U.S. Bancorp

Letter to Shareholders:

OUR 2005 RESULTS WERE EXCELLENT ACROSS A WIDE RANGE OF KEY MEASURES. I am pleased that we were able to deliver on our promise to produce high-quality earnings and industry leading returns. At the same time, we maintained superior credit quality and continued to make revenue-producing investments in this corporation.

Fellow Shareholders:

Industry-leading core earnings and consistent performance

We achieved record earnings of $4.5 billion in 2005. This represented $2.42 per diluted share, an 11 percent increase over our 2004 results. This is the fourth consecutive year that we have exceeded our long-term goal of 10 percent earnings per share growth. We also improved upon our industry-leading performance metrics and posted return on average assets of 2.21 percent and return on average equity of 22.5 percent for the year.

Our financial results reflect our ability to execute our strategies for success. These include our long-term targets for earnings per share growth of 10 percent and for return on equity of 20 percent, both of which we exceeded in 2005. Other corporate goals include reducing credit and earnings volatility of the company and continuing to invest for future growth. You will read below more details about our accomplishing these goals.

Finally, two overriding goals are to provide high-quality service to every customer and to target 80 percent return of earnings to our shareholders. In the pages to follow, you will see some excellent examples of ways we are changing and growing to enhance customer service. And in the graphs at the top of the next page, you can see that we continue our commitment to creating shareholder value.

Positive operating leverage and superior efficiency

Excluding securities gains and losses and the valuation of our mortgage servicing rights, we grew revenue faster than expense in 2005, thus creating positive operating leverage — a fundamental objective of this corporation. In this fiercely competitive and commodity-like banking industry, maintaining superior operating efficiency is critical. This management team is dedicated to maintaining superior operating efficiency, and the year 2005 was no exception, as we obtained a tangible efficiency ratio for the year of 40.8 percent.

Achieving our goal of lowering our credit risk profile

We are extremely proud of the improvements we have made in the company's overall risk profile. Our net charge-offs were 51 basis points of average loans in 2005, a continued improvement compared with prior years. Nonperforming assets at December 31, 2005, were $644 million, a 14 percent decrease from the balance at December 31, 2004. The steps we have taken to reduce the company's risk profile we believe will enable us to minimize the impact of future changes in the economy, keep our credit costs lower than our peers and thereby lower the volatility of operating results.

Continuing to invest in this company

We have continued to invest in our company. In particular, the acquisitions we have made in our fee-based businesses over the past few years have allowed us to achieve our earnings objectives while maintaining high returns, despite the pressure on the net interest margin, the challenges of the recent and current interest rate cycle and an incredibly competitive environment.

Our continued investments in fee-based businesses, distribution channels and market expansion provide future growth opportunities for U.S. Bancorp. These investments have strengthened our presence and product offerings for the benefit of our entire customer base. We operate with an advantageous mix of businesses and have strong market positions in fee-based businesses, particularly merchant processing and corporate trust. We have strategically developed a number of diverse national business lines, which in addition to our powerhouse regional consumer and small business banking, have generated sustainable profitability.

Standard & Poor's Rating Services raises ratings on U.S. Bancorp

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

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

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

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

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

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

Creating shareholder value is always our priority

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

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

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

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

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

March 7, 2006

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