UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

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)

800 Nicollet Mall

Minneapolis, Minnesota 55402

(Address of principal executive offices, including zip code)

651-466-3000

(Registrant’s telephone number, including area code)

(not applicable)

(Former name, former address and former fiscal year, if changed since last report)

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

YES þ     NO o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o     NO þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Table of Contents and Form 10-Q Cross Reference Index

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.

     This Form 10-Q contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of the Company. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including changes in general business and economic conditions, changes in interest rates, legal and regulatory developments, increased competition from both banks and non-banks, changes in customer behavior and preferences, effects of mergers and acquisitions and related integration, and effects of critical accounting policies and judgments. For discussion of these and other risks that may cause actual results to differ from expectations, refer to our Annual Report on Form 10-K for the year ended December 31, 2005, on file with the Securities and Exchange Commission, including the sections entitled “Risk Factors” and “Corporate Risk Profile.” Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update them in light of new information or future events.

Management’s Discussion and Analysis

OVERVIEW

Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income of $1,203 million for the third quarter of 2006, compared with $1,154 million for the third quarter of 2005. Net income of $.66 per diluted common share in the third quarter of 2006 was higher than the same period of 2005 by $.04 (6.5 percent). Return on average assets and return on average common equity were 2.23 percent and 23.6 percent, respectively, for the third quarter of 2006, compared with returns of 2.23 percent and 22.8 percent, respectively, for the third quarter of 2005. The Company’s results for the third quarter of 2006 improved over the same period of 2005, as net income increased by $49 million (4.2 percent), primarily due to strong growth in fee-based revenues and the benefit of a lower effective tax rate from a year ago. This was offset somewhat by lower net interest income and the additional operating costs of acquired businesses.

     Total net revenue, on a taxable-equivalent basis, for the third quarter of 2006, was $54 million (1.6 percent) higher than the third quarter of 2005, primarily reflecting a 10.9 percent increase in noninterest income, partially offset by a 6.6 percent decline in net interest income. Noninterest income growth was driven by organic business growth and expansion in trust and payment processing businesses. Noninterest income also included a gain related to the sale of equity interests in a card association. These favorable changes in noninterest income were partially offset by lower mortgage banking revenue due to the impact of adopting the fair value method of accounting under Statement of Financial Accounting Standards No. 156 “Accounting for Servicing of Financial Assets” (“SFAS 156”) in the first quarter of 2006.

     Total noninterest expense in the third quarter of 2006 was $65 million (4.4 percent) higher than the third quarter of 2005, primarily reflecting incremental operating and business integration costs associated with recent acquisitions, increased pension costs and higher operating costs related to investments in tax-advantaged projects from a year ago. This was partially offset by lower intangible expense due to the adoption of SFAS 156. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 45.0 percent for the third quarter of 2006, compared with 43.8 percent for the third quarter of 2005.

     The provision for credit losses for the third quarter of 2006 decreased $10 million (6.9 percent), compared with the third quarter of 2005. The decrease in the provision for credit losses year-over-year primarily reflected strong credit quality and the near-term favorable impact of changes in bankruptcy law in the fourth quarter of 2005. Net charge-offs in the third quarter of 2006 were $135 million, compared with $156 million in the third quarter of 2005. The decline in credit losses from a year ago was principally due to the impact of changes in bankruptcy legislation that went into effect during the fourth quarter of 2005. 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.

     The Company reported net income of $3,557 million for the first nine months of 2006, compared with $3,346 million for the first nine months of 2005. Net income of $1.95 per diluted common share in the first nine months of 2006 was higher than the same period of 2005 by $.15 (8.3 percent). Return on average assets and return on average common equity were 2.24 percent and 23.7 percent, respectively, for the first nine months of 2006, compared with returns of 2.22 percent and 22.5 percent, respectively, for the first nine months of 2005. The Company’s results for the first nine months of 2006 improved over the same period of 2005, as net income rose by $211 million (6.3 percent), primarily due to strong growth in fee-based revenues and lower credit-related costs. This was offset somewhat by lower net interest income and incremental operating and integration costs of acquired businesses.

