US BANCORP \DE\ - 10-Q Quarterly Report

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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 ACT OF 1934

For the quarterly period ended September 30, 2003

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES 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)

612-973-1111

(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 twelve months, and (2) has been subject to such filing requirements for the past 90 days.

YES X NO

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


Class Common Stock, $.01 Par Value		Outstanding as of October 31, 2003 1,928,745,593 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

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	6
	c)	Balance Sheet Analysis	10
	d)	Accounting Changes	28
	e)	Critical Accounting Policies	29
	f)	Disclosure Controls and Procedures (Item 4)	31
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	16
	d)	Operational Risk Management	16
	e)	Interest Rate Risk Management	17
	f)	Market Risk Management	20
	g)	Liquidity Risk Management	20
	h)	Capital Management	22
3) Line of Business Financial Review			22
4) Financial Statements (Item 1)			32
Part II — Other Information
1) Exhibits and Reports on Form 8-K (Item 6)			50
2) Signature			50
3) Exhibit 12 — Computation of Ratio of Earnings to Fixed Charges			51
4) Exhibit 31.1 — Section 302 CEO Certification			52
5) Exhibit 31.2 — Section 302 CFO Certification			53
6) Exhibit 32 — Section 906 CEO and CFO Certifications			54

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 (the “Company”). 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 the Company’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 the Company’s assets, or the availability and terms of funding necessary to meet the Company’s liquidity needs; (iv) changes in the extensive laws, regulations and policies governing financial services companies could alter the Company’s business environment or affect operations; (v) the potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent, could present operational issues or require significant capital spending; (vi) competitive pressures could intensify and affect the Company’s 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 saving habits could adversely affect the Company’s results of operations; (viii) changes in the financial performance and condition of the Company’s 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 the Company’s 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 the Company 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)		2003			2002			Change			2003			2002			Change


Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)		$	1,832.6		$	1,741.1			5.3	%	$	5,422.3		$	5,101.3			6.3	%
Noninterest income			1,483.9			1,446.6			2.6			4,319.0			4,148.7			4.1
Securities gains (losses), net			(108.9	)		119.0			*			244.9			193.7			26.4

	Total net revenue		3,207.6			3,306.7			(3.0)			9,986.2			9,443.7			5.7
Noninterest expense			1,397.3			1,647.6			(15.2)			4,667.9			4,617.4			1.1
Provision for credit losses			310.0			330.0			(6.1)			968.0			1,000.0			(3.2	)

	Income before taxes and cumulative effect of change in accounting principles		1,500.3			1,329.1			12.9			4,350.3			3,826.3			13.7
Taxable-equivalent adjustment			8.0			9.3			(14.0)			23.9			27.4			(12.8	)
Applicable income taxes			507.4			459.5			10.4			1,476.7			1,322.3			11.7

Income before cumulative effect of change in accounting principles			984.9			860.3			14.5			2,849.7			2,476.6			15.1
Cumulative effect of change in accounting principles (after-tax)			—			—			—			—			(37.2	)		*

	Net income	$	984.9		$	860.3			14.5		$	2,849.7		$	2,439.4			16.8

Per Common Share
Earnings per share before cumulative effect of change in accounting principles		$	.51		$	.45			13.3	%	$	1.48		$	1.29			14.7	%
Diluted earnings per share before cumulative effect of change in accounting principles			.51			.45			13.3			1.47			1.29			14.0
Earnings per share			.51			.45			13.3			1.48			1.27			16.5
Diluted earnings per share			.51			.45			13.3			1.47			1.27			15.7
Dividends declared per share			.205			.195			5.1			.615			.585			5.1
Book value per share, period end			10.08			9.15			10.2
Market value per share, period end			23.99			18.58			29.1
Average shares outstanding			1,926.0			1,915.0			.6			1,922.4			1,916.0			.3
Average diluted shares outstanding			1,940.8			1,923.3			.9			1,933.5			1,926.7			.4

Financial Ratios
Return on average assets			2.05	%		1.97	%					2.04	%		1.92	%
Return on average equity			20.5			19.8						20.2			19.6
Net interest margin (taxable-equivalent basis)			4.41			4.61						4.49			4.60
Efficiency ratio (b)			42.1			51.7						47.9			49.9

Average Balances
Loans		$	119,982		$	114,664			4.6	%	$	118,046		$	114,135			3.4	%
Loans held for sale			4,460			2,264			97.0			4,078			2,256			80.8
Investment securities			37,777			30,219			25.0			36,059			28,300			27.4
Earning assets			165,165			150,336			9.9			161,285			147,992			9.0
Assets			190,241			173,067			9.9			187,015			170,017			10.0
Noninterest-bearing deposits			31,907			28,838			10.6			32,412			27,872			16.3
Deposits			117,956			104,912			12.4			116,649			103,139			13.1
Short-term borrowings			12,584			9,641			30.5			10,854			11,934			(9.0	)
Long-term debt			31,433			32,089			(2.0)			31,214			29,584			5.5
Total shareholders’ equity			19,017			17,275			10.1			18,862			16,640			13.4

		September 30, 2003			December 31, 2002

Period End Balances
Loans		$	119,882		$	116,251			3.1	%
Allowance for credit losses			2,368			2,422			(2.2	)
Investment securities			35,015			28,488			22.9
Assets			188,835			180,027			4.9
Deposits			115,043			115,534			(.4	)
Long-term debt			31,603			28,588			10.5
Total shareholders’ equity			19,426			18,101			7.3
Regulatory capital ratios
	Tangible common equity		6.4	%		5.6	%
	Tier 1 capital		8.8			7.8
	Total risk-based capital		13.3			12.2
	Leverage		7.8			7.5


*		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 $984.9 million for the third quarter of 2003, or $.51 per diluted share, compared with $860.3 million, or $.45 per diluted share, for the third quarter of 2002. Return on average assets and return on average equity were 2.05 percent and 20.5 percent, respectively, for the third quarter of 2003, compared with returns of 1.97 percent and 19.8 percent, respectively, for the third quarter of 2002. The Company’s results for the third quarter of 2003 improved over the third quarter of 2002, primarily due to growth in net interest income and fee-based products and services, as well as controlled operating expense and lower credit costs. Included in the third quarter of 2003 were losses on the sale of securities of $108.9 million, a net reduction of $227.9 million from securities gains (losses) realized in the third quarter of 2002. The third quarter of 2003 also included a $108.5 million reparation of mortgage servicing rights (“MSR”), a $226.2 million favorable variance over the third quarter of 2002. Higher interest rates in the third quarter of 2003 drove the realization of the MSR reparation and the Company’s decision to sell lower yielding securities. Net income for the third quarter of 2003 also included after-tax merger and restructuring-related items of $6.7 million ($10.2 million on a pre-tax basis), compared with after-tax merger and restructuring-related items of $45.9 million ($70.4 million on a pre-tax basis) for the third quarter of 2002. The $60.2 million decline in pre-tax merger and restructuring-related charges was primarily due to the completion of integration activities associated with the merger of Firstar Corporation (“Firstar”) and the former U.S. Bancorp (“USBM”) at the end of 2002. Refer to the “Merger and Restructuring-Related Items” section for further discussion on merger and restructuring-related items.

Total net revenue, on a taxable-equivalent basis, was $3,207.6 million for the third quarter of 2003, compared with $3,306.7 million for the third quarter of 2002, a decrease of $99.1 million (3.0 percent) from a year ago. This decline primarily reflected the net reduction in securities gains (losses) of $227.9 million. Otherwise, favorable growth occurred in net interest income, capital markets-related revenue, cash management fees and payment systems revenue. Acquisitions, including the 57 branches of Bay View Bank in northern California and the corporate trust business of State Street Bank and Trust Company, contributed approximately $46.7 million of the increase in net revenue year-over-year. The Company experienced lower revenue levels in commercial loan products and the mortgage banking business during the period. With the rise in interest rates from the end of the second quarter of 2003, mortgage originations slowed resulting from lower refinancing activities. The 3.0 percent decline in net revenue was comprised of a 12.2 percent decline in noninterest income, partially offset by a 5.3 percent increase in net interest income. The 12.2 percent decline in noninterest income was driven by a net reduction in gains (losses) on the sale of securities, commercial loan products revenue and mortgage banking revenue, partially offset by increases in investment banking revenue, cash management fees, payment services revenue and acquisitions. The sale of securities was due to the Company’s practice of utilizing its securities portfolio as an interest rate risk management tool to offset the economic impact of changes in MSR valuation. Refer to the “Noninterest Income” section for further discussion on the impact of changes in MSR valuations. The 5.3 percent increase in net interest income was driven by an increase of $14.8 billion (9.9 percent) in average earning assets, primarily due to increases in investment securities, residential mortgages, loans held for sale and retail loans, partially offset by a decline in commercial loans. The net interest margin for the third quarter of 2003 was 4.41 percent, compared with 4.61 percent in the third quarter of 2002. The decline in net interest margin primarily reflected growth in lower-yielding investment securities as a percent of total earning assets, a change in loan mix and a decline in the margin benefit from net free funds due to lower average interest rates. In addition, the net interest margin declined year-over-year as a result of consolidating high credit quality, low margin loans from Stellar Funding Group, Inc., a commercial loan conduit, onto the Company’s balance sheet during the third quarter of 2003. In anticipation of accounting changes required under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” the Company elected not to reissue more than 90 percent of the commercial paper funding of Stellar, causing Stellar to lose its status as a qualified special purpose entity and triggering the consolidation.


