 2 or 4 of this Agreement, none of the Shares may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance shall be void and unenforceable against the Company. No attempt to transfer the Shares, whether voluntary or involuntary, by operation of law or otherwise, shall vest the purported transferee with any interest or right in or with respect to the Shares.

4. Forfeiture; Early Vesting

(a) If Participant ceases to be an employee of the Company or any Affiliate prior to vesting of the Shares pursuant to Section 2(a) or Section 2(b), all of Participant’s rights to all of the unvested Shares shall be immediately and irrevocably forfeited, except that (x) if

Participant ceases to be an employee by reason of Disability or Retirement (as defined in Section 4(b)) the Shares shall continue to vest pursuant to Section 2(a) and Section 2(b) as though such termination of employment had never occurred so long as the Participant has at all times that Shares are restricted under this Agreement complied with the terms of a properly executed Confidentiality and Nonsolicitation Agreement between U.S. Bank and the Participant, in all other cases, the Shares shall be immediately and irrevocably forfeited; and (y) if Participant ceases to be an employee by reason of death prior to the vesting of Shares under Section 2(a) or Section 2(b), Participant or his or her estate in addition to Shares previously vested under this Agreement shall become immediately vested, as of the date of death, in all previously unvested Shares. Upon forfeiture, Participant will no longer have any rights relating to the Shares, including the right to vote the Shares and the right to receive cash dividends.

(b) For purposes of this Agreement, (i) “Retirement” means termination of employment (other than for gross and willful misconduct) by a person who is age 59 1/2 or older and has 10 or more years of employment with the Company or its Affiliates, and (ii) “Disability” means leaving active employment and qualifying for and receiving disability benefits under the Company’s long-term disability programs as in effect from time to time.

5. Issuance and Custody of Shares

(a) The Company shall cause the Shares to be deposited in the name of the Participant in book entry form on the books and records of its shareholders maintained by the Company and its stock transfer agent. Access to the Shares in that account will be restricted. Such Shares are subject to forfeiture, are not transferable and remain subject to the restrictions, terms and conditions contained in the Plan and this Agreement.

(b) The Company or its stock transfer agent shall issue statements to the Participant evidencing the Shares.

(c) After any Shares vest pursuant to Section 2 or 4 of this Agreement, the Company shall promptly release the restriction on the Shares and authorize the stock transfer agent to issue them to Participant or Participant’s legal representatives, beneficiaries or heirs, as the case may be.

6. Securities Law Compliance

The delivery of all or any of the Shares shall only be effective at such time that the issuance of such Shares will not violate any state or federal securities or other laws. The Company is under no obligation to effect any registration of the Shares under the Securities Act of 1933 or to effect any state registration or qualification of the Shares. The Company may, in its sole discretion, delay the delivery of the Shares or place restrictive legends on such Shares in order to ensure that the issuance of any Shares will be in compliance with federal or state securities laws and the rules of the New York Stock Exchange or any other exchange upon which the Company’s Common Stock is traded.

7. Distributions and Adjustments

(a) In the event that any dividend or other distribution (whether in the form of cash, shares of Common Stock, or other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Common Stock or other securities of the Company or other similar corporate transaction or event affecting the Shares would be reasonably likely to result in the diminution or enlargement of any of the benefits or potential benefits intended to be made available pursuant to this Agreement (including, without limitation, the benefits or potential benefits of provisions relating to the vesting of the Shares and any “change in control” provision), the committee of the Board of Directors administering the Plan (the “Committee”) shall, in such manner as it shall deem equitable or appropriate in order to prevent such diminution or enlargement of any such benefits or potential benefits make adjustments to the award, including adjustments in the number and type of Shares Participant would have received; provided, however, that the number of shares covered by the award shall always be a whole number.

(b) Any additional shares of Common Stock, any other securities of the Company and any other property (except for cash dividends) distributed with respect to the Shares prior to the date the Shares vest shall be subject to the same restrictions, terms and conditions as the Shares. Any cash dividends payable with respect to the Shares shall be distributed to Participant at the same time cash dividends are distributed to shareholders of the Company generally.

(c) Any additional shares of Common Stock, any securities and any other property (except for cash dividends) distributed with respect to the Shares prior to the date such Shares vest shall be promptly deposited with the Secretary or the custodian designated by the Secretary to be held in custody in accordance with Section 5(b) hereof.

8. Income Tax Withholding

In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of Participant, are withheld or collected from Participant. Participant may, at Participant’s election, satisfy applicable tax withholding obligations arising from the receipt of, or lapse of restrictions relating to, the Shares by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered with a Fair Market Value (as such term is defined in the Plan) equal to the amount of such taxes or (ii) delivering to the Company shares of Common Stock of the Company or other securities with a Fair Market Value equal to the amount of such taxes. The election must be made on or before the date that the amount of tax to be withheld is determined.

9. Miscellaneous

(a) This Agreement is issued pursuant to the Plan and is subject to its terms. Participant acknowledges receipt of a copy of the Plan. The Plan is also available for inspection on the Intranet and during business hours at the principal office of the Company.

(b) This Agreement shall not confer on Participant any right with respect to continuance of employment with the Company or any Affiliate, nor will it interfere in any way with the right of the Company or any Affiliate to terminate such employment at any time.

(c) Until the Shares shall have been issued to Participant as provided in this Agreement, Participant shall have the rights to receive cash dividends and vote the Shares, but shall have no other rights of a shareholder with respect to the Shares. Subject to the restrictions and terms of this Agreement, after such issuance, Participant shall have all of the rights of a shareholder with respect to the Shares.

10. Governing Law

This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota.

IN WITNESS WHEREOF , the parties have caused this Agreement to be executed as of the day and year first above written.

U.S. BANCORP

By: Karen A. Bulman
Its: Vice President

EXHIBIT 10.4

U.S. BANCORP
NON-QUALIFIED STOCK OPTION AGREEMENT FOR DIRECTORS


		Number of U.S. Bancorp	Exercise Price	Social Security
GRANTED TO	Grant Date	Common Shares	Per Share ($)	Number
	Expiration Date

To accept receipt of the Option and to agree to the terms and conditions of the Plan and this Agreement, take no action. To reject receipt of the Option and the terms and conditions of the Plan and this Agreement, please notify the Corporate Secretary at U.S. Bancorp, 800 Nicollet Mall, BC-MN-H21O, Minneapolis, MN 55402, in writing within 30 calendar days of the day you receive this document. Failure to notify in a timely manner will result in your acceptance of the Option and the terms and conditions of the Plan and this Agreement.

THIS AGREEMENT is made as of the date in the box above labeled “Grant Date” (the “Grant Date”) by and between U.S. Bancorp, a Delaware corporation (the “Company”), and the director named in the box above labeled “Granted To” (the “Optionee”).

WHEREAS , the Company pursuant to its 2001 Stock Incentive Plan (the “Plan”) wishes to grant a stock option for the purchase of Common Stock of the Company, $.01 par value (the “Common Stock”), to the Optionee on the terms and conditions contained in this Agreement and the Plan. In consideration of the mutual covenants contained in this Agreement, the parties agree as follows:

1. Grant of Option .

2. Vesting of Exercise Rights .

(a) Subject to the terms and conditions of this Agreement, the Option may be exercised by Optionee in cumulative installments not in excess of 25% on or after the first anniversary of the Grant Date, 25% on or after the second anniversary of the Grant Date, 25% on or after the third anniversary of the Grant Date and 25% on or after the fourth anniversary of the Grant Date. If the full amount of stock available for purchase in any of the foregoing periods is not purchased during such period, the shares not purchased shall be available for purchase in any subsequent period during the term of the Option. The Option shall terminate at the close of business on the date in the box above labeled “Expiration Date,” or on such earlier date as described in this Agreement.

(b) Notwithstanding the other vesting provisions contained in Section 2(a) above, but subject to the other terms and conditions of this Agreement, the Option may be exercised in full immediately upon a “Change in Control.” For purposes of this Agreement, the following terms shall have the following definitions:

(i) “Announcement Date” shall mean the date of the public announcement of the transaction, event or course of action that results in a Change in Control.

(ii) “Cause” shall mean (A) the continued failure by Optionee to substantially perform Optionee’s duties with the Company, after a demand for substantial performance is delivered to Optionee that specifically identifies the manner in which the Company believes that Optionee has not substantially performed Optionee’s duties, and Optionee has failed to resume substantial performance of Optionee’s duties on a continuous basis, (B) gross and willful misconduct during service as a director (regardless of whether the misconduct occurs on the Company’s premises), including, but not limited to, theft, assault, battery, malicious destruction of property, arson, sabotage, embezzlement, harassment, acts or omissions which violate the Company’s rules or policies (such as breaches of confidentiality), or other conduct which demonstrates a willful or reckless disregard of the interests of the Company or its Affiliates or (C) Optionee’s conviction of a crime (including, without limitation, a misdemeanor offense) which impairs Optionee’s ability substantially to perform Optionee’s duties as a Director.