     Total net revenue, on a taxable-equivalent basis, for the first nine months of 2006, was $410 million (4.2 percent) higher than the first nine months of 2005, primarily reflecting a 13.7 percent increase in noninterest income, partially offset by a 3.9 percent decline in net interest income. Noninterest income growth was driven by organic business growth, expansion in trust and payment processing businesses, higher trading income, and equity gains from the initial public offering and subsequent sale of the equity interest of a card association during the second and third quarters of 2006, respectively. These favorable changes in noninterest income categories were partially offset by

lower mortgage banking revenue due to the impact of adopting SFAS 156, effective in the first quarter of 2006. In addition, there was a $60 million favorable change in net securities gains (losses) as compared with the first nine months of 2005.

     Total noninterest expense in the first nine months of 2006 was $169 million (3.8 percent) higher than the first nine months of 2005, primarily reflecting incremental operating and business integration costs associated with recent acquisitions, increased pension costs and higher operating costs related to certain investments. This was partially offset by lower intangible expense due to the adoption of SFAS 156 and lower debt prepayment expense. The efficiency ratio was 44.7 percent for the first nine months of 2006, compared with 44.6 percent for the first nine months of 2005.

     The provision for credit losses for the first nine months of 2006 decreased $86 million (18.7 percent), compared with the first nine months of 2005. The decrease in the provision for credit losses year-over-year primarily reflected strong credit quality and lower net charge-offs relative to 2005. Net charge-offs in the first nine months of 2006 were $375 million, compared with $472 million in the first nine months of 2005. The decline in losses from a year ago was principally due to the impact of changes in bankruptcy legislation that went into effect during the fourth quarter of 2005 offset somewhat by lower commercial loan recoveries relative to the first nine months of 2005. 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 $1,673 million in the third quarter of 2006, compared with $1,791 million in the third quarter of 2005. Net interest income, on a taxable-equivalent basis, was $5,095 million in the first nine months of 2006, compared with $5,303 million in the first nine months of 2005. Average earning assets increased $6.7 billion (3.7 percent) and $8.2 billion (4.7 percent) in the third quarter and first nine months of 2006, respectively, compared with the same periods of 2005. The increases in average earning assets were primarily driven by growth in total average loans, partially offset by a decrease in investment securities. The positive impact to net interest income from the growth in earning assets was more than offset by a lower net interest margin. The net interest margin for the third quarter and first nine months of 2006 was 3.56 percent and 3.68 percent, respectively, compared with 3.95 percent and 4.00 percent, respectively, for the same periods of 2005. The year-over-year decline in the net interest margin for the third quarter and first nine months of 2006 reflected the competitive lending environment, asset/liability management decisions and the impact of changes in the yield curve from a year ago. Compared with the same periods of 2005, credit spreads have tightened by approximately 24 basis points in the third quarter and 22 basis points in the first nine months of 2006 across most lending products due to competitive pricing and a change in mix reflecting growth in lower-spread, fixed-rate credit products and noninterest-bearing corporate card balances. The net interest margin also declined due to funding incremental asset growth with higher cost wholesale funding, share repurchases and asset/liability decisions designed to reduce the Company’s interest rate sensitivity position. An increase in the margin benefit of net free funds and loan fees partially offset these factors. Beginning in the third quarter of 2006, the Federal Reserve Bank paused from its policies of increasing interest rates and tightening the money supply. If the Federal Reserve Bank leaves rates unchanged over the next several quarters, the Company expects net interest margin to stabilize as asset repricing occurs and funding costs moderate. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” table for further information on net interest income.

     Average loans for the third quarter and first nine months of 2006 were higher by $7.6 billion (5.6 percent) and $9.6 billion (7.3 percent), respectively, compared with the same periods of 2005, reflecting growth in the majority of loan categories. During the first quarter of 2006, the Company began selling an increased proportion of its residential mortgage loan production and anticipates that residential mortgage loan balances will remain essentially flat in future periods.