U.S. Bancorp	3

The net impact from consolidating the commercial loan conduit in the third quarter of 2003 was not significant.

Total noninterest expense was $1,397.3 million in the third quarter of 2003, compared with $1,647.6 million in the third quarter of 2002. The decrease in noninterest expense of $250.3 million (15.2 percent) primarily reflected the $226.2 million favorable change in the valuation of mortgage servicing rights caused by rising interest rates from late second quarter 2003. Also contributing to the positive variance in expense year-over-year was a $60.2 million reduction in merger and restructuring-related charges. These positive variances were partially offset by expense increases due to recent acquisitions, which accounted for approximately $28.1 million of expense growth year-over-year, and higher incentive-based compensation related to capital markets-related activities. Refer to the “Acquisition and Divestiture Activity” section for further information on the timing of acquisitions and the “Noninterest Expense” section for further discussion of noninterest expense items. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 42.1 percent for the third quarter of 2003, compared with 51.7 percent for the third quarter of 2002.

The provision for credit losses was $310.0 million for the third quarter of 2003 and $330.0 million for the third quarter of 2002, a decrease of $20.0 million (6.1 percent). Net charge-offs in the third quarter of 2003 were $309.9 million, compared with net charge-offs of $329.0 million during the third quarter of 2002. The decline from a year ago primarily reflected lower retail losses, the result of collection efforts and an improving credit risk profile. 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.

Net income for the first nine months of 2003 was $2,849.7 million, or $1.47 per diluted share, compared with $2,439.4 million, or $1.27 per diluted share, for the first nine months of 2002. Return on average assets and return on average equity were 2.04 percent and 20.2 percent, respectively, for the first nine months of 2003, compared with returns of 1.92 percent and 19.6 percent, respectively, for the first nine months of 2002. The Company’s results for the first nine months of 2003 improved over the first nine months of 2002, primarily due to growth in net revenue and a slight decline in credit costs, offset somewhat by a modest increase in expense. A notable favorable item in the first nine months of 2003 was gains on the sale of securities of $244.9 million, an increase of $51.2 million over the first nine months of 2002. Offsetting this favorable item during the first nine months of 2003 was a year-over-year increase of $76.7 million of MSR impairment, driven by changes in interest rates and related prepayments. Net income for the first nine months of 2003 also included after-tax merger and restructuring-related items of $25.4 million ($38.6 million on a pre-tax basis), compared with $141.0 million ($216.2 million on a pre-tax basis) for the first nine months of 2002. The $177.6 million decline in pre-tax merger and restructuring-related charges was primarily due to the completion at the end of 2002 of integration activities associated with the Firstar/ USBM merger. During the first quarter of 2002, the Company recognized an after-tax goodwill impairment charge of $37.2 million, or $.02 per diluted share, primarily related to the purchase of a transportation leasing company in 1998 by the equipment leasing business. This charge was taken at the time of adopting new accounting standards related to goodwill and other intangible assets and was recognized as a “cumulative effect of change in accounting principles” in the income statement. Refer to the “Merger and Restructuring-Related Items” and “Accounting Changes” sections for further discussion on merger and restructuring-related items and the earnings impact of changes in accounting principles.

Total net revenue, on a taxable-equivalent basis, was $9,986.2 million for the first nine months of 2003, compared with $9,443.7 million for the first nine months of 2002, a 5.7 percent increase from a year ago. This growth was primarily due to an increase in gains on the sale of securities, net interest income, payment services revenue, mortgage banking activities, growth in cash management fees and deposit service charges and acquisitions. This growth was comprised of a 6.3 percent increase in net interest income and a 5.1 percent increase in noninterest income. The 6.3 percent increase in net interest income was driven by an increase of $13.3 billion (9.0 percent) in average earning assets, primarily driven by increases in investment securities, residential mortgages, retail loans and loans held for sale, partially offset by an overall decline in commercial and commercial real estate loans. The impact of the increase in average earning assets was offset in part by a lower net interest margin given the current interest rate environment. The net interest margin for the first nine months of 2003 was 4.49 percent, compared with 4.60 percent in the first nine months of 2002. The decline reflected the change in asset mix towards lower-rate investment securities.


4	U.S. Bancorp

The 5.1 percent increase in noninterest income growth was driven by net securities gains, payment services, deposit service charges, mortgage banking activity and acquisitions. Included in total net revenue were net securities gains of $244.9 million and $193.7 million for the first nine months of 2003 and 2002, respectively, an increase of $51.2 million. Approximately $161.6 million of the year-over-year increase in net revenue for the first nine months of 2003 was due to acquisitions, including The Leader Mortgage Company, LLC, the 57 branches of Bay View Bank in northern California and the corporate trust business of State Street Bank and Trust Company.

Total noninterest expense was $4,667.9 million in the first nine months of 2003, compared with $4,617.4 million in the first nine months of 2002. The increase in total noninterest expense of $50.5 million (1.1 percent) primarily reflected a year-over-year increase of $76.7 million in MSR impairment coupled with acquisitions, which accounted for approximately $108.9 million of the expense growth in the first nine months of 2003. Partially offsetting these increases in expense over the first nine months of 2002 were a year-over-year reduction in merger and restructuring-related charges of $177.6 million and cost savings related to integration efforts. Refer to the “Acquisition and Divestiture Activity” section for further information on the timing of acquisitions and the “Noninterest Expense” section for further discussion of merger and restructuring-related items. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 47.9 percent for the first nine months of 2003, compared with 49.9 percent for the first nine months of 2002.

The provision for credit losses was $968.0 million for the first nine months of 2003 and $1,000.0 million for the first nine months of 2002, a decrease of $32.0 million (3.2 percent). Net charge-offs in the first nine months of 2003 were $966.6 million, compared with net charge-offs of $994.5 million during the first nine months of 2002. 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.

Acquisition and Divestiture Activity The following transactions were accounted for as purchases from the date of completion. On December 31, 2002, the Company acquired the corporate trust business of State Street Bank and Trust Company in a cash transaction. The transaction represented total assets acquired of $682 million and total liabilities assumed of $39 million at the closing date.

On April 1, 2002, the Company acquired Cleveland-based The Leader Mortgage Company, LLC, a wholly-owned subsidiary of First Defiance Financial Corp., in a cash transaction. The transaction represented total assets acquired of $531 million and total liabilities assumed of $446 million.

Refer to Notes 3 and 4 of the Notes to Consolidated Financial Statements for additional information regarding business combinations and divestitures and merger and restructuring-related items.

Planned Spin-Off of Piper Jaffray Companies On February 19, 2003, the Company announced that its Board of Directors approved a plan to effect a spin-off of its capital markets business unit, including the investment banking and brokerage activities primarily conducted by its wholly-owned subsidiary, U.S. Bancorp Piper Jaffray Companies Inc. (“Piper Jaffray Companies”). As of September 30, 2003, Piper Jaffray Companies had assets of $2.6 billion. During the first nine months of 2003, Piper Jaffray Companies generated revenue of $584.9 million (5.9 percent of total consolidated revenue) and contributed $29.3 million of net income, representing 1.0 percent of the Company’s consolidated net income.