(iii) “Change in Control” shall mean any of the following occurring after the date of this Agreement:

“Company Entity”) or (iv) any acquisition by any corporation pursuant to a transaction which complies with clause (i), (ii) or (iii) of this clause (A); or

(B) Individuals who, as of the date, constitute the Company’s Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors (except as a result of the death, retirement or disability of one or more members of the Incumbent Board); provided, however, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, (1) any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board, (2) any director designated by or on behalf of a Person who has entered into an agreement with the Company (or which is contemplating entering into an agreement) to effect a Business Combination (as defined in Section 2(b)(iii)(C) hereof) with one or more entities that are not Company Entities or (3) any director who serves in connection with the act of the Board of Directors of increasing the number of directors and filling vacancies in connection with, or in contemplation of, any such Business Combination; or

(C) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (1) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding any Company Entity or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or

(D) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

(iv) “Person” shall be defined as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.

3. Effect of Termination of Directorship

(a) The Option shall terminate and may no longer be exercised if Optionee ceases to be a director of the Company, except that:

(i) If Optionee’s service as a director is terminated for any reason other than for Cause or for voluntary separation from service with less than ten years of service as a director, the Option will immediately be fully exercisable in whole notwithstanding the vesting provisions contained in Section 2(a) or Section 2(b), and may be exercised at any time during the remaining term of the option, but not after the termination date of the Option.

(ii) If Optionee’s service as a director is terminated upon the Optionee’s reaching mandatory retirement age, the Option will immediately be fully exercisable in whole notwithstanding the vesting provisions contained in Section 2(a) or Section 2(b), and may be exercised at any time during the remaining term of the option, but not after the termination date of the Option.

(iii) If Optionee’s service as a director is terminated by reason of Cause, the Option shall be terminated as of the date of the misconduct.

(iv) If Optionee’s service as a director is terminated by voluntary separation from the Board with fewer than ten years service as a Director, then Optionee may at any time within a period of three years after such termination, but not after the termination date of the Option, exercise the option to the extent that the Option was exercisable by Optionee on the date of the termination of service as a director.

4. Securities Law Compliance

5. Method of Exercise of Option

exercised and be accompanied by payment of the purchase price. Optionee may, at Optionee’s election, pay the purchase price (a) by check payable to the Company, (b) in previously owned shares of the Company’s Common Stock or (c) in any combination of the two, in each case having a Fair Market Value (as defined in the Plan) on the exercise date equal to the applicable exercise price. Optionee may, at Optionee’s election, exercise the Option, in whole or in part, by providing the Company with an attestation that such previously owned shares of the Company’s Common Stock are owned by Optionee, in which case the number of previously owned shares having a Fair Market Value equal to the exercise price (or appropriate portion of the exercise price) will be withheld from the number of shares issued to Optionee pursuant to the exercise of the Option. Previously owned shares used as provided in the two immediately preceding sentences must have been owned by Optionee for a minimum of six months prior to the date of exercise of the Option for this method of payment to apply.

6. Miscellaneous

(a) Except pursuant to terms approved by the Compensation Committee of the Board of Directors (the “Committee”), the Option may not be transferred, except by will or the laws of descent and distribution to the extent provided in Section 3(a)(iii) or Section 3(a)(iv) , and during Optionee’s lifetime the Option is exercisable only by Optionee (or by Optionee’s guardian or legal representative in the case of Disability).

(b) In the event that any dividend or other distribution (whether in the form of cash, shares of Common Stock, or other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Common Stock or other securities of the Company or other similar corporate transaction or event affecting the stock subject to the Option would be reasonably likely to result in the diminution or enlargement of any of the benefits or potential benefits intended to be made available under the Option (including, without limitation, the benefits or potential benefits of provisions relating to the term, vesting or exercisability of the Option, and any “change in control” provision), the Committee shall, in such manner as it shall deem equitable or appropriate in order to prevent such diminution or enlargement of any such benefits or potential benefits, adjust any or all of (i) the number and type of shares (or other securities or other property) subject to the Option and (ii) the exercise price with respect to the Option; provided, however, that the number of shares covered by the Option shall always be a whole number. Without limiting the foregoing, if any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of the Company’s assets to another corporation, shall be effected in such a way that holders of the Company’s Common Stock shall be entitled to receive stock, securities, cash or other assets with respect to or in exchange for such shares, Optionee shall have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Agreement and in lieu of the shares of the Common Stock of the Company immediately available for purchase and receivable upon the exercise of the Option, with appropriate adjustments to prevent diminution or enlargement of benefits or potential benefits intended to be made available under the Option, such shares of stock, other securities, cash or other assets as would have been issued or delivered to Optionee if Optionee had exercised the Option and had received such shares of Common

Stock prior to such reorganization, reclassification, consolidation, merger or sale. The Company shall not effect any such consolidation, merger or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument the obligation to deliver to Optionee such shares of stock, securities, cash or other assets as, in accordance with the foregoing provisions, Optionee may be entitled to purchase or receive.

(c) The Company shall at all times during the term of the Option reserve and keep available such number of shares of the Company’s Common Stock as will be sufficient to satisfy the requirements of this Agreement.

(d) This Option is issued under the Plan and is subject to its terms. The Plan is available for inspection on the intranet and during business hours at the principal offices of the Company.

7. Governing Law

This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota.

IN WITNESS WHEREOF , the parties have caused this Agreement to be executed as of the day and year first written above.

U.S. BANCORP

By:

Its: Vice President and Assistant Secretary

EXHIBIT 10.5

U.S. BANCORP
RESTRICTED STOCK UNIT AGREEMENT FOR DIRECTORS

WHEREAS , the Company pursuant to its 2001 Stock Incentive Plan (the “Plan”) wishes to award restricted stock units corresponding to such number of Shares of common stock of the Company (“Shares”) in the box above labeled “Number of U.S. Bancorp Common Shares” to the Participant, subject to certain restrictions and on the terms and conditions contained in this Agreement and the Plan.

In consideration of the mutual covenants contained in this Agreement, the parties agree as follows:

Capitalized terms not defined shall have the meaning set forth in the Plan.

1. Award

The Company, effective as of the Award Date, grants to Participant a restricted stock unit award representing the right to acquire the number of Shares set forth in the box above labeled “Number of U.S. Bancorp Common Shares” (the “Restricted Stock Units,” and one such “Unit” representing one such Share). The Participant acknowledges and accepts such grant and the Shares subject to the terms and conditions under this Award Agreement.

2. Vesting

(a) Subject to the terms and conditions of this Agreement, the Restricted Stock Units shall vest in cumulative installments not in excess of 25% on or after the first anniversary of the Award Date, 25% on or after the second anniversary of the Award Date, 25% on or after the third anniversary of the Award Date and 25% on or after the fourth anniversary of the Award Date.

(b) Notwithstanding the other vesting provisions contained in Section 2(a) above, but subject to the other terms and conditions of this Agreement, Participant shall be vested in all of the Restricted Stock Units granted in this Agreement immediately upon a “Change in Control” as defined in Section 2(b)(iii) below. For purposes of this Agreement, the following terms shall have the following definitions:

(i) “Announcement Date” shall mean the date of the public announcement of the transaction, event or course of action that results in a Change in Control.

(ii) “Cause” shall mean (A) the continued failure by Participant to substantially perform Participant’s duties with the Company, after a demand for substantial performance is delivered to Participant that specifically identifies the manner in which the Company believes that Participant has not substantially performed Participant’s duties, and Participant has failed to resume substantial performance of Participant’s duties on a continuous basis, (B) gross and willful misconduct during service as a director (regardless of whether the misconduct occurs on the Company’s premises), including, but not limited to, theft, assault, battery, malicious destruction of property, arson, sabotage, embezzlement, harassment, acts or omissions which violate the Company’s rules or policies (such as breaches of confidentiality), or other conduct which demonstrates a willful or reckless disregard of the interests of the Company or its Affiliates or (C) Participant’s conviction of a crime (including, without limitation, a misdemeanor offense) which impairs Participant’s ability substantially to perform Participant’s duties as a Director.