     Average investment securities in the third quarter and first nine months of 2006 were $2.0 billion (4.7 percent) and $2.5 billion (5.8 percent) lower, respectively, than the same periods of 2005. The change in the balance of the investment securities portfolio from a year ago principally reflected prepayments and maturities of securities and a reduced focus on residential mortgage assets given the changing interest rate environment and mix of loan growth. Additionally, the Company reclassified approximately $460 million of principal-only securities to its trading account effective January 1, 2006, in connection with the adoption of SFAS 156. 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 2006 decreased $1.2 billion (4.1 percent) and $337 million (1.2 percent), respectively, compared with the same periods of 2005, reflecting a decline in business demand deposits as these customers reduce excess liquidity to fund business growth. The change also reflects a migration of customers to interest-bearing products given rising interest rates.

     Average total savings products declined year-over-year by $1.7 billion (3.0 percent) in the third quarter and $2.4 billion (4.2 percent) in the first nine months of 2006, compared with the same periods of 2005, due to reductions in average money market savings and other savings accounts, partially offset by an increase in interest checking balances. Average money market savings balances declined year-over-year primarily due to a decline in balances within the branches. This decrease was partially offset by increases in broker dealer and corporate trust balances. The overall decrease in average money market savings balances year-over-year was primarily the result of the Company’s deposit pricing decisions for money market products in relation to fixed-rate deposit products offered. A portion of branch-based money market savings accounts have migrated to fixed-rate time certificates to take advantage of higher interest rates for these products.

     Average time certificates of deposit less than $100,000 were higher by $604 million (4.6 percent) and $556 million (4.2 percent) in the third quarter and first nine months of 2006, respectively, compared with the same periods of 2005. Average time deposits greater than $100,000 grew $1.3 billion (6.2 percent) and $2.1 billion (10.5 percent) in the third quarter and first nine months of 2006, respectively, compared with the same periods of 2005. This growth was broad-based across most areas of the Company including: branch banking, commercial banking, private client and corporate trust, as customers migrated balances to higher rate deposits.

Provision for Credit Losses The provision for credit losses for the third quarter and first nine months of 2006 decreased $10 million (6.9 percent) and $86 million (18.7 percent), respectively, compared with the same periods of 2005. The decrease in the provision for credit losses year-over-year primarily reflected stronger credit quality and the near-term favorable impact of changes in bankruptcy law in the fourth quarter of 2005. Net charge-offs in the third quarter and first nine months of 2006 were $135 million and $375 million, respectively, compared with $156 million and $472 million in the third quarter and first nine months of 2005, respectively. The decline in losses from a year ago was principally due to the impact of changes in bankruptcy legislation that went into effect during the fourth quarter of 2005. 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 third quarter and first nine months of 2006 was $1,748 million and $5,117 million, respectively, compared with $1,576 million and $4,499 million in the same periods of 2005. The $172 million (10.9 percent) increase during the third quarter and $618 million (13.7 percent) increase during the first nine months of 2006, compared with the same periods in 2005, were driven by favorable variances in the majority of fee income categories and a gain on the sale of equity interests in a card association included in other income. The increase in noninterest income for the first nine months of 2006 also reflected the impact of higher trading income related to certain derivatives and a gain from the initial public offering of a card association recorded in the current year, and a favorable variance in securities gains (losses) of $60 million related to net securities losses recorded in the prior year. This strong growth in fee-based revenue was partially offset by the accounting impact of SFAS 156 on mortgage banking revenue.

