OVERVIEW

Earnings Summary U.S. Bancorp and its subsidiaries (the "Company") reported net income attributable to U.S. Bancorp of $529 million for the first quarter of 2009 or $.24 per diluted common share, compared with $1,090 million, or $.62 per diluted common share for the first quarter of 2008. Return on average assets and return on average common equity were .81 percent and 9.0 percent, respectively, for the first quarter of 2009, compared with 1.85 percent and 21.2 percent, respectively, for the first quarter of 2008. As a result of the current economic environment, the Company increased the allowance for credit losses by recording $530 million of provision for credit losses in excess of net charge-offs. Additional significant items in the first quarter of 2009 results included $198 million of net securities losses, principally related to impairment of investments in perpetual preferred stock of a large financial institution downgraded during the quarter and a $92 million gain from a corporate real estate transaction. The first quarter of 2008 also included several significant items, including a $492 million gain related to the Company's ownership position in Visa, Inc. ("Visa Gain"), $192 million of provision for credit losses in excess of net charge-offs and $253 million of impairment charges on structured investment securities.
Total net revenue, on a taxable-equivalent basis, for the first quarter of 2009 was $9 million (.2 percent) higher than the first quarter of 2008, reflecting a 14.5 percent increase in net interest income and a 12.5 percent decrease in noninterest income. The increase in net interest income from a year ago was a result of growth in average earning assets and an increase in net interest margin. The net interest margin increased from 3.55 percent in the first quarter of 2008 to 3.59 percent in the first quarter of 2009, because of growth in higher-spread loans and the Company's interest rate sensitivity position which benefited from declining market rates. Noninterest income declined from a year ago as payment products revenue, merchant processing services, trust and investment management fees and deposit service charges were affected by the impact of the slowing economy on equity markets and customer spending. In addition, noninterest income decreased due to the Visa Gain in the first quarter of 2008, higher retail lease residual losses and lower income from equity investments. These revenue declines were partially offset by higher mortgage banking revenue, a lower level of net securities losses and a $92 million corporate real estate gain related to acquiring a controlling interest in an entity that owns an office building in which the Company leases office space. Total noninterest expense in the first quarter of 2009 was $92 million (5.2 percent) higher than in the first quarter of 2008, principally due to costs associated with businesses acquired in 2008, partially offset by focused reductions in costs from implementation of the Company's cost containment plan in the first quarter of 2009. Operating expense in the first quarter of 2009 also included higher pension and credit collection costs.
The provision for credit losses for the first quarter of 2009 increased $833 million over the first quarter of 2008. The increase in the provision for credit losses reflected continuing stress in residential real estate markets, driven by declining home prices in most geographic regions, as well as deteriorating economic conditions and the corresponding impact on the commercial and consumer loan portfolios. Net charge-offs in the first quarter of 2009 were $788 million, compared with net charge-offs of $293 million in the first quarter of 2008. At March 31, 2009, $11.1 billion of the Company's assets were covered by loss sharing agreements with the Federal Deposit Insurance Corporation ("FDIC") ("covered assets"). Refer to "Corporate Risk Profile" for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

STATEMENT OF INCOME ANALYSIS

Net Interest Income Net interest income, on a taxable-equivalent basis, was $2,095 million in the first quarter of 2009, compared with $1,830 million in the first quarter of 2008. The $265 million (14.5 percent) increase was due to growth in average earning assets, as well as a higher net interest margin percentage. Average earning assets were $28.3 billion (13.7 percent) higher in the first quarter of 2009 than the first quarter of 2008, primarily driven by an increase in average loans. During the first quarter of 2009, the net interest margin increased to 3.59 percent, compared with 3.55 percent in the first quarter of 2008. The net interest margin increased because of growth in higher-spread loans and asset/liability re-pricing in a declining interest rate