(iii) “Change in Control” shall mean any of the following occurring after the date of this Agreement:

(A) The acquisition by any Person (as defined in Section 2(b)(iv) hereof) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (1) the then outstanding shares of Common Stock (the “Outstanding Company Common Stock”) or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that, for purposes of this clause (A), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by a subsidiary of the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or a subsidiary of the Company (a “Company Entity”) or (iv) any acquisition by any corporation pursuant to a transaction which complies with clause (i), (ii) or (iii) of this clause (A); or

(B) Individuals who, as of the date, constitute the Company’s Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors (except as a result of the death, retirement or disability of one or more members of the Incumbent Board); provided, however, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, (1) any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board, (2) any director designated by or on behalf of a Person who has entered into an agreement with the Company (or which is contemplating entering into an agreement) to effect a Business Combination (as defined in Section 2(b)(iii)(C) hereof) with one or more entities that are not Company Entities or (3) any director who serves in connection with the act of the Board of Directors of increasing the number of directors and filling vacancies in connection with, or in contemplation of, any such Business Combination; or

(C) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of

the Company (a “Business Combination”), in each case, unless, following such Business Combination, (1) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding any Company Entity or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or

(D) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

(iv) “Person” shall be defined as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.

3. Restriction on Transfer

The restricted Stock Units granted to the Participant may not be transferred, sold, assigned, pledged, alienated, attached or otherwise encumbered (“Transfer”), and any purported Transfer shall be void and unenforceable against the Company. No attempt to Transfer the Restricted Stock Units, whether voluntary or involuntary, by operation of law or otherwise, shall vest the purported transferee with any interest or right in or with respect to the Restricted Stock Units or rights.

4. Forfeiture

(a) If the Participant ceases to be a director of the Company and all Affiliates prior to vesting of the Restricted Stock Units pursuant to Section 2(a) or Section 2(b), all of Participant’s rights to all of the unvested Restricted Stock Units shall be immediately and irrevocably forfeited, except that:

(i) If Participant’s service as a director is terminated for any reason other than Cause or for voluntary separation from service with less than ten years of service as a director, the Award will immediately be vest in full without regard to the vesting provisions contained in Section 2(a) or Section 2(b).

(ii) If Participant’s service as a director is terminated upon the Optionee’s reaching mandatory retirement age, the Award will immediately vest in full without regard to the vesting provisions contained in Section 2(a) or Section 2(b).

(iii) If Participant’s service as a director is terminated by reason of Cause, the Award shall be forfeited as of the date of the misconduct.

Upon forfeiture, Participant shall have no rights relating to the Restricted Stock Units, including the right to receive dividends of additional Restricted Stock Units.

5. Issuance of Shares

(a) Except to the extent the Restricted Stock Units have been surrendered and provided that the Restricted Stock Units have vested in accordance with either Section 2(a), 2(b) or 4(a) of this agreement, the Restricted Stock Units are distributable on the date the Participant no longer serves on the Board of the Company (the “Distribution Date”). The Company shall deliver to Participant one (1) Share for each such vested Restricted Stock Unit.

(b) Participant shall have no right, title or interest in, or (except as provided at Section 6) receive distributions in respect of, or otherwise be considered the owner of, any of the Shares covered by this Restricted Stock Unit Award, unless and until the Shares have been delivered pursuant to Section 5(a).

Notwithstanding the distribution provisions in Section 5(a) above, if there is a Change of Control as defined in this Agreement, the Restricted Stock Units will be distributed to the Participant as of the date of the Change of Control.

6. Dividends

To the extent that cash dividends are paid on Shares after the Award Date and prior to the Distribution Date, the Participant shall be entitled to receive additional Restricted Stock Units on each dividend payment date of the Company (including any dividend declared prior to the Distribution Date and payable after such date, which shall be deemed paid on the Distribution Date) having a fair market value (based on the closing price of Shares on such payment date) equal to the amount of dividends paid on Shares represented by the Restricted Stock Units. Such additional Restricted Stock Units shall be vested as of the payment date.

7. Securities Law Compliance

8. Distributions and Adjustments

Subject to the foregoing provisions of this Award Agreement, in the event that any dividend or other distribution (whether in the form of cash, shares of Common Stock, or other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Common Stock or other securities of the Company or other similar corporate transaction or event affecting the Shares would be reasonably likely to result in the diminution or enlargement of any of the benefits or potential benefits intended to be made available pursuant to this Agreement, the committee of the Board of Directors administering the Plan (the “Committee”) shall, in such manner as it shall deem equitable or appropriate in order to prevent such diminution or enlargement of any such benefits or potential benefits make adjustments to the award, including adjustments in the number and type of shares of Common Stock represented by the Restricted Stock Units that Participant would have received; provided, however, that the number of shares covered by this Award shall always be a whole number.

Any additional Shares, any other securities of the Company and any other property (except for cash dividends) distributed with respect to Shares represented by the Restricted Stock Units prior to the Distribution Date shall be subject to the same restrictions, terms and conditions as the Restricted Stock Units. Any cash dividends payable with respect to the Common Stock represented by the Restricted Stock Units shall be distributed to Participant in accordance with Section 6 hereof.

9. Miscellaneous

The Company shall at all times during the term of the Award reserve and keep available such number of shares of the Company’s Common Stock to satisfy the requirements of this Agreement.

This Award is issued under the Plan and is subject to its terms. The Plan is available for inspection on the intranet and during business hours at the principal offices of the Company.

10. Governing Law

This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota.

IN WITNESS WHEREOF , the parties have caused this Agreement to be executed as of the day and year first written above.

U.S. BANCORP

By:

Its: Vice President and Assistant Secretary

EXHIBIT 10.6

U.S. BANCORP
RESTRICTED STOCK UNIT AWARD AGREEMENT

In consideration of the mutual covenants contained in this Agreement, the parties agree as follows:

Capitalized terms not defined herein shall have the meaning set forth in the Plan.

1. Award

2. Vesting

(a) Subject to the terms and conditions of this Agreement, the Restricted Stock Units shall vest entirely four years from the Award date unless U.S. Bancorp’s total shareholder return (TSR) for the three-calendar-year period following the award date is at or above the median TSR of the regional banks in the U.S. Bancorp peer group, in which case vesting accelerates to April 1, 2006, provided that the Participant has been continuously employed by the Company or an affiliate of the Company from the award date through December 31, 2005.

(b) Notwithstanding the vesting provisions contained in Section 2(a) above, but subject to the other terms and conditions of this Agreement, if the Participant has been continuously employed by the Company or an Affiliate of the Company until the date of a Qualifying Termination, immediately prior to such Qualifying Termination, the Participant shall be vested in all of the Restricted Stock Units granted in this Agreement. For purposes of this Agreement, the following terms shall have the following definitions:

(i) “Cause” shall mean: (A) the willful and continued failure of the Participant to perform substantially the Participant’s duties with the Company or one of its Affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Participant by the Board of Directors (“Board”) which specifically identifies the manner in which the Board believes that the Participant has not substantially performed the Participant’s duties, or (B) the willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Participant, shall be considered “willful” unless it is done, or omitted to be done, by the Participant in bad faith or without reasonable belief that the Participant’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Company. The cessation of employment of the Participant shall not be deemed to be for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of a majority of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Participant and the Participant is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Participant is guilty of the conduct described in (A) or (B) above, and specifying the particulars hereof in detail.

(ii) “Disability” shall mean the absence of the Participant from the Participant’s duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by

a physician selected by the Company or its insurers and acceptable to the Participant or the Participant’s legal representative. If the Company determines in good faith that the Disability of the Participant has occurred during the Employment Period (as defined under the Employment Agreement), it may give to the Participant written notice in accordance with Section 12(b) of the Employment Agreement of its intention to terminate the Participant’s employment. In such event, the Participant’s employment with the Company shall terminate effective on the 30 ^th day after receipt of such notice by the Participant (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Participant shall not have returned to full-time performance of the Participant’s duties.

(iii) “Good Reason” shall mean:

(A) the assignment to the Participant of any duties inconsistent with the Participant’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of the Employment Agreement, or any other action by the Company which results in a diminution of such position, authority, duties or responsibilities; provided, however, that (subject to the election of the Participant as Chairmen as provided at Section 4(a)(i) of the Employment Agreement) any change in the Participant’s position (including status, duties and titles), authority, duties or responsibilities, in accordance with normal succession planning by the Board shall not constitute Good Reason if made with the Participant’s consent;

(B) any failure by the Company to comply with any of the provisions of Section 4(b) of the Employment Agreement;

(C) the Company’s requiring the Participant to be based at any office or location after the Effective Date (as defined under the Employment Agreement) other than where the Participant was located immediately prior to such Effective Date other than in connection with a change of the Company’s headquarters if the Participant is relocated to such headquarters, or, after such Effective Date, the Company’s requiring the Participant to travel on Company business to a substantially greater extent than required immediately prior to such Effective Date;

(D) any purported termination by the Company of the Participant’s employment otherwise than as expressly permitted by the Employment Agreement; or

(E) any failure by the Company to comply with and satisfy Section 11(c) of the Employment Agreement.