The Company intends to execute this plan as a tax-free distribution of 100 percent of its ownership interests in the capital markets business and plans to retain approximately $180 million of subordinated debt of the broker-dealer subsidiary, subject to regulatory approval. The distribution is subject to certain conditions, including SEC registration, regulatory review and approval and a determination that the distribution will be tax-free to the Company and its shareholders. While the spin-off is expected to be completed in late 2003, the Company has no obligation to consummate the distribution, whether or not these conditions are satisfied.

This distribution does not include brokerage, financial advisory or asset management services offered to customers through the Company’s other business units. The Company will continue to provide asset


U.S. Bancorp	5

management services to its customers through the Private Client, Trust and Asset Management business units and access to investment products and services through its extensive network of licensed financial advisors within the retail brokerage platform of the Consumer Banking business unit.

STATEMENT OF INCOME ANALYSIS

Net Interest Income The third quarter of 2003 net interest income, on a taxable-equivalent basis, was $1,832.6 million, compared with $1,741.1 million for the third quarter of 2002, which represented a $91.5 million (5.3 percent) increase over 2002. Net interest income for the first nine months of 2003, on a taxable-equivalent basis, was $5,422.3 million, compared with $5,101.3 million for the first nine months of 2002, which represented a $321.0 million (6.3 percent) increase from a year ago. Average earning assets in the third quarter and first nine months of 2003 increased $14.8 billion (9.9 percent) and $13.3 billion (9.0 percent), respectively, over the comparable periods of 2002. The increase in net interest income for the third quarter and first nine months of 2003 was driven by an increase in average earning assets, growth in average net free funds and favorable changes in the Company’s average funding mix. The increase in average earning assets in the third quarter and first nine months of 2003, compared with the same periods of 2002, was primarily driven by increases in investment securities, residential mortgages, loans held for sale and retail loans, partially offset by a decline in commercial loans. Also contributing to the year-over-year increase in net interest income were recent acquisitions, including The Leader Mortgage Company, LLC, State Street Corporate Trust and Bay View, which accounted for approximately $19.6 million and $63.2 million of the increase in net interest income during the third quarter and first nine months of 2003, respectively. The net interest margin for the third quarter of 2003 was 4.41 percent, compared with 4.61 percent for the third quarter of 2002, while the year-to-date net interest margin decreased from 4.60 percent for the first nine months of 2002 to 4.49 percent for the first nine months of 2003. The year-over-year decline in the net interest margin for the third quarter and the first nine months of 2003 primarily reflected growth in lower-yielding investment securities as a percent of total earning assets, a change in loan mix and a decline in the margin benefit from net free funds due to lower average interest rates. In addition, the net interest margin declined year-over-year as a result of consolidating high credit quality, low margin loans from a commercial loan conduit onto the Company’s balance sheet during the third quarter of 2003. The Company expects the net interest margin to remain relatively unchanged in the fourth quarter of 2003.

Total average loans for the third quarter of 2003 were $5.3 billion (4.6 percent) higher than the third


Table 2		Analysis of Net Interest Income



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



(Dollars in Millions)		2003			2002			Change			2003			2002			Change

Components of net interest income
	Income on earning assets (taxable-equivalent basis) (a)	$	2,329.7		$	2,429.3		$	(99.6	)	$	7,027.9		$	7,185.6		$	(157.7	)
	Expense on interest-bearing liabilities		497.1			688.2			(191.1	)		1,605.6			2,084.3			(478.7	)

Net interest income (taxable-equivalent basis)		$	1,832.6		$	1,741.1		$	91.5		$	5,422.3		$	5,101.3		$	321.0

Net interest income, as reported		$	1,824.6		$	1,731.8		$	92.8		$	5,398.4		$	5,073.9		$	324.5

Average yields and rates paid
	Earning assets yield (taxable-equivalent basis)		5.61	%		6.43	%		(.82	)%		5.82	%		6.49	%		(.67	)%
	Rate paid on interest-bearing liabilities		1.49			2.26			(.77	)		1.66			2.33			(.67	)

Gross interest margin (taxable-equivalent basis)			4.12	%		4.17	%		(.05	)%		4.16	%		4.16	%		—	%

Net interest margin (taxable-equivalent basis)			4.41	%		4.61	%		(.20	)%		4.49	%		4.60	%		(.11	)%

Average balances
	Investment securities	$	37,777		$	30,219		$	7,558		$	36,059		$	28,300		$	7,759
	Loans		119,982			114,664			5,318			118,046			114,135			3,911
	Earning assets		165,165			150,336			14,829			161,285			147,992			13,293
	Interest-bearing liabilities		132,642			120,758			11,884			129,043			119,671			9,372
	Net free funds (b)		32,523			29,578			2,945			32,242			28,321			3,921


(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 credit losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity.


6	U.S. Bancorp

quarter of 2002 and year-to-date average loans were $3.9 billion (3.4 percent) higher than the first nine months of 2002. During the third quarter and first nine months of 2003, total average loan growth was driven by growth in average residential mortgages of $3.7 billion (43.7 percent) and $2.9 billion (35.3 percent), respectively, and retail loan growth of $1.3 billion (3.4 percent) and $1.9 billion (5.3 percent), respectively. Year-over-year average commercial and commercial real estate loans grew by $343 million (.5 percent) for the third quarter of 2003 and declined by $896 million (1.3 percent) for the first nine months of 2003. The modest increase for the third quarter of 2003 was primarily due to the consolidation of loans from Stellar offset somewhat by lower loan demand due to soft economic conditions. Lower commercial loan demand was also the primary reason for the decline in total commercial and commercial real estate loans in the first nine months of 2003, compared with a year ago.

Average investment securities for the third quarter and the first nine months of 2003 were higher by $7.6 billion (25.0 percent) and $7.8 billion (27.4 percent), respectively, compared with the same periods of 2002, reflecting the reinvestment of proceeds from loan sales, declining commercial loan balances and deposits assumed in connection with the Bay View Bank branch acquisition. During the third quarter and first nine months of 2003, the Company sold $3.2 billion and $15.1 billion, respectively, of fixed-rate securities, classified as available-for-sale, as part of the Company’s interest rate risk management practices of utilizing its securities portfolio to reduce the economic impact of changes in MSR valuations. During the third quarter of 2003, proceeds from sales of securities were reinvested into higher yielding securities.

Average noninterest-bearing deposits for the third quarter and first nine months of 2003 were higher by $3.1 billion (10.6 percent) and $4.5 billion (16.3 percent), respectively, compared with the same periods of 2002, primarily due to higher business and government banking demand deposit balances year-over-year. Average interest-bearing deposits were higher by $10.0 billion for the third quarter of 2003 and $9.0 billion for the first nine months of 2003, increases of 13.1 percent and 11.9 percent, respectively, compared with the same periods of 2002. Approximately $3.7 billion of the increase in average interest-bearing deposits during the third quarter of 2003 and $3.5 billion for the first nine months of 2003 was due to acquisitions, while the remaining growth was driven by increases in savings product balances.

Refer to the Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 48 and 49 for further information on net interest margin.

Provision for Credit Losses The provision for credit losses was $310.0 million and $330.0 million for the third quarter of 2003 and 2002, respectively, a decrease of $20.0 million (6.1 percent). For the first nine months of 2003 and 2002, the provision for credit losses was $968.0 million and $1,000.0 million, respectively, a decrease of $32.0 million (3.2 percent). The decline from a year ago primarily reflected lower retail losses, the result of collection efforts and an improving credit risk profile. 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 2003 was $1,375.0 million, a decrease of $190.6 million (12.2 percent) from the third quarter of 2002. The reduction in noninterest income from the third quarter of 2002 was driven by a decrease in net gains (losses) on the sale of securities, commercial products revenue and mortgage banking revenue, partially offset by increases in investment banking revenue, cash management fees, payment services revenue and increases in revenue attributable to acquisitions. Noninterest income for the first nine months of 2003 was $4,563.9 million, compared with $4,342.4 million for the first nine months of 2002, which represented an increase of $221.5 million (5.1 percent). The growth in noninterest income in the first nine months of 2003, compared with the same period of 2002, was driven by payment services revenue, cash management fees, mortgage banking revenue, deposit service charges and increases in revenue attributable to acquisitions. Also, contributing to the increase in noninterest income was a net increase in net securities gains (losses) of $51.2 million during 2003 relative to the first nine months of 2002. The favorable impact on noninterest income from acquisitions, which included The Leader Mortgage Company, LLC, Bay View and State Street Corporate Trust, was approximately $27.1 million and $98.4 million for the third quarter and first nine months of 2003, respectively.