U.S. Bancorp

environment. Refer to the "Consolidated Daily Average Balance Sheet and Related Yields and Rates" table for further information on net interest income. Total average loans for the first quarter of 2009 were $30.5 billion (19.6 percent) higher than the first quarter of 2008, driven by growth in most loan categories. This included growth in average retail loans of $9.9 billion (19.4 percent), commercial loans of $4.4 billion (8.6 percent), commercial real estate loans of $3.9 billion (13.1 percent) and residential mortgages of $.9 billion (4.1 percent). Retail loan growth, year-over-year, included a $4.7 billion increase in federally guaranteed student loan balances resulting from the transfer of loans held for sale to held for investment, a portfolio purchase and production growth. Retail loans also experienced strong growth in credit card and home equity loan balances. The increase in commercial loans was principally a result of growth in corporate and commercial banking balances as new and existing business customers used bank credit facilities to fund business growth and liquidity requirements. The growth in commercial real estate loans reflected new business growth driven by capital market conditions and an acquisition in the second quarter of 2008. The increase in residential mortgages reflected increased origination activity as a result of current market interest rate declines. Average covered assets related to the fourth quarter of 2008 acquisitions of Downey Savings and Loan Association, F.A. and PFF Bank and Trust ("Downey" and "PFF", respectively) were $11.3 billion in the first quarter of 2009.
Average investment securities in the first quarter of 2009 were $1.6 billion (3.6 percent) lower than the first quarter of 2008, principally a result of prepayments and sales. The composition of the Company's investment portfolio remained essentially unchanged from a year ago.
Average total deposits for the first quarter of 2009 increased $29.7 billion (22.7 percent) over the first quarter of 2008. Excluding deposits from 2008 acquisitions, average total deposits increased $16.1 billion (12.3 percent) over the first quarter of 2008. Average noninterest-bearing deposits increased $8.9 billion (32.8 percent) year-over-year, primarily due to growth in the Wealth Management & Securities Services and Wholesale Banking business lines and the impact of acquisitions. Average total savings deposits increased year-over-year by $9.3 billion (15.2 percent) primarily because of an increase in average savings accounts of $5.2 billion, primarily in Consumer Banking. The increase was also due to a $1.7 billion (5.7 percent) increase in average interest checking balances, the result of higher Consumer Banking and state and municipal government-related balances, and a $2.3 billion (9.1 percent) increase in average money market savings balances driven by higher balances from broker-dealer and institutional trust customers and the impact of acquisitions. Average time certificates of deposit less than $100,000 were higher year-over-year by $4.5 billion (33.3 percent), primarily due to acquisitions. Average time deposits greater than $100,000 increased by $7.0 billion (23.9 percent) year-over-year as a result of the business lines' ability to attract larger customer deposits given current market conditions and the impact of acquisitions.

Provision for Credit Losses The provision for credit losses for the first quarter of 2009 increased $833 million over the first quarter of 2008. The provision for credit losses exceeded net charge-offs by $530 million in the first quarter of 2009 and $192 million in the first quarter of 2008. The increases in the provision and allowance for credit losses reflected continuing stress in residential real estate markets, driven by declining home prices in most geographic regions. The increases also reflected deteriorating economic conditions and the corresponding impact on the commercial and consumer loan portfolios. Net charge-offs in the first quarter of 2009 were $788 million, compared with net charge-offs of $293 million in the first quarter of 2008. Refer to "Corporate Risk Profile" for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Noninterest Income Noninterest income in the first quarter of 2009 was $1,788 million, compared with $2,044 million in the first quarter of 2008. The $256 million (12.5 percent) decrease in the first quarter of 2009 from the first quarter of 2008 was principally due to the $492 million Visa Gain included in the first quarter of 2008. Offsetting this item was a significant increase in mortgage banking revenue due to an increase in gains on the sales of mortgage loans brought on by improving margins and higher production levels, the result of the current refinancing activities, given the lower rate environment. Other increases in noninterest income included higher ATM processing services related to growth in transaction volumes and business expansion, higher treasury management fees as declining rates reduced customer earnings credits, and higher commercial products revenue due to higher foreign exchange revenue, letters of credit and other commercial loan fees. Fee-based revenue in certain revenue categories decreased because weaker economic conditions adversely impacted consumer and business