Notwithstanding the above, “Good Reason” shall exclude an isolated, insubstantial and inadvertent action or failure to act not taken or occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Participant. For purposes of this Section 2(b)(iii), any good faith determination of “Good Reason” made by the Participant shall be conclusive.

(iv) “Qualifying Termination” shall mean a termination of the Participant’s employment with the Company and its Affiliates (A) by the Company without Cause, or due to Participant’s Disability (as of his Disability Effective Date), (B) by the Participant for Good Reason, or (C) as a result of the Participant’s death.

3. Restriction on Transfer

The Restricted Stock Units may not be transferred, sold, assigned, pledged, alienated, attached or otherwise encumbered (“Transfer”), and any purported Transfer shall be void and unenforceable against the Company. No attempt to Transfer the Restricted Stock Units, whether voluntary or involuntary, by operation of law or otherwise, shall vest the purported transferee with any interest or right in or with respect to the Restricted Stock Units or rights.

4. Forfeiture

If the Participant ceases to be an employee of the Company and all Affiliates prior to vesting of the Restricted Stock Units pursuant to Section 2(a) or Section 2(b) of this Agreement, all of Participant’s rights to all of the unvested Restricted Stock Units shall immediately and irrevocably forfeit. Upon forfeiture, Participant shall have no rights relating to the Restricted Stock Units, including the right to receive dividends of additional Restricted Stock Units.

5. Issuance of Shares

(a) Except to the extent the Restricted Stock Units have been surrendered and provided that the Restricted Stock Units have vested in accordance with either (i) Section 2(a), the Restricted Stock Units are distributable in two equal installments on the first and second anniversary of the later of the Participant’s attaining the age of 62 or his retirement (the “Distribution Date”); or (ii) Section 2(b), the Restricted Stock Units are distributable in full on the date in which the Participant’s employment with the company and all Affiliates shall terminate (the “Distribution Date”), the Company shall deliver to Participant one (1) Share for each such vested Restricted Stock Unit.

(b) Participant shall not have any right, title or interest in, be entitled to vote, or (except as provided at Section 6 hereof) receive distributions in respect of, or otherwise be considered the owner of, any of the Shares covered by this Restricted Stock Unit Award, except to the extent that such Shares have been delivered pursuant to Section 5(a) hereof.

Notwithstanding the distribution provisions in Section 5(a)(i) above, if there is a Change of Control as defined in the Employment Agreement, the Restricted Stock Units will be distributed in one installment to the Participant as of the date of the Change of Control.

6. Dividends

To the extent that cash dividends are paid on Shares after the Award Date (as first set forth herein) and prior to the Distribution Date, the Participant shall be entitled to receive additional Restricted Stock Units on each dividend payment date of the Company (including any dividend declared prior to the Distribution Date and payable after such date, which shall be deemed paid on the Distribution Date) having a fair market value (based on the closing price of Shares on such payment date) equal to the amount of dividends paid on Shares represented by the Restricted Stock Units, which additional Restricted Stock Units shall vest in accordance with Section 2(a) or Section 2(b) hereof.

7. Securities Law Compliance

8. Distributions and Adjustments

of any of the benefits or potential benefits intended to be made available pursuant to this Agreement, the committee of the Board of Directors administering the Plan (the “Committee”) shall, in such manner as it shall deem equitable or appropriate in order to prevent such diminution or enlargement of any such benefits or potential benefits make adjustments to the award, including adjustments in the number and type of shares of Common Stock represented by the Restricted Stock Units that Participant would have received; provided, however, that the number of shares covered by this Award shall always be a whole number.

(b) Any additional Shares, any other securities of the Company and any other property (except for cash dividends) distributed with respect to Shares represented by the Restricted Stock Units prior to the Distribution Date shall be subject to the same restrictions, terms and conditions as the Restricted Stock Units. Any cash dividends payable with respect to the Common Stock represented by the Restricted Stock Units shall be distributed to Participant in accordance with Section 6 hereof.

9. Income Tax Withholding

In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of Participant, are withheld or collected from Participant. Participant may, at Participant’s election, satisfy applicable tax withholding obligations arising from the receipt of, or lapse of restrictions relating to, the Shares by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered with a Fair Market Value equal to the amount of such taxes or (ii) delivering to the Company Shares or other securities issued by the Company with a Fair Market Value equal to the amount of such taxes. The election must be made on or before the date that the amount of tax to be withheld is determined.

10. Miscellaneous

any right, title or interest in, or be entitled to vote, or (except as provided above) to receive distributions in respect of, or otherwise be considered the owner of, any of the Shares covered by this Restricted Stock Unit Award. Subject to the restrictions and terms of this Agreement, after such issuance, Participant (or his beneficiary) shall have all of the rights of a shareholder with respect to the Shares.

(d) Participant may designate, upon forms to be furnished by and filed with the Company, one or more primary beneficiaries or alternative beneficiaries to receive all or a specified part of Participant’s Restricted Stock Units in the event of Participant’s death. Participant may change or revoke any such designation from time to time without notice to or consent from any beneficiary or spouse. No such designation, change or revocation shall be effective unless executed by Participant and received by the Company during Participant’s lifetime. If Participant fails to designate a beneficiary, designates a beneficiary and revokes such designation without naming another beneficiary, or designates one or more beneficiaries and all such beneficiaries so designated fail to survive Participant, then Participant’s Restricted Stock Units, or the part as to which Participant’s designation fails, as the case may be, shall be paid to the representative of Participant’s estate.

11. Governing Law

This agreement shall be governed by and constructed in accordance with the laws of the State of Minnesota.

IN WITNESS WHEREOF , the parties have caused this Agreement to be executed as of the day and year first above written.

U.S. BANCORP


By:
		Karen A. Bulman

	Its: Vice President

EXHIBIT 10.7

U.S. BANCORP
RESTRICTED STOCK UNIT AWARD AGREEMENT


		Number of
		U.S. Bancorp Common	Social Security
AWARDED TO	Award Date	Shares	Number
	1/2/02	[300,268]
JERRY GRUNDHOFER	Final Vesting Date
	12/31/06

WHEREAS , the Company pursuant to Section 4(b)(iii) of the Employment Agreement between the Company and the Participant, dated as of October 16 2001 (“Employment Agreement”), and the Company’s 2001 Stock Incentive Plan (the “Plan”), the Company agreed to award to Participant, on or before the Award Date, restricted stock units corresponding to such number of Shares of common stock of the Company (“Shares”) as equals the quotient of (x) $5,600,000 divided by (y) the average New York Stock Exchange closing price of Shares of the Company during the sixty (60) trading day period ending on the day prior to the Award Date, subject to certain restrictions and on the terms and conditions contained in the Employment Agreement, this Agreement and the Plan.

In consideration of the mutual covenants contained in this Agreement, the parties agree as follows:

Capitalized terms not defined herein shall have the meaning set forth in the Plan.

1. Award

The Company, effective as of the Award Date, grants to Participant a restricted stock unit award representing the right to acquire the number of Shares set forth in the box above labeled “Number of U.S. Bancorp Common Shares” (the “Restricted Stock Units,” and one such “Unit” representing one such Share) as provided herein. The Participant hereby acknowledges and accepts such grant and the Shares covered thereby, subject to the terms and conditions under this Award Agreement.

2. Vesting

(a) Subject to the terms and conditions of this Agreement, the Restricted Stock units shall vest on December 31, 2006, provided that the Participant has been continuously employed by the Company or an Affiliate of the Company from the Award Date through December 31, 2006.

(b) Notwithstanding the vesting provisions contained in Section 2(a) above, but subject to the other terms and conditions of this Agreement, if the Participant has been continuously employed by the Company or an Affiliate of the Company until the date of a Qualifying Termination, immediately prior to such Qualifying Termination, the Participant shall be vested in all of the Restricted Stock Units granted in this Agreement. For purposes of this Agreement, the following terms shall have the following definitions:

(i) “Cause” shall mean: (A) the willful and continued failure of the Participant to perform substantially the Participant’s duties with the Company or one of its Affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Participant by the Board of Directors (“Board”) which specifically identifies the manner in which the Board believes that the Participant has not substantially performed the Participant’s duties, or (B) the willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Participant, shall be considered “willful” unless it is done, or omitted to be done, by the Participant in bad faith or without reasonable belief that the Participant’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Company. The cessation of employment of the Participant shall not be deemed to be for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of a majority of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Participant and the Participant is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Participant is guilty of the conduct described in (A) or (B) above, and specifying the particulars thereof in detail.