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 2003 by $11.3 million (4.3 percent) and $68.0 million (9.2 percent), respectively, compared with the same


U.S. Bancorp	7

periods of 2002. 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, Sears and other retailers, which lowered interchange rates on signature debit transactions as of August 1, 2003. The year-over-year impact of VISA’s settlement on debit card revenue for the third quarter of 2003 was approximately $6.8 million. Management currently estimates that the 2004 impact of the VISA settlement will be approximately $.03 per diluted share. This change in the interchange rate in the third quarter of 2003, in addition to higher customer loyalty rewards expenses, however, were more than offset by increases in transaction volumes and other rate adjustments. The corporate payment products revenue growth reflected growth in sales and card usage. The unfavorable variance in ATM processing services revenue during the third quarter of 2003 was primarily due to lower transaction volumes. Merchant processing services revenue was lower in the third quarter and first nine months of 2003 by $1.0 million (.7 percent) and $9.9 million (2.3 percent), respectively, compared with the same periods of 2002, primarily due to lower processing spreads resulting from changes in the mix of merchants. The favorable variance in trust and investment management fees in the third quarter and first nine months of 2003 of $16.7 million (7.4 percent) and $29.7 million (4.3 percent), respectively, compared with the same periods of 2002, was driven by the acquisition of State Street Corporate Trust, which contributed $21.9 million and $62.6 million in fees in the third quarter and first nine months of 2003, respectively. Cash management fees grew by $20.4 million (19.3 percent) and $35.7 million (11.4 percent) in the third quarter and first nine months of 2003, respectively, compared with the same periods of 2002, with the majority of the variance within the Wholesale Banking line of business. The increase in cash management fees in the third quarter and first nine months of 2003 was driven by growth in product sales, pricing enhancements and lower earning credit rates to

customers. The growth was also driven by a 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 of 2003. During the third quarter and first nine months of 2003, commercial products revenue declined $27.2 million (21.8 percent) and $68.9 million (18.6 percent), respectively, principally reflecting lower commercial loan conduit servicing fees, resulting, in part, from consolidating the Stellar commercial loan conduit. Mortgage banking revenue decreased by $22.3 million (19.9 percent) in the third quarter of 2003, compared to the third quarter of 2002, due to lower gains on sale of mortgage loans, offset somewhat by higher servicing revenue. Mortgage banking revenue had a year-over-year increase of $33.4 million (13.8 percent) during the first nine months of 2003, principally due to higher mortgage originations, servicing and secondary market sales and the acquisition of The Leader Mortgage Company, LLC, which contributed $17.0 million of the favorable variance in the first nine months of 2003. Capital markets-related revenue increased during the third quarter and first nine months of 2003 by $42.4 million (21.9 percent) and


Table 3		Noninterest Income



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


							Percent							Percent
(Dollars in Millions)		2003			2002		Change			2003		2002		Change

Credit and debit card revenue		$	137.6		$	132.8		3.6	%	$	407.3	$	373.3		9.1	%
Corporate payment products revenue			95.7			87.6		9.2			272.6		245.3		11.1
ATM processing services			41.3			42.9		(3.7	)		125.6		118.9		5.6
Merchant processing services			146.3			147.3		(.7	)		415.4		425.3		(2.3	)
Trust and investment management fees			241.9			225.2		7.4			714.1		684.4		4.3
Deposit service charges			187.0			186.5		.3			529.2		503.9		5.0
Cash management fees			126.2			105.8		19.3			350.0		314.3		11.4
Commercial products revenue			97.8			125.0		(21.8	)		302.0		370.9		(18.6	)
Mortgage banking revenue			89.5			111.8		(19.9	)		275.2		241.8		13.8
Trading account profits and commissions			56.2			52.6		6.8			184.7		152.0		21.5
Investment products fees and commissions			104.5			105.0		(.5	)		314.0		323.5		(2.9	)
Investment banking revenue			75.0			35.7		*			169.4		159.4		6.3
Securities gains (losses), net			(108.9	)		119.0		*			244.9		193.7		26.4
Other			84.9			88.4		(4.0	)		259.5		235.7		10.1

	Total noninterest income	$	1,375.0		$	1,565.6		(12.2	)%	$	4,563.9	$	4,342.4		5.1	%


*		Not meaningful


8	U.S. Bancorp

$33.2 million (5.2 percent), compared with the same periods of 2002, primarily due to increased equity market activity. Deposit service charges increased in the third quarter and first nine months of 2003 by $.5 million (.3 percent) and $25.3 million (5.0 percent), respectively, compared with the same periods of 2002, primarily due to volume and fee enhancements principally within the Consumer Banking line of business. Other fee income was relatively flat, year-over-year, for the third quarter of 2003, and increased by $23.8 million (10.1 percent) during the first nine months of 2003, compared with the first nine months of 2002, due in part to earnings from equity investments.

Noninterest Expense Third quarter of 2003 noninterest expense was $1,397.3 million, a decrease of $250.3 million (15.2 percent) from the third quarter of 2002. For the first nine months of 2003, noninterest expense was $4,667.9 million, an increase of $50.5 million (1.1 percent) from the first nine months of 2002. The year-over-year decline in noninterest expense during the third quarter of 2003 was primarily due to the favorable change in MSR impairment of $226.2 million and a $60.2 million reduction in merger and restructuring-related charges. These positive variances were partially offset by the impact of recent acquisitions, including the Bay View Bank branches and State Street Corporate Trust, and compensation expense, which primarily reflected higher incentive-based compensation related to improving capital markets activity. The year-over-year increase in noninterest expense during the first nine months of 2003 was primarily due to an increase in MSR impairment, incremental pension and retirement expense and recent acquisitions partially offset by lower merger and restructuring-related charges.

During the third quarter of 2003, noninterest expense included a MSR reparation of $108.5 million, compared with a MSR impairment of $117.7 million for the third quarter of 2002. On a year-to-date basis, noninterest expense included an MSR impairment of $208.7 million, a net increase of $76.7 million, compared with the first nine months of 2002. The year-over-year changes in the valuation of MSR’s were caused by fluctuations in mortgage interest rates and related prepayment speeds due to refinancing activities. Refer to Note 6 of the Notes to Consolidated Financial Statements for a sensitivity analysis on fair value to future changes in interest rates. The Company’s third quarter and first nine months of 2003 compensation and related benefits costs increased 2.1 percent and 3.0 percent, respectively. The unfavorable year-over-year variance for the third quarter and first nine months of 2003 included approximately $6.0 million and $33.5 million, respectively, of incremental pension and retirement expense, primarily the result of changes in pension assumptions, including a lower long-term rate of return on pension plan assets. Recent acquisitions, including The Leader Mortgage Company, LLC, Bay View and State Street Corporate Trust, accounted for approximately $28.1 million and $108.9 million of the year-over-year increase in noninterest expense for the third quarter and first nine months of 2003, respectively. Partially offsetting these year-over-year increases in noninterest expense during the third quarter and first nine months of 2003, was a decline in merger and restructuring-related charges of $60.2 million and $177.6 million, respectively, compared with the same periods of 2002. The decline in merger and restructuring-related charges was primarily due to the completion of integration activities associated with the merger of Firstar and USBM.


Table 4		Noninterest Expense



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


								Percent									Percent
(Dollars in Millions)		2003			2002			Change			2003			2002			Change


Compensation and related benefits		$	714.2		$	699.8			2.1	%	$	2,145.5		$	2,083.2			3.0	%
Net occupancy and equipment			174.0			178.9			(2.7	)		522.7			534.7			(2.2	)
Professional services			45.9			39.8			15.3			112.8			103.5			9.0
Marketing and business development			55.0			53.4			3.0			149.4			145.8			2.5
Technology and communications			118.8			113.1			5.0			355.1			330.7			7.4
Postage, printing and supplies			64.2			64.6			(.6	)		193.1			194.5			(.7	)
Intangibles			10.8			211.4			(94.9	)		558.2			396.3			40.9
Merger and restructuring-related charges			10.2			70.4			(85.5	)		38.6			216.2			(82.1	)
Other			204.2			216.2			(5.6	)		592.5			612.5			(3.3	)

	Total noninterest expense	$	1,397.3		$	1,647.6			(15.2	)%	$	4,667.9		$	4,617.4			1.1	%

Efficiency ratio (a)			42.1	%		51.7	%					47.9	%		49.9	%


(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.