U.S. Bancorp

Table 2  Noninterest Income


                                                         Three Months Ended
                                                             March 31,
                                                                           Percent
       (Dollars in Millions)                         2009        2008       Change
       Credit and debit card revenue              $   256     $   248          3.2 %
       Corporate payment products revenue             154         164         (6.1 )
       ATM processing services                        102          84         21.4
       Merchant processing services                   258         271         (4.8 )
       Trust and investment management fees           294         335        (12.2 )
       Deposit service charges                        226         257        (12.1 )
       Treasury management fees                       137         124         10.5
       Commercial products revenue                    129         112         15.2
       Mortgage banking revenue                       233         105              *
       Investment products fees and commissions        28          36        (22.2 )
       Securities gains (losses), net                (198 )      (251 )       21.1
       Other                                          169         559        (69.8 )

       Total noninterest income                   $ 1,788     $ 2,044        (12.5 )%

* Not meaningful.

behavior. Corporate payment products revenue and merchant processing services revenue decreased because transaction volumes declined. Deposit service charges decreased primarily due to lower overdraft fees, with a decrease in the volume of overdraft incidences more than offsetting account growth. Trust and investment management fees declined, as did investment product fees and commissions, reflecting a decline in equity market conditions. Other income decreased, primarily due to the net impact of the 2008 Visa Gain, offset by a $62 million reduction in income in 2008 from the adoption of an accounting standard and the corporate real estate gain in the current quarter. Net securities losses were lower than a year ago because the Company sold certain fixed-rate securities for gains in the first quarter of 2009. Impairment charges on securities were $254 million in the first quarter of 2009, approximately the same as recorded in the first quarter of 2008.

Noninterest Expense Noninterest expense was $1,871 million in the first quarter of 2009, an increase of $92 million (5.2 percent) from the first quarter of 2008. Compensation expense increased primarily due to businesses acquired in 2008. Employee benefits expense increased partially due to acquired businesses, but also because of increased pension costs associated with previous period declines in the value of pension assets. Net occupancy and equipment expense, and technology and communications expense increased over the first quarter of 2008, primarily due to acquisitions, as well as branch-based and other business expansion initiatives. Other expense increased year-over-year as a result of increased costs for other real estate owned, mortgage servicing, tax-advantaged projects and acquisition integration. Marketing and business development expense decreased year-over-year due to a contribution to the U.S. Bancorp Foundation in the first quarter of 2008.

Income Tax Expense The provision for income taxes was $101 million (an effective rate of 15.6 percent) for the first quarter of 2009, compared with $476 million (an effective rate of 30.1 percent) for the first quarter of 2008. The decline in the effective tax rate from the first quarter of 2008 reflected the impact of the decline in pre-tax earnings and the relative level of tax-advantaged investments. For further information on income taxes, refer to Note 10 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS

Loans The Company's total loan portfolio was $184.4 billion at March 31, 2009, compared with $185.2 billion at December 31, 2008, a decrease of $.8 billion (.4 percent). The decrease was driven by a decrease in commercial loans and covered assets, partially offset by growth in retail loans, residential mortgages and commercial real estate loans. The $1.7 billion (3.0 percent) decrease in commercial loans was primarily driven by business customers' lower capital spending and utilization of bank credit facilities to fund business growth and liquidity requirements.
Commercial real estate loans increased $.4 billion (1.3 percent) at March 31, 2009, compared with December 31, 2008, reflecting new business growth, as current market conditions have limited borrower access to capital markets. Residential mortgages held in the loan portfolio increased $.4 billion (1.9 percent) at March 31, 2009, compared with December 31, 2008, reflecting an increase in mortgage banking origination activity as a

U.S. Bancorp


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Table 3  Noninterest Expense