(ii) “Disability” shall mean the absence of the Participant from the Participant’s duties with the Company on a full-time basis for 130 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent

by a physician selected by the Company or its insurers and acceptable to the Participant or the Participant’s legal representative. If the Company determines in good faith that the Disability of the Participant has occurred during the Employment Period (as defined under the Employment Agreement), it may give to the Participant written notice in accordance with Section 12(b) of the Employment Agreement of its intention to terminate the Participant’s employment. In such event, the Participant’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Participant (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Participant shall not have returned to full-time performance of the Participant’s duties.

(iii) “Good Reason” shall mean:

(A) the assignment to the Participant of any duties inconsistent with the Participant’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of the Employment Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities; provided, however, that (subject to the election of the Participant as Chairman as provided at Section 4(a)(i) of the Employment Agreement) any change in the Participant’s position (including status, duties and titles), authority, duties or responsibilities, in accordance with normal succession planning by the Board shall not constitute Good Reason if made with the Participant’s consent;

(B) any failure by the Company to comply with any of the provisions of Section 4(b) of the Employment Agreement;

(C) the Company’s requiring the Participant to be based at any office or location after the Effective Date (as defined under the Employment Agreement) other than where the Participant was located immediately prior to such Effective Date other than in connection with a change of the Company’s headquarters if the Participant is relocated to such headquarters, or, after such Effective Date, the Company’s requiring the Participant to travel on Company business to a substantially greater extent than required immediately prior to such Effective Date;

(D) any purported termination by the Company of the Participant’s employment otherwise than as expressly permitted by the Employment Agreement; or

(E) any failure by the Company to comply with and satisfy Section 11 (c) of the Employment Agreement.

by the Participant. For purposes of this Section 2(b)(iii), any good faith determination of “Good Reason” made by the Participant shall be conclusive.

3. Restriction on Transfer

The Restricted Stock Units granted hereunder to the Participant may not be transferred, sold, assigned, pledged, alienated, attached or otherwise encumbered (“Transfer”), and any purported Transfer shall be void and unenforceable against the Company. No attempt to Transfer the Restricted Stock Units, whether voluntary or involuntary, by operation of law or otherwise, shall vest the purported transferee with any interest or right in or with respect to the Restricted Stock Units or rights thereunder.

4. Forfeiture

If the Participant ceases to be an employee of the Company and all Affiliates prior to vesting of the Restricted Stock Units pursuant to Section 2(a) or Section 2(b) hereof, all of Participant’s rights to all of the unvested Restricted Stock Units shall be immediately and irrevocably forfeited. If the Participant shall violate any provision of Section 10(a) or Section 10(b) hereof, all of Participant’s rights to all of the vested and unvested Restricted Stock Units shall be immediately and irrevocably forfeited. Upon forfeiture, Participant shall have no rights relating to the Restricted Stock Units, including the right to receive dividends of additional Restricted Stock Units.

5. Issuance of Shares

(a) Except to the extent the Restricted Stock Units have been surrendered as hereafter provided, and provided that the Restricted Stock Units have vested in accordance with Section 2(a) or Section 2(b) hereof, the Company shall deliver to Participant one (1) Share for each such vested Restricted Stock Unit on January 15 (the “Distribution Date”) of the calendar year following the calendar year in which the Participant’s employment with the Company and all Affiliates shall terminate.

(b) Section 5(a) to the contrary notwithstanding, the Participant shall be allowed to elect, in writing, delivered to the Committee no later than the October 1 immediately preceding the Distribution Date, to surrender all or fewer than all of the Restricted Stock Units, if vested, effective on the Distribution Date in exchange for an additional benefit under the Firstar Corporation Non-Qualified Retirement Plan (or successor to such plan, the “NNRP”) commencing at age 62 (or earlier on an actuarially reduced basis to the extent so provided under the NQRP). The present value of such additional benefit on the Distribution Date shall be equal to the greater of (i) the product of (A) the number of Restricted Stock Units surrendered, multiplied by (B) the average closing price of Shares over the thirty (30) trading

day period immediately preceding the Distribution Date or (ii) such product determined by substituting the average closing price of Shares over the thirty (30) trading day period immediately preceding such October 1 (such greater product is the “Conversion Value”). The Conversion Value shall be converted to the normal form of annuity under the NQRP, using actuarial assumptions based on the FAS 87 interest rate and mortality assumptions in effect on such October 1, and the annuity so converted from the Conversion Value shall be added to any benefit payable to the Participant under the NQRP (in addition to any other such benefit provided under the Employment Agreement) at retirement. In the event of the Participant’s death prior to the Distribution Date, the Participant’s beneficiary under the NQRP shall have all rights of Participant to surrender Restricted Stock Units, to the extent vested pursuant to Section 2(a) or Section 2(b) hereof, for an additional benefit under the NQRP as set forth above; provided, the thirtieth (30th) day after Participant’s death shall be substituted for “October 1” thereunder and the “Distribution Date” shall be the ninetieth (90th) day after Participant’s death.

(c) Participant shall not have any right, title or interest in, be entitled to vote, or (except as provided at Section 6 hereof) receive distributions in respect of, or otherwise be considered the owner of, any of the Shares covered by this Restricted Stock Unit Award, except to the extent that such Shares have been delivered pursuant to Section 5(a) hereof.

6. Dividends

To the extent that cash dividends are paid on Shares after the effective date of the Employment Agreement (as first set forth therein) and prior to the Distribution Date, the Participant shall be entitled to receive additional Restricted Stock Units on each dividend payment date of the Company (including any dividend declared prior to the Distribution Date and payable after such date, which shall be deemed paid on the Distribution Date) having a fair market value (based on the closing price of Shares on such payment date) equal to the amount of dividends paid on Shares represented by the Restricted Stock Units, which additional Restricted Stock Units shall vest in accordance with Section 2(a) or Section 2(b) hereof.

7. Securities Law Compliance

8. Distributions and Adjustments

(a) Subject to the foregoing provisions of this Award Agreement, in the event that any dividend or other distribution (whether in the form of cash, shares of Common Stock, or other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Common Stock or other securities of the Company or other similar corporate transaction or event affecting the Shares would be reasonably likely to result in the diminution or enlargement of any of the benefits or potential benefits intended to be made available pursuant to this Agreement, the committee of the Board of Directors administering the Plan (the “Committee”) shall, in such manner as it shall deem equitable or appropriate in order to prevent such diminution or enlargement of any such benefits or potential benefits make adjustments to the award, including adjustments in the number and type of shares of Common Stock represented by the Restricted Stock Units that Participant would have received; provided, however, that the number of shares covered by this Award shall always be a whole number.

(b) Any additional Shares, any other securities of the Company and any other property (except for cash dividends) distributed with respect to Shares represented by the Restricted Stock Units prior to the Distribution Date shall be subject to the same restrictions, terms and conditions as the Restricted Stock Units. Any cash dividends payable with respect to the Common Stock represented by the Restricted Stock Units shall be distributed to Participant in accordance with Section 6 hereof.

9. Income Tax Withholding

In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of Participant, are withheld or collected from Participant. Participant may, at Participant’s election, satisfy applicable tax withholding obligations arising from the receipt of, or lapse of restrictions relating to, the Shares by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered with a Fair Market Value equal to the amount of such taxes or (ii) delivering to the Company Shares or other securities issued by the Company with a Fair Market Value equal to the amount of such taxes. The election must be made on or before the date that the amount of tax to be withheld is determined.

10. Confidential Information; Covenant Not to Compete

(a) Confidential Information. The Participant shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Participant during the Participant’s employment by the Company or any of its affiliated companies and

which shall not be or become public knowledge (other than by acts by the Participant or representatives of the Participant in violation of this Agreement or the Employment Agreement). After termination of the Participant’s employment with the Company, the Participant shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it.

(b) Covenant Not to Compete.

(i) Participant agrees that during the Employment Period (as defined under the Employment Agreement) and for a period of three (3) years following his termination of employment with the Company for any reason, he will not in any way engage in conduct which is detrimental to the Company or engage in, represent, furnish consulting services to, be employed by, or have any interest in any “Financial Services Company” (as hereinafter defined) within the United States; provided, the Participant shall be permitted to continue to serve as a member of the boards of directors of The Midland Company and Ohio National Life Insurance Company. Further, Participant shall not during the Employment Period and for a period of three (3) years following his termination of employment with the Company for any reason (1) induce or attempt to induce any person or entity which is a customer of the Company or any of its affiliates as of the date of termination of Participant’s employment to cease or reduce doing business with the Company or any of its affiliates, or (2) solicit or endeavor to cause any employee of the Company or its affiliates to leave the employ of the Company or any of its affiliates. Notwithstanding the foregoing, the Participant shall not be prevented from owning up to three percent (3%) of the outstanding stock of any publicly traded company which is a Financial Services Company.