U.S. Bancorp	9

Merger and Restructuring-Related Items Noninterest expense in the third quarter and first nine months of 2003 included merger and restructuring-related items of $10.2 million and $38.6 million, respectively, compared with $70.4 million and $216.2 million, respectively, for the same periods of 2002. For the third quarter and first nine months of 2003, total merger and restructuring-related items primarily represented system conversions associated with the acquisitions of NOVA, Bay View Bank branches and State Street Corporate Trust. For the third quarter of 2002, merger and restructuring-related items included $58.2 million of charges associated with the Firstar/USBM merger and $12.2 million associated with the integration of NOVA and other smaller acquisitions. For the first nine months of 2002, merger and restructuring-related items included $183.1 million of charges associated with the Firstar/USBM merger and $33.1 million associated with NOVA and other smaller acquisitions.

Refer to Notes 3 and 4 of the Notes to Consolidated Financial Statements for further information on these acquired businesses and merger and restructuring-related items.

Income Tax Expense The provision for income taxes was $507.4 million (an effective rate of 34.0 percent) for the third quarter of 2003 and $1,476.7 million (an effective rate of 34.1 percent) for the first nine months of 2003, compared with $459.5 million (an effective rate of 34.8 percent) and $1,322.3 million (an effective rate of 34.8 percent) for the same periods of 2002, respectively. The improvement in the effective tax rate primarily reflected a change in unitary state tax apportionment factors driven by a shift in business mix as a result of the impact of acquisitions, market demographics and the mix of product revenue.

BALANCE SHEET ANALYSIS

Loans The Company’s total loan portfolio was $119.9 billion at September 30, 2003, compared with $116.3 billion at December 31, 2002, an increase of $3.6 billion (3.1 percent). The increase in total loans was driven by growth in residential mortgages and other retail loans. Commercial loans, including lease financing, totaled $41.2 billion at September 30, 2003, compared with $41.9 billion at December 31, 2002, a decrease of $774 million (1.8 percent). Although the consolidation of loans from the Stellar commercial loan conduit during the third quarter of 2003 had a positive impact on loan balances year-over-year, current credit markets and soft economic conditions through early 2003 led to the decline in total commercial loans. The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction loans, was $27.2 billion at September 30, 2003, compared with $26.9 billion at December 31, 2002, an increase of $375 million (1.4 percent).

Residential mortgages held in the loan portfolio were $13.0 billion at September 30, 2003, compared with $9.7 billion at December 31, 2002, an increase of $3.2 billion (33.1 percent). The increase in residential mortgages was primarily the result of an increase in consumer finance originations and branch originated home equity loans with first liens driven by refinancing activities, partially offset by residential loan sales of approximately $832 million during the first nine months of 2003.

Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, were $38.5 billion at September 30, 2003, compared with $37.7 billion at December 31, 2002. The $.8 billion (2.1 percent) increase was driven by an increase in automobile, retail leasing and student loans. This growth was partially offset by declines in second lien home equity loans as consumers refinance with first lien home equity products classified as residential mortgages and reduced credit card activity due to seasonality.

Loans Held for Sale At September 30, 2003, loans held for sale, consisting of residential mortgages to be sold in the secondary markets, were $3.6 billion, compared with $4.2 billion at December 31, 2002. The $519 million (12.5 percent) decrease, despite strong mortgage banking activities, was the result of the timing of loan originations and sales in the first nine months of 2003.

Investment Securities At September 30, 2003, investment securities, both available-for-sale and held-to-maturity, totaled $35.0 billion, compared with $28.5 billion at December 31, 2002. The $6.5 billion (22.9 percent) increase reflected the reinvestment of average deposit growth, partially offset by the sale of $15.1 billion of fixed-rate securities during the first nine months of 2003. At September 30, 2003, approximately 14.5 percent of the investment securities portfolio represented adjustable-rate financial instruments, compared with 18.6 percent as of December 31, 2002.

Deposits Total deposits were $115.0 billion at September 30, 2003, compared with $115.5 billion at December 31, 2002, a decrease of $.5 billion (.4 percent). The decrease in total deposits was primarily the result of declines in noninterest-bearing deposits, time deposits greater than $100,000 and time certificates of deposit less than $100,000, partially offset


10	U.S. Bancorp

by an increase in savings products. Noninterest-bearing deposits were $32.4 billion at September 30, 2003, compared with $35.1 billion at December 31, 2002, a decrease of $2.7 billion (7.6 percent), primarily due to a decline in government deposits.

Interest-bearing deposits totaled $82.6 billion at September 30, 2003, compared with $80.4 billion at December 31, 2002, an increase of $2.2 billion (2.7 percent). The increase in interest-bearing deposits was primarily driven by increases in money market accounts of $6.1 billion (21.8 percent), along with increases in interest checking $3.1 billion (17.7 percent) and savings accounts of $.8 billion (15.5 percent). These increases were partially offset by a decline in time deposits greater than $100,000 (33.0 percent) and a decline in higher cost time certificates of deposits less than $100,000 (20.7 percent). The increase in money market accounts was the result of slightly higher interest rates on high-impact money market products, the continued desire by customers to maintain liquidity, specific deposit gathering initiatives and the State Street Corporate Trust acquisition, which contributed approximately $.6 billion of the increase during the first nine months of 2003. The decline in time certificates of deposits less than $100,000 reflected a shift in product mix toward savings products and funding decisions toward more favorably priced wholesale funding sources given the current interest rate environment.

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, securities sold under agreements to repurchase and other short-term borrowings, were $12.9 billion at September 30, 2003, compared with $7.8 billion at December 31, 2002. Short-term funding is managed to levels deemed appropriate given alternative funding sources. The increase of $5.1 billion (64.8 percent) in short-term borrowings reflected the impact of funding earning assets and the decline in government deposits. Long-term debt was $31.6 billion at September 30, 2003, compared with $28.6 billion at December 31, 2002. The $3.0 billion (10.5 percent) increase in long-term debt was driven by the issuance of $8.4 billion of medium- and long-term notes and bank notes during the first nine months of 2003. The issuance of long-term debt was partially offset by maturities of $5.4 billion during the first nine months of 2003. 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. 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 mortgage 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 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. The Company utilizes a credit risk rating system to measure the credit quality of individual commercial loan transactions and regularly forecasts potential changes in risk ratings and nonperforming status. In the Company’s retail banking operations, standard credit scoring systems are used to assess consumer credit risks and to price consumer products


U.S. Bancorp	11

accordingly. The Company also engages in non-lending activities that may give rise to credit risk, including interest rate swap contracts for balance sheet hedging purposes, foreign exchange transactions and interest rate swap contracts for customers, settlement risk 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 2003 had stabilized somewhat from the third quarter of 2002, although the banking sector continued to experience elevated levels of nonperforming assets and net charge-offs, especially with respect to certain industry segments.

Analysis of Net Loan Charge-offs Total loan net charge-offs were $309.9 million and $966.6 million during the third quarter and first nine months of 2003, respectively, compared with net charge-offs of $329.0 million and $994.5 million, respectively, for the same periods of 2002. The ratio of total loan net charge-offs to average loans in the third quarter and first nine months of 2003 was 1.02 percent and 1.09 percent, respectively, compared with 1.14 percent and 1.16 percent, respectively, for the same periods of 2002. The overall level of net charge-offs in the third quarter of 2003 continued to reflect current economic conditions. Due to the Company’s ongoing efforts to reduce the overall risk profile of the organization, net charge-offs are expected to continue to trend lower.

Commercial and commercial real estate loan net charge-offs for the third quarter of 2003 were $153.6 million (.88 percent of average loans outstanding), compared with $156.9 million (.90 percent of average loans outstanding) for the third quarter of 2002. Commercial and commercial real estate loan net charge-offs for the first nine months of 2003 were $480.0 million (.93 percent of average loans outstanding), compared with $472.4 million (.91 percent of average loans outstanding) for the first nine months of 2002.

Retail loan net charge-offs for the third quarter of 2003 were $149.0 million (1.54 percent of average loans outstanding), compared with $166.2 million (1.78 percent of average loans outstanding) for the third quarter of 2002. Retail loan net charge-offs for the first nine months of 2003 were $466.9 million (1.64 percent of average loans outstanding), compared with $509.6 million (1.88 percent of average loans outstanding) for the same period of 2002. Lower levels of retail loan net charge-offs principally reflected the Company’s improvement in ongoing collection efforts and risk management.