     The growth in credit and debit card revenue was primarily driven by higher customer transaction volumes. The corporate payment products revenue growth reflected organic growth in sales volumes and card usage and acquired business expansion. ATM processing services revenue for the first nine months of 2006 was higher due to the acquisition of an ATM business in May of 2005. Merchant processing services revenue growth reflected an increase in sales volume driven by acquisitions, higher same store sales, rates and equipment fees. Trust and investment management fees increased in the third quarter and first nine months year-over-year, primarily due to the acquisition of the corporate and institutional trust business of a large national bank, account growth and favorable equity market conditions. Deposit service charges grew year-over-year due to increased transaction-related fees and the impact of net new checking accounts. Other income for the third quarter and first nine months of 2006 was higher than the same periods of 2005 due to a $32 million gain on the sale of equity interests in a card association and an increase in other equity investment revenue. In addition, other income for the first nine months of 2006 was higher due to a $44 million gain on certain interest rate swaps, a $35 million gain from the initial public offering of a card association, end-of-term lease residual value improvement, higher student loan sales gains and the receipt of a favorable settlement within the merchant processing business. These favorable changes in fee-based revenue were partially offset by the decline in mortgage banking revenue, principally driven by the adoption of the fair value method of accounting for mortgage servicing rights (“MSRs”) under SFAS 156.

Noninterest Expense Noninterest expense was $1,538 million and $4,568 million, respectively, in the third quarter and first nine months of 2006, an increase of $65 million (4.4 percent) and $169 million (3.8 percent), respectively, from the same periods of 2005. Compensation expense was higher year-over-year in the third quarter and first nine months of 2006, primarily due to the corporate and institutional trust and payments processing acquisitions and other growth initiatives. Employee benefits increased year-over-year primarily as a result of higher pension costs. Net occupancy and equipment expense increased from the same periods of 2005 primarily due to business expansion. Professional services expense was higher year-over-year primarily due to business development initiatives, regulatory and legal costs. Technology and communications expense rose due to higher outside data

processing expense principally associated with expanding a prepaid gift card program and the corporate and institutional trust acquisition. Other expense increased in the third quarter and first nine months of 2006 from the same periods of 2005, primarily due to the increased investments in tax-advantaged projects relative to a year ago. Offsetting these expense increases was a year-over-year decline in other intangibles expense, reflecting the elimination of MSR amortization and impairment due to the adoption of SFAS 156. Debt prepayment expense was also lower in the first nine months of 2006, compared with the same period of 2005.

Income Tax Expense The provision for income taxes was $532 million (an effective rate of 30.7 percent) for the third quarter and $1,678 million (an effective rate of 32.1 percent) for the first nine months of 2006, compared with $586 million (an effective rate of 33.7 percent) and $1,573 million (an effective rate of 32.0 percent) for the same periods of 2005. The effective rate for the third quarter of 2006 reflected an expected increase in income tax credits from tax-advantaged investments through the remainder of the year. For further information on income taxes, refer to Note 9 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS

Loans The Company’s total loan portfolio was $144.4 billion at September 30, 2006, compared with $137.8 billion at December 31, 2005, an increase of $6.6 billion (4.8 percent). The increase in total loans was driven by growth in commercial loans, retail loans, commercial real estate loans and residential mortgages. The $3.7 billion (8.5 percent) increase in commercial loans was primarily driven by new customer relationships and growth in corporate payment card and commercial leasing balances.

     Commercial real estate loans were $29.0 billion at September 30, 2006, an increase of $.5 billion (1.8 percent) compared with December 31, 2005. The increase was driven by growth in construction loans, partially offset by a decrease in commercial mortgage balances.

     Residential mortgages held in the loan portfolio were $21.2 billion at September 30, 2006, an increase of $.5 billion (2.3 percent) compared with December 31, 2005. The growth was the result of an increase in consumer finance originations, partially offset by the Company selling an increased proportion of its residential mortgage loan production in 2006.

     Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, were $47.6 billion at September 30, 2006, an increase of $2.0 billion (4.3 percent) compared with December 31, 2005. The increase was primarily driven by growth in installment, credit card and home equity and second mortgage loans, partially offset by decreases in retail leasing balances.