(ii) As used herein, the term “Financial Services Company” means any national or state chartered bank; any bank holding company; any other institution that engages as its principal activity in taking deposits or making loans; any entity that engages in commercial or consumer secured and unsecured lending, transaction processing, insurance, investment services, security brokerage, or trust services; or any affiliates of any such institutions.

(iii) Participant agrees that this covenant is reasonable with respect to its duration, geographic area and scope, and acknowledges that compliance with this Section 10(b) is necessary to protect the business and goodwill of the Company.

(c) Consequences of Violation. In the event that the Participant violates either Section 10(a) or Section 10 (b) above, the Participant agrees that he shall:

(i) forfeit all vested but undistributed Restricted Stock Units;

(ii) assign and tender to the Company, free and clear of all liens and encumbrances, that number of Shares then owned directly or beneficially, by the Participant equal to the number of such Shares distributed to the Participant pursuant to this Award of Restricted Stock Units;

(iii) pay cash to the Company an amount equal to the gross proceeds realized by the Participant upon the sale through the New York Stock Exchange, or if sold or otherwise disposed in any other manner (including, without limitation, a disposition without receipt of consideration such as by gift) the value (such value to be equal to the product of such number of Shares multiplied by the average of the highest and lowest sale prices of Shares on the day of such sale or disposition (or if not traded on such day then the immediately preceding trading day)), of the difference between (A) all Shares directly or beneficially owned by the Participant not to exceed the number of Shares distributed to the Participant pursuant to this Award of Restricted Stock Units, minus (B) the number of Shares tendered to the Company pursuant to Section 10(c)(ii), such sale or other disposition occurring during the one-year period immediately prior to the occurrence of the Participant’s conduct which constitutes such violation; and

(iv) be subject to such other consequences as provided under the Employment Agreement.

All payments, assignments and tenders provided under this Section 10(c) shall be paid by the Participant to the Company within 60 days following notice of such violation from the Company.

11. Miscellaneous

(a) This Agreement is issued pursuant to the Plan and is subject to its terms. Participant acknowledges receipt of a copy of the Plan. The Plan is also available for inspection on the intranet and during business hours at the principal office of the Company.

(b) Subject to the Employment Agreement, this Agreement shall not confer on Participant any right with respect to continuance of employment with the Company or any Affiliate, nor will it interfere in any way with the right of the Company or any Affiliate to terminate such employment at any time.

(c) Until the Shares shall have been issued to Participant (or his beneficiary) as provided in this Agreement, the Participant shall not have any right, title or interest in, or be entitled to vote, or (except as provided above) to receive distributions in respect of, or otherwise be considered the owner of, any of the Shares covered by this Restricted Stock Unit Award. Subject to the restrictions and terms of this Agreement, after such issuance, Participant (or his beneficiary) shall have all of the rights of a shareholder with respect to the Shares.

12. Governing Law

This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota.

IN WITNESS WHEREOF , the parties have caused this Agreement to be executed as of the day and year first above written.

U.S. BANCORP


By:	/s/ Stephen E. Smith	/s/ Jerry A. Grundhofer
Its:	EVP-Human Resources	Jerry Grundhofer

EXHIBIT 10.8

AMENDMENT NO. 2 OF EMPLOYMENT AGREEMENT

This AMENDMENT NO. 2 OF EMPLOYMENT AGREEMENT entered into by and between U.S Bancorp, a Delaware corporation (the “Company”) and Jerry A. Grundhofer (the “Executive”), is entered into effective October 19, 2004.

RECITALS

WHEAREAS, the Company and the Executive entered into that certain Employment Agreement effective October 16, 2001;

WHEREAS, the Company and the Executive entered into an Amendment of Employment Agreement, effective January 1, 2004; and

WHEREAS, the parties desire to further amend such Employment Agreement.

AMENDMENT

NOW THEREFORE, it is agreed:

1. Section 4. Terms of Employment (a) Position and Duties is deleted in its entirety and replaced as follows:

“During the Employment Period, the Executive shall be Chairman and Chief Executive Officer of the Company, and, in such capacity, the Executive shall be responsible for the strategic direction and operations of the Company, and shall serve on the Company’s Board of Directors and shall have such other duties, responsibilities, and authorities as shall be consistent therewith. The Executive shall also be Chairman and Chief Executive Officer of U.S. Bank, N.A. and shall serve on its Board of Directors.”

2. In all other respects, the Employment Agreement is approved, ratified and continued, as amended hereby.

3. This Amendment may be executed in one or more counterparts, each of which shall be an original and all of which, taken together, shall constitute one and the same agreement.

IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Amendment to be executed in its name on its behalf, all as of the day and year first above written.


		/s/ Jerry A. Grundhofer
		Jerry A. Grundhofer

		U.S. Bancorp

		/s/ David B. O'Maley by: David B. O’Maley
		Chairman, Compensation Committee
		Board of Directors



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


(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)) 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)	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


	(c)	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


	(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.


(1)	The Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (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.

1.		Grant of Option .

		The Company grants Optionee the right and option (the “Option”) to purchase all or any part of an aggregate of the number of shares of the Company’s Common Stock set forth in the box above labeled “Number of U.S. Bancorp Common Shares” at the exercise price set forth in the box above labeled “Exercise Price Per Share” on the terms and conditions of this Agreement. The Option is not intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).

(i)		“Affiliate” shall be defined as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(ii)		“Announcement Date” shall mean the date of the public announcement of the transaction, event or course of action that results in a Change in Control.

(iii)		“Cause” shall mean (A) the continued failure by Optionee to substantially perform Optionee’s duties with the Company or any Affiliate (other than any such failure resulting from Optionee’s Disability (as defined in Section 3(c))), after a demand for substantial performance is delivered to Optionee that specifically identifies the manner in which the Company believes that Optionee has not substantially performed Optionee’s duties, and Optionee has failed to resume substantial performance of Optionee’s duties on a continuous basis, (B) gross and willful misconduct during the course of employment (regardless of whether the misconduct occurs on the Company’s premises), including, but not limited to, theft, assault, battery, malicious destruction of property, arson, sabotage, embezzlement, harassment, acts or omissions which violate the Company’s rules or policies (such as breaches of confidentiality), or other conduct which demonstrates a willful or reckless disregard of the interests of the Company or its Affiliates or (C) Optionee’s conviction of a crime (including, without limitation, a misdemeanor offense) which impairs Optionee’s ability substantially to perform Optionee’s duties with the Company.

(iv)		“Change in Control” shall mean any of the following occurring after the date of this Agreement:

(B)		Individuals who, as of the date, constitute the Company’s Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors (except as a result of the death, retirement or disability of one or more members of the Incumbent Board); provided, however, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, (1) any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board, (2) any director designated by or on behalf of a Person who has entered into an agreement with the Company (or which is contemplating entering into an agreement) to effect a Business Combination (as defined in Section 2(b)(iv)(C)) with one or more entities that are not Company Entities or (3) any director who serves in connection with the act of the Board of Directors of increasing the number of directors and filling vacancies in connection with, or in contemplation of, any such Business Combination; or

(C)		Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (1) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding any Company Entity or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (3) at least a majority of the members of the board of directors of the

(v)		“Notice of Termination” shall mean a written notice which sets forth the date of termination of Optionee’s employment.

(vi)		“Person” shall be defined as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.

(vii)		“Qualifying Termination” shall mean a termination of Optionee’s employment with the Company or its Affiliates by the Company for any reason other than Cause within 12 months following a Change in Control; provided, however, that any such termination shall not be a Qualifying Termination if Optionee has been notified in writing more than 30 days prior to the Announcement Date that Optionee’s employment with the Company is not expected to continue for more than 12 months following the date of such notification; provided that such exclusion from Qualifying Termination shall only apply if Optionee’s employment with the Company is terminated within such 12 month period; and provided, further, that any such termination shall not be a Qualifying Termination if Optionee has announced in writing, prior to the date the Company provides Notice of Termination to Optionee, the intention to terminate employment or retire, subject to the condition that any such termination by the Company prior to Optionee’s stated termination or retirement date shall be deemed to be termination or retirement by Optionee on such stated date unless termination by the Company is for Participant’s gross and willful misconduct.

(i)		If Optionee’s employment shall be terminated for any reason other than Cause, death, Disability, Retirement (as defined in Section 3(c)) or Early Retirement (as defined in Section 3(c)), Optionee may at any time within a period of 90 days after such termination, but not after the termination date of the Option, exercise the option to the extent that Option was exercisable by Optionee on the date of the termination of employment.