Table 5		Net Charge-offs as a Percent of Average Loans Outstanding



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


				2003			2002			2003			2002

Commercial
	Commercial				1.33	%		1.31	%		1.40	%		1.23	%
	Lease financing				1.52			1.67			1.80			2.16

		Total commercial			1.35			1.35			1.45			1.34
Commercial real estate
	Commercial mortgages				.12			.07			.12			.13
	Construction and development				.25			.37			.16			.17

		Total commercial real estate			.15			.15			.13			.14

Residential mortgages					.24			.27			.24			.20
Retail
	Credit card				4.20			5.01			4.71			5.02
	Retail leasing				.83			.67			.90			.71
	Home equity and second mortgages				.70			.63			.73			.74
	Other retail				1.55			2.07			1.61			2.17

		Total retail			1.54			1.78			1.64			1.88

			Total loans		1.02	%		1.14	%		1.09	%		1.16	%


12	U.S. Bancorp

Analysis of Nonperforming Assets 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, 2003, total nonperforming assets were $1,318.3 million, compared with $1,373.5 million at December 31, 2002. The ratio of total nonperforming assets to total loans and other real estate decreased to 1.10 percent at September 30, 2003, compared with 1.18 percent at December 31, 2002. While nonperforming assets levels have declined, the relative level of nonperforming assets reflects the general impact of soft economic conditions during the past two years, specific weakness in the communications, transportation and manufacturing sectors, and the more pronounced affect of the economy on highly leveraged enterprise value refinancings. Given the Company’s ongoing efforts to reduce the overall risk profile of the organization, nonperforming assets are expected to continue to trend lower.

The Company had restructured loans of $35.7 million as of September 30, 2003, compared with $50.0 million as of December 31, 2002. Commitments to lend additional funds under restructured loans were $4.6 million as of September 30, 2003, compared with $1.7 million as of December 31, 2002. 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, 2003, $5.6 million were reported as accruing.

Accruing loans 90 days or more past due totaled $352.4 million at September 30, 2003, compared with $426.4 million at December 31, 2002. These loans were not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, and/or 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 declined to ..29 percent at September 30, 2003, compared with ..37 percent at December 31, 2002. Residential mortgages 30 days or more past due and still accruing were 1.48 percent of the total residential mortgage portfolio at September 30, 2003, compared with 2.31 percent at December 31, 2002. Residential mortgages 90 days or more past due and still accruing totaled .63 percent at September 30, 2003, compared with .90 percent at December 31, 2002. The improvement in the first nine months of 2003 reflected improved collection efforts. Retail loans 30 days or more past due and still accruing were 1.93 percent of the total retail portfolio at September 30, 2003, compared with 2.39 percent at December 31, 2002. The percentage of retail loans 90 days or more past due and still accruing was ..57 percent of total retail loans at September 30, 2003, compared with .72 percent at December 31, 2002. The improvement in retail loan delinquencies from December 31, 2002, to September 30, 2003, primarily reflected risk management actions and collection efforts.


U.S. Bancorp	13

Table 6 Nonperforming Assets (a)



				September 30,			December 31,
(Dollars in Millions)				2003			2002


Commercial
	Commercial			$	793.9		$	760.4
	Lease financing				111.6			166.7

		Total commercial			905.5			927.1
Commercial real estate
	Commercial mortgages				161.5			174.6
	Construction and development				40.2			57.5

		Total commercial real estate			201.7			232.1
Residential mortgages					46.1			52.0
Retail
	Retail leasing				.7			1.0
	Other retail				20.9			25.1

		Total retail			21.6			26.1

			Total nonperforming loans		1,174.9			1,237.3

Other real estate					70.4			59.5
Other assets					73.0			76.7

			Total nonperforming assets	$	1,318.3		$	1,373.5

Restructured loans accruing interest (b)				$	5.6		$	1.4
Accruing loans 90 days or more past due (c)				$	352.4		$	426.4
Nonperforming loans to total loans					.98	%		1.06	%
Nonperforming assets to total loans plus other real estate					1.10	%		1.18	%

Delinquent Loan Ratios


(as a percent of ending loan balances)				September 30,			December 31,
90 days or more past due excluding nonperforming loans				2003			2002


Commercial
	Commercial				.10	%		.14	%
	Lease financing				.16			.10

		Total commercial			.11			.14
Commercial real estate
	Commercial mortgages				—			.03
	Construction and development				.04			.07

		Total commercial real estate			.01			.04
Residential mortgages					.63			.90
Retail
	Credit card				1.71			2.09
	Retail leasing				.18			.19
	Other retail				.43			.54

		Total retail			.57			.72

			Total loans		.29	%		.37	%


		September 30,			December 31,
90 days or more past due including nonperforming loans		2003			2002


Commercial			2.31	%		2.35	%
Commercial real estate			.75			.90
Residential mortgages			.98			1.44
Retail			.63			.79

	Total loans		1.27	%		1.43	%


(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)		These loans are not included in nonperforming assets and continue to accrue interest because they are secured by collateral and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status.

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


14	U.S. Bancorp

off-balance sheet items, recent loss experience and other factors, including regulatory guidance and economic conditions.

At September 30, 2003, the allowance for credit losses was $2,367.7 million (1.98 percent of loans), compared with an allowance of $2,422.0 million


Table 7		Summary of Allowance for Credit Losses



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



(Dollars in Millions)					2003			2002			2003			2002


Balance at beginning of period					$	2,367.6		$	2,466.4		$	2,422.0		$	2,457.3
Charge-offs
	Commercial
		Commercial				146.6			137.2			429.8			404.8
		Lease financing				31.6			34.1			111.4			121.5

			Total commercial			178.2			171.3			541.2			526.3
	Commercial real estate
		Commercial mortgages				9.6			6.9			27.8			25.2
		Construction and development				4.7			6.1			9.8			8.6

			Total commercial real estate			14.3			13.0			37.6			33.8
	Residential mortgages					8.3			6.7			22.4			15.6
	Retail
		Credit card				67.7			77.1			213.9			229.8
		Retail leasing				14.0			10.6			43.7			33.3
		Home equity and second mortgages				26.4			25.5			81.0			80.7
		Other retail				64.7			75.6			202.0			239.0

			Total retail			172.8			188.8			540.6			582.8

				Total charge-offs		373.6			379.8			1,141.8			1,158.5
Recoveries
	Commercial
		Commercial				22.7			13.2			45.1			49.7
		Lease financing				12.4			10.7			42.3			30.8

			Total commercial			35.1			23.9			87.4			80.5
	Commercial real estate
		Commercial mortgages				3.7			3.4			9.7			6.9
		Construction and development				.1			.1			1.7			.3

			Total commercial real estate			3.8			3.5			11.4			7.2
	Residential mortgages					1.0			.8			2.7			3.1
	Retail
		Credit card				8.4			6.3			21.4			18.6
		Retail leasing				1.8			1.2			5.0			5.1
		Home equity and second mortgages				3.2			4.0			8.5			7.8
		Other retail				10.4			11.1			38.8			41.7

			Total retail			23.8			22.6			73.7			73.2

				Total recoveries		63.7			50.8			175.2			164.0
Net Charge-offs
	Commercial
		Commercial				123.9			124.0			384.7			355.1
		Lease financing				19.2			23.4			69.1			90.7

			Total commercial			143.1			147.4			453.8			445.8
	Commercial real estate
		Commercial mortgages				5.9			3.5			18.1			18.3
		Construction and development				4.6			6.0			8.1			8.3

			Total commercial real estate			10.5			9.5			26.2			26.6
	Residential mortgages					7.3			5.9			19.7			12.5
	Retail
		Credit card				59.3			70.8			192.5			211.2
		Retail leasing				12.2			9.4			38.7			28.2
		Home equity and second mortgages				23.2			21.5			72.5			72.9
		Other retail				54.3			64.5			163.2			197.3

			Total retail			149.0			166.2			466.9			509.6

				Total net charge-offs		309.9			329.0			966.6			994.5

Provision for credit losses						310.0			330.0			968.0			1,000.0
Acquisitions and other changes						—			(6.9	)		(55.7	)		(2.3	)

Balance at end of period (a)					$	2,367.7		$	2,460.5		$	2,367.7		$	2,460.5

Allowance as a percentage of
	Period-end loans					1.98	%		2.12	%
	Nonperforming loans					202			204
	Nonperforming assets					180			183
	Annualized net charge-offs					193			189


(a)		The allowance for credit losses includes credit loss liability related to off-balance sheet commitments. At September 30, 2003, the allowance for credit losses included an estimated $126.5 million credit loss liability related to the Company’s $57.4 billion of commercial off-balance sheet loan commitments and letters of credit.