                                                      Three Months Ended
                                                          March 31,
                                                                        Percent
          (Dollars in Millions)                   2009        2008       Change
          Compensation                         $   786     $   745          5.5 %
          Employee benefits                        155         137         13.1
          Net occupancy and equipment              211         190         11.1
          Professional services                     52          47         10.6
          Marketing and business development        56          79        (29.1 )
          Technology and communications            155         140         10.7
          Postage, printing and supplies            74          71          4.2
          Other intangibles                         91          87          4.6
          Other                                    291         283          2.8

          Total noninterest expense            $ 1,871     $ 1,779          5.2 %

          Efficiency ratio                        45.8 %      43.1 %

result of current market interest rate declines. Most loans retained in the portfolio are to customers with prime or near-prime credit characteristics at the date of origination.
Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, increased $.4 billion (.7 percent) at March 31, 2009, compared with December 31, 2008. The increase was primarily driven by growth in student loan and credit card balances, partially offset by a decrease in installment loan balances.

Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages and student loans to be sold in the secondary market, were $4.7 billion at March 31, 2009, compared with $3.2 billion at December 31, 2008. The increase in loans held for sale was principally due to an increase in mortgage loan origination activity due to a decline in rates and seasonal loan originations during the first quarter of 2009.

Investment Securities Investment securities, including available-for-sale and held-to-maturity, totaled $39.3 billion at March 31, 2009, compared with $39.5 billion at December 31, 2008. At March 31, 2009, adjustable-rate financial instruments comprised 44 percent of the investment securities portfolio, compared with 40 percent at December 31, 2008.
The Company conducts a regular assessment of its investment securities to determine whether any securities are other-than-temporarily impaired. On April 9, 2009, the Financial Accounting Standards Board issued FASB Staff Position No. FAS 115-2 and FAS 124-2 ("FSP 115-2"), "Recognition and Presentation of Other-Than-Temporary Impairments", which the Company adopted effective January 1, 2009. FSP 115-2 provides guidance for the measurement and recognition of other-than-temporary impairment for debt securities, and requires the portion of other-than-temporary impairment related to factors other than credit losses be recognized in other comprehensive income (loss), rather than earnings. The effect of the adoption of FSP 115-2 was not significant. Net unrealized losses included in accumulated other comprehensive income (loss) were $2.3 billion at March 31, 2009, compared with $2.8 billion at December 31, 2008. The decrease in unrealized losses was primarily due to amounts recognized as other-than-temporary impairment, and an increase in fair value of agency mortgage-backed securities and obligations of state and political subdivisions. Many of the state and political subdivision obligations are supported by mono-line insurers. As a result, management monitors the underlying credit quality of the issuers and the support of the mono-line insurers. As of March 31, 2009, approximately 1 percent of the available-for-sale securities portfolio consisted of perpetual preferred securities, primarily issued by financial institutions. The unrealized losses for these securities were $274 million at March 31, 2009, compared to $387 million at December 31, 2008. The decrease was principally a result of impairment recognized on the perpetual preferred stock of a large domestic bank downgraded during the first quarter of 2009.
There is limited market activity for the remaining structured investment security and certain non-agency mortgage-backed securities held by the Company. As a result the Company estimates the fair value of these securities using estimates of expected cash flows, discount rates and management's assessment of various market factors, which are judgmental in nature. The Company recorded $56 million of impairment charges on non-agency mortgage-backed and structured investment vehicle related securities during the first

U.S. Bancorp

Table 4  Investment Securities


                                                                               March 31, 2009                                                   December 31, 2008
                                                                                          Weighted-                                                         Weighted-
                                                                                            Average        Weighted-                                          Average        Weighted-
                                                           Amortized          Fair         Maturity          Average         Amortized          Fair         Maturity          Average
(Dollars in Millions)                                           Cost         Value         in Years        Yield (c)              Cost         Value         in Years        Yield (c)