Investment Securities Investment securities, both available-for-sale and held-to-maturity, totaled $39.5 billion at September 30, 2006, compared with $39.8 billion at December 31, 2005, reflecting purchases of $5.6 billion of securities, which were more than offset by maturities and prepayments and the reclassification of $.5 billion of principal-only securities to the trading account effective January 1, 2006, in connection with the adoption of SFAS 156. As of September 30, 2006, approximately 39 percent of the investment securities portfolio represented adjustable-rate financial instruments, compared with 41 percent at December 31, 2005. Adjustable-rate financial instruments include variable-rate collateralized mortgage obligations, mortgage-backed securities, agency securities, adjustable-rate money market accounts, asset-backed securities and floating-rate preferred stock.

Deposits Total deposits were $121.0 billion at September 30, 2006, compared with $124.7 billion at December 31, 2005, a decrease of $3.7 billion (3.0 percent). The decrease in total deposits was primarily the result of decreases in noninterest-bearing deposits, money market savings accounts and time deposits greater than $100,000, partially offset by increases in interest checking and time certificates of deposits less than $100,000. The $1.7 billion (5.2 percent) decrease in noninterest-bearing deposits primarily reflected a decline in business demand deposits as these customers reduce excess liquidity to fund business growth. The change also reflected a migration of customers to interest-bearing products given rising interest rates. The $2.5 billion (8.8 percent) decrease in money market savings account balances reflected the Company’s deposit pricing decisions for money market products in relation to other fixed-rate deposit products offered. A portion of branch-based money market savings accounts have migrated to fixed-rate time certificates to take advantage of higher interest rates for these products. Time deposits greater than $100,000 decreased $1.2 billion (5.2 percent) at September 30, 2006, compared with December 31, 2005, due to a decrease in corporate banking balances, partially offset by increases in consumer and private banking balances due to customer migration of deposit balances. Time deposits greater than $100,000 are largely viewed as purchased funds and are managed at levels deemed appropriate given alternative lending sources. Time certificates of deposit less than $100,000 increased $.6 billion (4.2 percent) at September 30, 2006, compared with December 31, 2005. Interest checking accounts increased $1.1 billion (4.6 percent) due to an increase in trust and custody and government balances, partially offset by decreases in consumer and private banking balances.

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, which include federal funds purchased, commercial paper, securities sold under agreements to repurchase and other short-term borrowings, were $24.8 billion at September 30, 2006, compared with $20.2 billion at December 31, 2005. Short-term funding is managed within approved liquidity policies. The increase of $4.6 billion in short-term borrowings reflected wholesale funding associated with the Company’s earning asset growth and asset/liability management activities. Long-term debt was $41.2 billion at September 30, 2006, compared with $37.1 billion at December 31, 2005, reflecting the issuances of $8.0 billion of medium-term and bank notes, $2.5 billion of junior subordinated debentures and the addition of $2.8 billion of Federal Home Loan Bank advances, partially offset by $8.2 billion of medium-term and bank note maturities and repayments, and $.7 billion of junior subordinated debentures repayments. 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.

Table 5		Delinquent Loan Ratios as a Percent of Ending Loan Balances

					September 30,				December 31,
90 days or more past due excluding nonperforming loans					2006				2005
Commercial
	Commercial					.07	%			.06	%
	Lease financing					—				—
		Total commercial				.06				.05
Commercial real estate
	Commercial mortgages					.01				—
	Construction and development					.01				—
		Total commercial real estate				.01				—
Residential mortgages						.36				.32
Retail
	Credit card					1.59				1.26
	Retail leasing					.03				.04
	Other retail					.19				.22
		Total retail				.40				.36
			Total loans			.20	%			.18	%

			September 30,				December 31,
90 days or more past due including nonperforming loans			2006				2005
Commercial				.55	%			.69	%
Commercial real estate				.54				.55
Residential mortgages (a)				.53				.55
Retail				.51				.50
	Total loans			.53	%			.58	%

(a)		Delinquent loan ratios exclude advances made pursuant to servicing agreements to Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Including the guaranteed amounts, the ratio of residential mortgages 90 days or more past due was 2.78 percent at September 30, 2006, and 4.35 percent at December 31, 2005.