U.S. Bancorp	15

(2.08 percent of loans) at December 31, 2002. The primary reasons for the decline in the allowance for credit losses were the transfer of $62 million to separate balance sheet categories for certain equipment leases and uncollectible fees and interest income related to the credit card portfolios. The latter reclassification was mandated by recently issued regulatory guidelines. The ratio of the allowance for credit losses to nonperforming loans was 202 percent at September 30, 2003, compared with 196 percent at December 31, 2002. The ratio of the allowance for credit losses to annualized loan net charge-offs was 193 percent at September 30, 2003, compared with 176 percent at December 31, 2002.

Several factors were taken into consideration in evaluating the allowance for credit losses at September 30, 2003, including changes in the risk profile of the portfolios, extent of loan net charge-offs during the period, the continued elevated levels of nonperforming assets, the decline in accruing loans 90 days or more past due and the improvement in all delinquency categories from December 31, 2002. Management also considered changes in economic trends including corporate earnings, unemployment rates, bankruptcies and economic growth. Based on this analysis, management determined that the allowance for credit losses was adequate at September 30, 2003.

Residual Risk Management The Company manages its risk to changes in the value of lease residual assets through disciplined residual setting and valuation 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 if, in the aggregate, there is a net loss for such period. 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 $3.2 billion of retail leasing residuals at September 30, 2003, and at December 31, 2002. At September 30, 2003, the commercial leasing portfolio had $833 million of residuals, compared with $896 million at December 31, 2002. No significant change in the concentration of the portfolio has occurred since December 31, 2002.

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 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 improper employees’ 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


16	U.S. Bancorp

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, among other things, for 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 12 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 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. The interest rate risk position of the Company at September 30, 2003, was relatively unchanged from December 31, 2002. At September 30, 2003, the Company was well within its policy guidelines.

Sensitivity of Net Interest Income and Rate Sensitive Income:



	September 30, 2003												December 31, 2002

	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		1.49	%		(.93)	%		*	%		(3.21	)%		.08	%		(.34	)%		*	%		(1.91	)%
Rate sensitive income		1.08	%		(1.10)	%		*	%		(3.71	)%		.20	%		(.55	)%		*	%		(2.57	)%


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


U.S. Bancorp	17

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 base case. Given the low level of current interest rates, the down 200 basis point scenario cannot be computed. The up 200 basis point scenario was a 7.6 percent decrease at September 30, 2003, compared with a 2.5 percent decrease at December 31, 2002. ALPC reviews other down rate scenarios to evaluate the impact of falling interest rates. The down 100 basis point scenario was a 1.1 percent increase at September 30, 2003, and a 1.0 percent decrease at December 31, 2002. The overall sensitivity at September 30, 2003, was liability sensitive.

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 the ALPC monthly and is used to guide hedging strategies. The results of the valuation analysis as of September 30, 2003, were well within policy guidelines.

Use of Derivatives to Manage Interest Rate Risk In the ordinary course of business, the Company enters into derivative transactions to manage its interest rate and prepayment risk (“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 of customers. The Company minimizes its market and liquidity risks by taking substantively 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 the 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 $35.4 billion of total notional amount of asset and liability management derivative positions at September 30, 2003, $32.0 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, trust preferred securities, 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 $1.6 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


18	U.S. Bancorp

Activities.” The unfunded mortgage loan commitments are reported at fair value as options in Table 8.

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.

Of the Company’s $252.4 million of accumulated other comprehensive income at September 30, 2003, $242.7 million was related to the unrealized gain 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 2003 and the next 12 months is $17.7 million and $81.7 million, respectively.

Gains or losses on customer-related derivative positions were not material for the third quarter and first nine months of 2003. The change in fair value of forward commitments attributed to hedge ineffectiveness recorded in noninterest income was an increase of $28.0 million and $8.4 million for the third quarter and first nine months of 2003, 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 2003.

Table 8 summarizes information on the Company’s derivative positions at September 30, 2003.


Table 8		Derivative Positions


									Weighted-
									Average
									Remaining
				Notional		Fair			Maturity
September 30, 2003 (Dollars in Millions)				Amount		Value			In Years


Asset and Liability Management Positions

	Interest rate contracts
		Receive fixed/pay floating swaps		$	24,853	$	1,137			4.58
		Pay fixed/receive floating swaps			4,190		(85	)		1.67
		Futures and forwards			4,756		(25	)		.17
		Options
			Written		1,581		15			.20
	Equity contracts				3		—			2.17

Customer-related Positions

	Interest rate contracts
		Receive fixed/pay floating swaps		$	5,739	$	222			4.93
		Pay fixed/receive floating swaps			5,739		(189	)		4.93
		Basis swaps			1		—			.92
		Options
			Purchased		267		7			2.58
			Written		267		(7	)		2.58
	Risk participation agreements (a)
		Purchased			115		—			7.53
		Written			18		—			2.16
	Foreign exchange rate contracts
		Forwards, spots and swaps
			Buy		1,751		70			.31
			Sell		1,782		(69	)		.30
		Options
			Purchased		83		—			.28
			Written		83		—			.28


(a)		The credit equivalent amount for both purchased and written risk participation agreements was $1 million at September 30, 2003.


U.S. Bancorp	19

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, market making, underwriting, 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 $40.0 million at September 30, 2003, and December 31, 2002. The market valuation risk inherent in its customer-based derivative trading, mortgage banking pipeline, broker-dealer activities (including equities, fixed-income, and high-yield securities) and foreign exchange, as estimated by the VaR analysis, was $8.0 million at September 30, 2003, and $8.8 million at December 31, 2002.

Liquidity Risk Management ALPC establishes policies, as well as analyzes and manages liquidity, to ensure that 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 due to 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 Federal Home Loan Banks (“FHLB”) 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, it has access to national fed funds, funding through repurchase agreements and sources of more stable, regionally based certificates of deposit. During the third quarter of 2003, Standard & Poor’s raised the debt ratings of U.S. Bancorp and its subsidiary banks to a A+ and AA-, respectively.

The Company’s routine funding requirements at the parent level consist primarily of operating expenses, dividends to shareholders, debt service 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. On April 1, 2003, USB Capital II, a subsidiary of U.S. Bancorp, redeemed 100 percent, or $350 million, of its 7.20 percent Trust Preferred Securities.

At September 30, 2003, parent company long-term debt outstanding was $5.3 billion, compared with $5.7 billion at December 31, 2002. The change in long-term debt in the first nine months of 2003 was driven by medium-term note maturities of $1.2 billion and $.3 billion of parent company subordinated debt maturities partially offset by the issuance of $1.2 billion of fixed-rate medium-term notes. Total parent company debt scheduled to mature in the remainder of 2003 is $100 million. These debt obligations are expected to 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 from banking subsidiaries was approximately $1.6 billion at September 30, 2003.


20	U.S. Bancorp

Off-Balance Sheet Arrangements Conduits and asset securitizations represent a source of funding for the Company through off-balance sheet structures.

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, a qualifying special purpose entity, held assets of $7.8 billion at September 30, 2003, and $9.5 billion at December 31, 2002. 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 $7.8 billion at September 30, 2003, and $9.5 billion at December 31, 2002.

The Company provides a liquidity facility to the conduit. Utilization of the liquidity facility would be triggered by the conduit’s inability to issue commercial paper to fund its assets. The recorded fair value of the Company’s liability for the liquidity facility included in other liabilities was $26.7 million at September 30, 2003, and $37.7 million at December 31, 2002. Changes in fair value of these liabilities are recorded in the income statement as other income or expense. In addition, the Company recorded at fair value its retained residual interest in the investment securities conduit of $62.4 million at September 30, 2003, and $93.4 million at December 31, 2002.

The Company also has an asset-backed securitization to fund an unsecured small business credit product. The unsecured small business credit securitization held assets of $529.5 million at September 30, 2003, of which the Company retained $120.1 million of subordinated securities, transferor’s interests of $13.2 million and a residual interest-only strip of $38.4 million. This compared with $652.4 million in assets at December 31, 2002, of which the Company retained $150.1 million of subordinated securities, transferor’s interests of $16.3 million and a residual interest-only strip of $53.3 million. The qualifying special purpose entity 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 $7.0 million and $25.0 million during the third quarter and first nine months of 2003, respectively, and $12.9 million and $40.1 million, respectively, during the same periods of 2002. The unsecured small business credit securitization held average assets of $550.0 million and $664.8 million during the third quarter of 2003 and 2002, respectively.