(ii)		If Optionee’s employment shall be terminated by reason of Cause, the Option shall be terminated as of the date of the misconduct.

(iii)		If Optionee shall die while in the employ of the Company or any Affiliate or within 90 days after termination of employment for any reason other than Cause, the Option will be fully exercisable in whole or in part, notwithstanding the vesting provisions contained in Section 2(a) or Section 2(b), at any time up to the last day of the three year period commencing on the date of Optionee’s termination of employment (or, if earlier, the termination date of the Option), by the personal representatives or administrators of Optionee or by any Person or Persons to whom the Option has been transferred by will or the applicable laws of descent and distribution.

(b)		Notwithstanding the provisions contained in Section 3(a), but subject to the other terms and conditions of this Agreement, in the event that Optionee’s employment is terminated pursuant to a Qualifying Termination, Optionee shall have the right to exercise the Option in whole or in part at any time within a one year period after such termination of employment; provided that no provision of this paragraph shall shorten the period in which the Option may be exercised in the event of death, Disability, Retirement or Early Retirement; and, provided further, that no Option shall be exercisable after the expiration of the term of the Option.

(c)		For purposes of this Agreement, (A) “Retirement” means termination of employment (other than for gross and willful misconduct) by a Person who is age 59 1/2 or older and has 10 or more years of employment with the Company or its Affiliates (based on the Person’s latest date of hire by the Company or its Affiliates), (B) “Early Retirement” means termination of employment (other than for gross and willful misconduct) by a Person who is age 55 or older and has 10 or more years of employment with the Company or its Affiliates (based on the Person’s latest date of hire by the Company or its Affiliates) and (C) “Disability” means leaving active employment and qualifying for and receiving disability benefits under the Company’s long-term disability programs as in effect from time to time.

(a)		This Agreement shall not give Optionee any right with respect to continuance of employment with the Company or any Affiliate, nor will it interfere in any way with the right of the Company or any Affiliate to terminate such employment at any time. In addition, the Company or any Affiliate may at any time dismiss Optionee from employment, free from any liability or claim under the Plan. The holder of the Option will not be deemed to be the holder of any shares subject to the Option unless and until the Option has been exercised and the purchase price of the shares purchased has been paid.

(b)		Except pursuant to terms approved by the Compensation Committee of the Board of Directors (the “Committee”), the Option may not be transferred, except by will or the laws of descent and distribution to the extent provided in Section 3(a)(iii) or Section 3(a)(iv) , and during Optionee’s lifetime the Option is exercisable only by Optionee (or by Optionee’s guardian or legal representative in the case of Disability).

(c)		In the event that any dividend or other distribution (whether in the form of cash, shares of Common Stock, or other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Common Stock or other securities of the Company or other similar corporate transaction or event affecting the stock subject to the Option would be reasonably likely to result in the diminution or enlargement of any of the benefits or potential benefits intended to be made available under the Option (including, without limitation, the benefits or potential benefits of provisions relating to the term, vesting or exercisability of the Option, and any “change in control” provision), the Committee shall, in such manner as it shall deem equitable or appropriate in order to prevent such diminution or enlargement of any such benefits or potential benefits, adjust any or all of (i) the number and type of shares (or other securities or other property) subject to the Option and (ii) the exercise price with respect to the Option; provided, however, that the number of shares covered by the Option shall always be a whole number. Without limiting the foregoing, if any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of the Company’s assets to another corporation, shall be effected in such a way that holders of the Company’s Common Stock shall be entitled to receive stock, securities, cash or other assets with respect to or in exchange for such shares, Optionee shall have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Agreement and in lieu of the shares of the Common Stock of the Company immediately available for purchase and receivable upon the exercise of the Option, with appropriate adjustments to prevent diminution or enlargement of benefits or potential benefits intended to be made available under the Option, such shares of stock, other securities, cash or other assets as would have been issued or delivered to Optionee if Optionee had exercised the Option and had received such shares of Common Stock prior to such reorganization, reclassification, consolidation, merger or sale. The Company shall not effect any such consolidation, merger or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument the obligation to deliver to Optionee such shares of stock, securities, cash or other assets as, in accordance with the foregoing provisions, Optionee may be entitled to purchase or receive.

(d)		The Company shall at all times during the term of the Option reserve and keep available such number of shares of the Company’s Common Stock as will be sufficient to satisfy the requirements of this Agreement.

(e)		This Option is issued under the Plan and is subject to its terms. The Plan is available for inspection on the intranet and during business hours at the principal offices of the Company.

(a)		Subject to the terms and conditions of this Agreement, the Shares shall fully vest on the fifth anniversary date of this award, unless the company’s TSR performance for the 3-calendar year period following award date is at or above median TSR of the regional banks in our peer group, in which case vesting would accelerate to February 1 of the year following the third anniversary date of this award, as determined by U.S. Bancorp in its sole discretion.

(b)		Notwithstanding the vesting provision contained in Section 2(a) above, but subject to the other terms and conditions of this Agreement, the Option may be exercised in full immediately upon a “Qualifying Termination.” For purposes of this Agreement, the following terms shall have the following definitions:

(a)		The Company shall cause the Shares to be deposited in the name of the Participant in book entry form on the books and records of its shareholders maintained by the Company and its stock transfer agent. Access to the Shares in that account will be restricted. Such Shares are subject to forfeiture, are not transferable and remain subject to the restrictions, terms and conditions contained in the Plan and this Agreement.

(b)		The Company or its stock transfer agent shall issue statements to the Participant evidencing the Shares.

(c)		After any Shares vest pursuant to Section 2 or 4 of this Agreement, the Company shall promptly release the restriction on the Shares and authorize the stock transfer agent to issue them to Participant or Participant’s legal representatives, beneficiaries or heirs, as the case may be.

(a)		In the event that any dividend or other distribution (whether in the form of cash, shares of Common Stock, or other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Common Stock or other securities of the Company or other similar corporate transaction or event affecting the Shares would be reasonably likely to result in the diminution or enlargement of any of the benefits or potential benefits intended to be made available pursuant to this Agreement (including, without limitation, the benefits or potential benefits of provisions relating to the vesting of the Shares and any “change in control” provision), the committee of the Board of Directors administering the Plan (the “Committee”) shall, in such manner as it shall deem equitable or appropriate in order to prevent such diminution or enlargement of any such benefits or potential benefits make adjustments to the award, including adjustments in the number and type of Shares Participant would have received; provided, however, that the number of shares covered by the award shall always be a whole number.

(b)		Any additional shares of Common Stock, any other securities of the Company and any other property (except for cash dividends) distributed with respect to the Shares prior to the date the Shares vest shall be subject to the same restrictions, terms and conditions as the Shares. Any cash dividends payable with respect to the Shares shall be distributed to Participant at the same time cash dividends are distributed to shareholders of the Company generally.

(c)		Any additional shares of Common Stock, any securities and any other property (except for cash dividends) distributed with respect to the Shares prior to the date such Shares vest shall be promptly deposited with the Secretary or the custodian designated by the Secretary to be held in custody in accordance with Section 5(b) hereof.

(a)		This Agreement is issued pursuant to the Plan and is subject to its terms. Participant acknowledges receipt of a copy of the Plan. The Plan is also available for inspection on the Intranet and during business hours at the principal office of the Company.

(b)		This Agreement shall not confer on Participant any right with respect to continuance of employment with the Company or any Affiliate, nor will it interfere in any way with the right of the Company or any Affiliate to terminate such employment at any time.

(c)		Until the Shares shall have been issued to Participant as provided in this Agreement, Participant shall have the rights to receive cash dividends and vote the Shares, but shall have no other rights of a shareholder with respect to the Shares. Subject to the restrictions and terms of this Agreement, after such issuance, Participant shall have all of the rights of a shareholder with respect to the Shares.

(a)		Subject to the terms and conditions of this Agreement, the Option may be exercised by Optionee in cumulative installments not in excess of 25% on or after the first anniversary of the Grant Date, 25% on or after the second anniversary of the Grant Date, 25% on or after the third anniversary of the Grant Date and 25% on or after the fourth anniversary of the Grant Date. If the full amount of stock available for purchase in any of the foregoing periods is not purchased during such period, the shares not purchased shall be available for purchase in any subsequent period during the term of the Option. The Option shall terminate at the close of business on the date in the box above labeled “Expiration Date,” or on such earlier date as described in this Agreement.