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, independent of business line managers, that performs assessments of compliance with commercial and consumer credit policies, risk ratings, and other critical credit information. The Company strives to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels for probable loan losses inherent in the portfolio.

     In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors. Economic conditions during the third quarter and first nine months of 2006 have improved from the same periods of 2005, as reflected in strong expansion of the gross domestic product index, lower unemployment rates, favorable trends related to corporate profits and consumer spending for retail goods and services. Current economic conditions are relatively unchanged from December 31, 2005. Through the second quarter of 2006, the Federal Reserve Bank continued increasing short-term interest rates in an effort to prevent an acceleration of inflation and maintain the current rate of economic growth. Beginning in the third quarter of 2006, the Federal Reserve Bank paused from its policies of increasing interest rates and tightening the money supply.

     Refer to “Management’s Discussion and Analysis — Credit Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, for a more detailed discussion on credit risk management processes.

Loan Delinquencies Trends in delinquency ratios represent an indicator, among other considerations, of credit risk within the Company’s loan portfolios. The entire balance of the account is considered delinquent if the minimum payment contractually required to be made is not received by the specified date on the billing statement. The Company measures delinquencies, both

including and excluding nonperforming loans, to enable comparability with other companies. Accruing loans 90 days or more past due increased $42 million to $295 million at September 30, 2006, compared with $253 million at December 31, 2005, due to the seasoning of the residential mortgage portfolio originated by the consumer finance division and the continued return to normalized delinquency levels after the bankruptcy legislation change that occurred in the fourth quarter of 2005. These loans are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. The ratio of delinquent loans to total loans was .20 percent at September 30, 2006, compared with .18 percent at December 31, 2005.

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

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

Nonperforming Assets The level of nonperforming assets represents another indicator of the potential for future credit losses. Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms, other real estate and other nonperforming assets owned by the Company. Interest payments collected from assets on nonaccrual status are typically applied against the principal balance and not recorded as income. At September 30, 2006, total nonperforming assets were $575 million, compared with $644 million at December 31, 2005. The ratio of total nonperforming assets to total loans and other real estate decreased to .40 percent at September 30, 2006, compared with .47 percent at December 31, 2005.

     Included in nonperforming loans were restructured loans of $43 million at September 30, 2006, compared with $75 million at December 31, 2005. At September 30, 2006, the Company had no commitments to lend additional funds under restructured loans, compared to commitments of $9 million at December 31, 2005.

Table 6		Nonperforming Assets (a)

					September 30,				December 31,
(Dollars in Millions)					2006				2005
Commercial
	Commercial					$192				$231
	Lease financing					39				42
		Total commercial				231				273
Commercial real estate
	Commercial mortgages					114				134
	Construction and development					40				23
		Total commercial real estate				154				157
Residential mortgages						36				48
Retail
	Credit card					37				49
	Retail leasing					—				—
	Other retail					16				17
		Total retail				53				66
			Total nonperforming loans			474				544
Other real estate (b)						79				71
Other assets						22				29
			Total nonperforming assets			$575				$644
Accruing loans 90 days or more past due						$295				$253
Nonperforming loans to total loans						.33	%			.39	%
Nonperforming assets to total loans plus other real estate (b)						.40	%			.47	%

						Commercial and				Retail and
						Commercial				Residential
(Dollars in Millions)						Real Estate				Mortgages (d)				Total
Balance December 31, 2005							$457				$187				$644
	Additions to nonperforming assets
		New nonaccrual loans and foreclosed properties					334				41				375
		Advances on loans					30				—				30
			Total additions				364				41				405
	Reductions in nonperforming assets
		Paydowns, payoffs					(210	)			(41	)			(251	)
		Net sales					(21	)			—				(21	)
		Return to performing status					(92	)			(6	)			(98	)
		Charge-offs (c)					(93	)			(11	)			(104	)
			Total reductions				(416	)			(58	)			(474	)
				Net additions to (reductions in) nonperforming assets			(52	)			(17	)			(69	)
Balance September 30, 2006							$405				$170				$575

(a)		Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b)		Excludes $85 million of foreclosed GNMA loans which continue to accrue 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.