Held-to-maturity
Mortgage-backed securities (a)                           $         5      $      5              5.2             5.74 %     $         5      $      5              5.2             5.89 %
Obligations of state and political subdivisions (b)               36            37             10.8             6.34                38            39             10.9             6.27
Other debt securities                                             10            10              1.3             3.26                10            10              1.6             3.92

Total held-to-maturity securities                        $        51      $     52              8.4             5.66 %     $        53      $     54              8.5             5.78 %

Available-for-sale
U.S. Treasury and agencies                               $       750      $    764              1.8             4.02 %     $       664      $    682              1.0             4.64 %
Mortgage-backed securities (a)
Agency                                                        25,976        26,336              2.1             3.60            26,512        26,527              3.3             3.91
Non-agency                                                     4,768         3,733              6.4             4.24             4,754         3,605              2.6             4.73
Asset-backed securities (a)                                      679           581              3.7             2.48               616           610              3.8             4.73
Obligations of state and political subdivisions (b)            6,992         6,378             20.2             6.71             7,220         6,416             21.3             6.73
Perpetual preferred securities                                   579           307             33.9             8.10               777           391             37.2             6.17
Other investments                                              1,752         1,116             23.5             3.52             1,740         1,237             24.0             4.21

Total available-for-sale securities                      $    41,496      $ 39,215              7.0             4.25 %     $    42,283      $ 39,468              7.7             4.56 %

(a) Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
(b) Information related to obligations of state and politcal subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if purchased at par or a discount.
(c) Average yields are presented on a fully-taxable equivalent basis under a tax rate of 35 percent. 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.

quarter of 2009. These impairment charges were a result of changes in expected cash flows resulting from the continuing decline in housing prices and an increase in foreclosure activity. Further adverse changes in market conditions may result in additional impairment charges in future periods. Refer to Note 3 in the Notes to Consolidated Financial Statements for further information on investment securities.

Deposits Total deposits were $162.6 billion at March 31, 2009, compared with $159.3 billion at December 31, 2008, an increase of $3.2 billion (2.0 percent). The increase in total deposits was primarily the result of increases in savings accounts, interest checking accounts and noninterest-bearing deposit balances, partially offset by a decrease in time deposits greater than $100,000. The $2.7 billion (29.3 percent) increase in savings account balances was due primarily to strong participation in a new savings product offered by Consumer Banking and higher broker-dealer balances. The $2.1 billion (6.5 percent) increase in interest checking balances was due to higher government, broker-dealer and branch-based balances. The $1.2 billion (3.2 percent) increase in noninterest-bearing deposits was primarily due to increases in broker-dealer and commercial banking balances, partially offset by the seasonal decline in corporate trust deposits. Time deposits greater than $100,000 decreased $2.8 billion (7.8 percent) at March 31, 2009, compared with December 31, 2008. Time deposits greater than $100,000 are managed as an alternative to other funding sources, such as wholesale borrowing, based largely on relative pricing.

Borrowings The Company utilizes both short-term and long-term borrowings to fund growth of assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $26.0 billion at March 31, 2009, compared with $34.0 billion at December 31, 2008. The decrease reflected continued increases in deposits due to customer flight to quality, as well as asset/liability management decisions to fund balance sheet growth with other funding sources, such as deposits and long-term debt.
Long-term debt was $38.8 billion at March 31, 2009, compared with $38.4 billion at December 31, 2008, primarily reflecting issuances of $1.6 billion of medium-term notes, partially offset by $.6 billion of medium-term note maturities and the net decrease of $.5 billion of Federal Home Loan Bank Advances in the first quarter of 2009. The $.5 billion (1.2 percent) increase in long-term debt reflected wholesale funding associated with the Company's asset growth and asset/liability management activities. Refer to the "Liquidity Risk Management" section for discussion of liquidity management of the Company.

U.S. Bancorp

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 value, 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 value risk is the potential reduction in the end-of-term value of leased assets. 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 . . .