(b)		Notwithstanding the other vesting provisions contained in Section 2(a) above, but subject to the other terms and conditions of this Agreement, the Option may be exercised in full immediately upon a “Change in Control.” For purposes of this Agreement, the following terms shall have the following definitions:

(i)		If Optionee’s service as a director is terminated for any reason other than for Cause or for voluntary separation from service with less than ten years of service as a director, the Option will immediately be fully exercisable in whole notwithstanding the vesting provisions contained in Section 2(a) or Section 2(b), and may be exercised at any time during the remaining term of the option, but not after the termination date of the Option.

(ii)		If Optionee’s service as a director is terminated upon the Optionee’s reaching mandatory retirement age, the Option will immediately be fully exercisable in whole notwithstanding the vesting provisions contained in Section 2(a) or Section 2(b), and may be exercised at any time during the remaining term of the option, but not after the termination date of the Option.

(iii)		If Optionee’s service as a director is terminated by reason of Cause, the Option shall be terminated as of the date of the misconduct.

(iv)		If Optionee’s service as a director is terminated by voluntary separation from the Board with fewer than ten years service as a Director, then Optionee may at any time within a period of three years after such termination, but not after the termination date of the Option, exercise the option to the extent that the Option was exercisable by Optionee on the date of the termination of service as a director.

(A)		The acquisition by any Person (as defined in Section 2(b)(iv) hereof) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (1) the then outstanding shares of Common Stock (the “Outstanding Company Common Stock”) or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that, for purposes of this clause (A), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by a subsidiary of the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or a subsidiary of the Company (a “Company Entity”) or (iv) any acquisition by any corporation pursuant to a transaction which complies with clause (i), (ii) or (iii) of this clause (A); or

(B)		Individuals who, as of the date, constitute the Company’s Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors (except as a result of the death, retirement or disability of one or more members of the Incumbent Board); provided, however, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, (1) any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board, (2) any director designated by or on behalf of a Person who has entered into an agreement with the Company (or which is contemplating entering into an agreement) to effect a Business Combination (as defined in Section 2(b)(iii)(C) hereof) with one or more entities that are not Company Entities or (3) any director who serves in connection with the act of the Board of Directors of increasing the number of directors and filling vacancies in connection with, or in contemplation of, any such Business Combination; or

(C)		Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of

(ii)		If Participant’s service as a director is terminated upon the Optionee’s reaching mandatory retirement age, the Award will immediately vest in full without regard to the vesting provisions contained in Section 2(a) or Section 2(b).

(iii)		If Participant’s service as a director is terminated by reason of Cause, the Award shall be forfeited as of the date of the misconduct.

(a)		Except to the extent the Restricted Stock Units have been surrendered and provided that the Restricted Stock Units have vested in accordance with either Section 2(a), 2(b) or 4(a) of this agreement, the Restricted Stock Units are distributable on the date the Participant no longer serves on the Board of the Company (the “Distribution Date”). The Company shall deliver to Participant one (1) Share for each such vested Restricted Stock Unit.

(b)		Participant shall have no right, title or interest in, or (except as provided at Section 6) receive distributions in respect of, or otherwise be considered the owner of, any of the Shares covered by this Restricted Stock Unit Award, unless and until the Shares have been delivered pursuant to Section 5(a).

(i)		“Cause” shall mean: (A) the willful and continued failure of the Participant to perform substantially the Participant’s duties with the Company or one of its Affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Participant by the Board of Directors (“Board”) which specifically identifies the manner in which the Board believes that the Participant has not substantially performed the Participant’s duties, or (B) the willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Participant, shall be considered “willful” unless it is done, or omitted to be done, by the Participant in bad faith or without reasonable belief that the Participant’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Company. The cessation of employment of the Participant shall not be deemed to be for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of a majority of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Participant and the Participant is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Participant is guilty of the conduct described in (A) or (B) above, and specifying the particulars hereof in detail.

(ii)		“Disability” shall mean the absence of the Participant from the Participant’s duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by

(A)		the assignment to the Participant of any duties inconsistent with the Participant’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of the Employment Agreement, or any other action by the Company which results in a diminution of such position, authority, duties or responsibilities; provided, however, that (subject to the election of the Participant as Chairmen as provided at Section 4(a)(i) of the Employment Agreement) any change in the Participant’s position (including status, duties and titles), authority, duties or responsibilities, in accordance with normal succession planning by the Board shall not constitute Good Reason if made with the Participant’s consent;

(B)		any failure by the Company to comply with any of the provisions of Section 4(b) of the Employment Agreement;

(C)		the Company’s requiring the Participant to be based at any office or location after the Effective Date (as defined under the Employment Agreement) other than where the Participant was located immediately prior to such Effective Date other than in connection with a change of the Company’s headquarters if the Participant is relocated to such headquarters, or, after such Effective Date, the Company’s requiring the Participant to travel on Company business to a substantially greater extent than required immediately prior to such Effective Date;

(D)		any purported termination by the Company of the Participant’s employment otherwise than as expressly permitted by the Employment Agreement; or

(a)		This Agreement is issued pursuant to the Plan and is subject to its terms. Participant acknowledges receipt of a copy of the Plan. The Plan is also available for inspection on the intranet and during business hours at the principal office of the Company.

(b)		Subject to the Employment Agreement, this Agreement shall not confer on Participant any right with respect to continuance of employment with the Company or any Affiliate, nor will it interfere in any way with the right of the Company or any Affiliate to terminate such employment at any time.

(c)		Until the Shares shall have been issued to Participant (or his beneficiary) as provided in this Agreement, the Participant shall not have

	(a)		Subject to the terms and conditions of this Agreement, the Restricted Stock units shall vest on December 31, 2006, provided that the Participant has been continuously employed by the Company or an Affiliate of the Company from the Award Date through December 31, 2006.

	(b)		Notwithstanding the vesting provisions contained in Section 2(a) above, but subject to the other terms and conditions of this Agreement, if the Participant has been continuously employed by the Company or an Affiliate of the Company until the date of a Qualifying Termination, immediately prior to such Qualifying Termination, the Participant shall be vested in all of the Restricted Stock Units granted in this Agreement. For purposes of this Agreement, the following terms shall have the following definitions:

	(a)		Except to the extent the Restricted Stock Units have been surrendered as hereafter provided, and provided that the Restricted Stock Units have vested in accordance with Section 2(a) or Section 2(b) hereof, the Company shall deliver to Participant one (1) Share for each such vested Restricted Stock Unit on January 15 (the “Distribution Date”) of the calendar year following the calendar year in which the Participant’s employment with the Company and all Affiliates shall terminate.

	(b)		Section 5(a) to the contrary notwithstanding, the Participant shall be allowed to elect, in writing, delivered to the Committee no later than the October 1 immediately preceding the Distribution Date, to surrender all or fewer than all of the Restricted Stock Units, if vested, effective on the Distribution Date in exchange for an additional benefit under the Firstar Corporation Non-Qualified Retirement Plan (or successor to such plan, the “NNRP”) commencing at age 62 (or earlier on an actuarially reduced basis to the extent so provided under the NQRP). The present value of such additional benefit on the Distribution Date shall be equal to the greater of (i) the product of (A) the number of Restricted Stock Units surrendered, multiplied by (B) the average closing price of Shares over the thirty (30) trading

	(i)		Participant agrees that during the Employment Period (as defined under the Employment Agreement) and for a period of three (3) years following his termination of employment with the Company for any reason, he will not in any way engage in conduct which is detrimental to the Company or engage in, represent, furnish consulting services to, be employed by, or have any interest in any “Financial Services Company” (as hereinafter defined) within the United States; provided, the Participant shall be permitted to continue to serve as a member of the boards of directors of The Midland Company and Ohio National Life Insurance Company. Further, Participant shall not during the Employment Period and for a period of three (3) years following his termination of employment with the Company for any reason (1) induce or attempt to induce any person or entity which is a customer of the Company or any of its affiliates as of the date of termination of Participant’s employment to cease or reduce doing business with the Company or any of its affiliates, or (2) solicit or endeavor to cause any employee of the Company or its affiliates to leave the employ of the Company or any of its affiliates. Notwithstanding the foregoing, the Participant shall not be prevented from owning up to three percent (3%) of the outstanding stock of any publicly traded company which is a Financial Services Company.

	(ii)		As used herein, the term “Financial Services Company” means any national or state chartered bank; any bank holding company; any other institution that engages as its principal activity in taking deposits or making loans; any entity that engages in commercial or consumer secured and unsecured lending, transaction processing, insurance, investment services, security brokerage, or trust services; or any affiliates of any such institutions.

	(iii)		Participant agrees that this covenant is reasonable with respect to its duration, geographic area and scope, and acknowledges that compliance with this Section 10(b) is necessary to protect the business and goodwill of the Company.