Restructured Loans Accruing Interest On a case-by-case basis, management determines whether an account that experiences financial difficulties should be modified as to its interest rate or repayment terms to maximize the Company’s collection of its balance.

     Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are excluded from restructured loans once repayment performance, in accordance with the modified agreement, has been demonstrated over several payment cycles. Loans that have interest rates reduced below comparable market rates remain classified as restructured loans; however, interest income is accrued at the reduced rate as long as the customer complies with the revised terms and conditions.

The following table provides a summary of restructured loans that continue to accrue interest:

     Restructured loans that continue to accrue interest were higher at September 30, 2006, compared with December 31, 2005, reflecting the impact of the Company implementing higher minimum balance payment requirements for credit card customers in response to industry guidance issued by the banking regulatory agencies.

Analysis of Loan Net Charge-Offs Total loan net charge-offs were $135 million and $375 million during the third quarter and first nine months of 2006, respectively, compared with net charge-offs of $156 million and $472 million, respectively, for the same periods of 2005. The ratio of total loan net charge-offs to average loans in the third quarter and first nine months of 2006 was .37 percent and ..36 percent, respectively, compared with .46 percent and .48 percent, respectively, for the same periods of 2005.

     Commercial and commercial real estate loan net charge-offs for the third quarter of 2006 were $21 million (.11 percent of average loans outstanding), compared with $23 million (.13 percent of average loans outstanding) for the third quarter of 2005. Commercial and commercial real estate loan net charge-offs for the first nine months of 2006 were $55 million (.10 percent of average loans outstanding), compared with $69 million (.13 percent of average loans outstanding) for the first nine months of 2005. The decrease in net charge-offs reflected lower gross charge-offs, partially offset by a lower level of recoveries as compared with the same periods of the prior year. The Company expects commercial net charge-offs to increase somewhat over the next several quarters due to an increase in gross chargeoffs from cyclical lows and declining commercial loan recoveries.

     Retail loan net charge-offs for the third quarter of 2006 were $103 million (.87 percent of average loans outstanding), compared with $124 million (1.09 percent of average loans outstanding) for the third quarter of 2005. Retail loan net charge-offs for the first nine months of 2006 were $291 million (.84 percent of average loans outstanding), compared with $377 million (1.14 percent of average loans outstanding) for the first nine months of 2005. The decrease in retail loan net charge-offs reflected the impact of the bankruptcy legislation change that occurred in the fourth quarter of 2005 and improved retail portfolio performance. The Company anticipates that bankruptcy charge-offs will return to more normalized levels during the next several quarters.

     The Company’s retail lending business utilizes several distinct business processes and channels to

originate retail credit including traditional branch lending, indirect lending and a consumer finance division. Each distinct underwriting and origination activity manages unique credit risk characteristics and prices its loan production commensurate with the differing risk profiles. Within Consumer Banking, U.S. Bank Consumer Finance (“USBCF”) participates in substantially all facets of the Company’s consumer lending activities. USBCF specializes in serving channel-specific and alternative lending markets in residential mortgages, home equity and installment loan financing. USBCF manages loans originated through a broker network, correspondent relationships and U.S. Bank branch offices. Generally, loans managed by the Company’s consumer finance division exhibit higher credit risk characteristics, but are priced commensurate with the differing risk profile. The following table provides an analysis of net charge-offs as a percent of average loans outstanding managed by the consumer finance division, compared with traditional branch related loans:

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

     At September 30, 2006, the allowance for credit losses was $2,256 million (1.56 percent of loans), compared with an allowance of $2,251 million (1.63 percent of loans) at December 31, 2005. The ratio of the allowance for credit losses to nonperforming loans was 476 percent at September 30, 2006, compared with 414 percent at December 31, 2005. The ratio of the allowance for credit losses to annualized loan net charge-offs was 421 percent at September 30, 2006, compared with 329 percent at December 31, 2005.