As of September 30, 2003, the Company had $144.4 million securitized, highly rated fixed-rate municipal bonds. Each municipal bond is sold into a separate trust that is funded by variable rate certificates that reprice weekly. The Company retains a residual interest in each structure that is accounted for as a trading asset and is recorded at fair value. The purpose of the arrangements is to meet customer demands for variable rate tax-free investments. Income and cash flows from these structures were not significant in the third quarter of 2003 and 2002.

Credit, liquidity, operational and legal structural risks exist due to the nature and complexity of the conduit and asset securitizations. 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 on off-balance sheet arrangements for liquidity or capital resources.

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” (“VIEs”), an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to improve financial reporting of special purpose and other entities. In accordance with FIN 46, business enterprises that represent the primary beneficiary of another entity by retaining a controlling financial interest in that entity’s assets, liabilities and results of operating activities must consolidate the entity in its financial statements. Prior to the issuance of FIN 46, consolidation generally occurred when an enterprise controlled another entity through voting interests. Certain VIEs that are qualifying special purpose entities (“QSPEs”) subject to the reporting requirements of Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” will not be required to be consolidated under the provisions of FIN 46. The consolidation provisions of FIN 46 apply to VIEs created or entered into after January 31, 2003. For VIEs


U.S. Bancorp	21

created before February 1, 2003, the effective date of applying the provisions of FIN 46 was deferred to periods ending after December 15, 2003. The Company plans to adopt FIN 46 for VIEs that existed prior to February 2003 during the fourth quarter of 2003.

As discussed above, the Company has relationships with several SPEs. Because the Company’s investment securities conduit and the asset-backed securitizations are QSPEs, which are exempted from consolidation under the provisions of FIN 46, the Company does not believe that FIN 46 requires the consolidation of that conduit or securitizations in its financial statements. During the third quarter of 2003, the Company elected not to reissue more than 90 percent of the commercial paper funding of Stellar Funding Group, Inc., the Company’s commercial loan conduit. This action caused the conduit to lose its status as a qualifying special purpose entity. As a result, the Company recorded all of Stellar’s assets and liabilities at fair value and the results of operations in the consolidated financial statements of the Company. Given the floating rate nature and high credit quality of the assets of Stellar, the impact to the Company’s financial statements was not significant. In the third quarter of 2003, average commercial loan balances increased by approximately $2 billion and the resulting increase in net interest income was offset by a similar decline in conduit fee income within commercial products revenue. Prior to December 31, 2003, the remaining commercial paper borrowings held by third-party investors will mature and the conduit will be legally dissolved.

With respect to other interests in entities subject to FIN 46, including low-income housing investments and guarantor trusts, the adoption of FIN 46 will not have a material impact on the Company’s financial statements. The Company has determined that the provisions of FIN 46 may require de-consolidation of the subsidiary grantor trusts, which issue mandatorily redeemable preferred securities (“Trust Preferred Securities”). The Company currently consolidates the grantor trusts, and its balance sheet includes the mandatorily redeemable preferred securities of the grantor trusts. At adoption of FIN 46, the grantor trusts may be de-consolidated and the junior subordinated debentures of the Company owned by the grantor trusts would be disclosed as an unconsolidated variable interest entity. The Trust Preferred Securities currently qualify as Tier 1 capital of the Company for regulatory capital purposes. The banking regulatory agencies have issued guidance that would continue the current capital treatment for Trust Preferred Securities until further notice.

Capital Management The Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. Total shareholders’ equity was $19.4 billion at September 30, 2003, compared with $18.1 billion at December 31, 2002. The increase was the result of corporate earnings offset primarily by dividends.

Tangible common equity to assets was 6.4 percent at September 30, 2003, compared with 5.6 percent at December 31, 2002. The Tier 1 capital ratio was 8.8 percent at September 30, 2003, compared with 7.8 percent at December 31, 2002. The total risk-based capital ratio was 13.3 percent at September 30, 2003, compared with 12.2 percent at December 31, 2002. The leverage ratio was 7.8 percent at September 30, 2003, compared with 7.5 percent at December 31, 2002. All regulatory ratios continue to be in excess of stated “well capitalized” requirements.

On December 18, 2001, the Board of Directors approved an authorization to repurchase 100 million shares of outstanding common stock through 2003. As of September 30, 2003, there were approximately 91.5 million shares remaining to be repurchased under this authorization.

On April 1, 2003, USB Capital II, a subsidiary of U.S. Bancorp, redeemed 100 percent, or $350 million, of its 7.20 percent Trust Preferred Securities.

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

Table 9 Capital Ratios



		September 30,			December 31,
(Dollars in Millions)		2003			2002

Tangible common equity		$	11,474		$	9,489
	As a percent of tangible assets		6.4	%		5.6	%
Tier 1 capital		$	14,243		$	12,606
	As a percent of risk-weighted assets		8.8	%		7.8	%
	As a percent of adjusted quarterly average assets (leverage ratio)		7.8	%		7.5	%
Total risk-based capital		$	21,514		$	19,753
	As a percent of risk-weighted assets		13.3	%		12.2	%


22	U.S. Bancorp

Asset Management, Payment Services, Capital Markets 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. Business line results are derived from the Company’s business unit profitability reporting systems. 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 2003, certain organization and methodology changes were made and, accordingly, 2002 results were restated and presented on a comparable basis. The provision for credit losses within the Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management, Payment Services and Capital Markets 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.

Wholesale Banking offers lending, depository, treasury management and other financial services to middle market, large corporate and public sector clients. Wholesale Banking contributed $316.1 million of the Company’s operating earnings for the third quarter of 2003 and $906.9 million for the first nine months of 2003, a 5.1 percent and 4.9 percent increase, respectively, over the same periods of 2002. The increase in operating earnings in the third quarter of 2003 was driven by higher net revenue and reductions in noninterest expense and provision for credit losses, compared with the same period of 2002. The increase in operating earnings in the first nine months of 2003, compared with the same period of 2002, was driven by higher net revenue and reductions in noninterest expense partially offset by higher provision for credit losses.

Total net revenue increased 1.3 percent from the third quarter of 2002 and 3.3 percent from the first nine months of 2002. Net interest income, on a taxable-equivalent basis, increased 2.2 percent and 2.8 percent, respectively, compared with the third quarter of 2002 and the first nine months of 2002 as average deposits grew $9.1 billion and $8.6 billion, respectively, over the same periods. The increase in net interest income for the third quarter and first nine months of 2003, compared with the same periods of 2002, was primarily due to the funding benefit resulting from the growth in average total deposits and the consolidation of the commercial loan conduit. The year-over-year reduction in average loan balances was driven by a decline in commercial loans, due in part to weak customer loan demand resulting from the current economic environment, in addition to asset workout strategies driven by the Company’s decisions in 2001 and 2002 to tighten credit availability and reduce outstandings to certain types of lending products, industries and customers. Noninterest income decreased .8 percent in the third quarter of 2003 to $188.1 million and increased 4.4 percent in the first nine months of 2003 to $566.5 million, compared with the same periods of 2002. The decline in noninterest income in the third quarter of 2003 was due to lower fee income related to consolidating the commercial loan conduit and lower commercial leasing revenue offset by growth in cash management-related fees. The increase in noninterest income in the first nine months of 2003 reflected growth in cash management-related fees, an increase in fee income related to growth in international banking, syndications and customer derivatives, partially offset by a reduction in fee income related to consolidating the commercial loan conduit. The increase in cash management-related fees was driven by growth in product sales, pricing enhancements and lower earning credit rates to customers. The growth was also driven by a 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 of 2003.

Noninterest expense decreased 13.7 percent, or $12.9 million, in the third quarter of 2003 to $81.3 million, and decreased 7.7 percent, or $21.9 million, in the first nine months of 2003 to $263.4 million, compared with the same periods of 2002. The expense reduction was primarily due to lower salaries and related employee benefits, legal and professional costs and equipment inventory write-downs.

The provision for credit losses was $101.9 million and $326.5 million in the third quarter and first nine months of 2003, respectively, compared with $104.2 million and $307.4 million, respectively, for the same periods of 2002. The year-over-year increase in the provision for credit losses in the first nine months of 2003 was due to higher net charge-offs attributable to weakness in the communications, transportation and manufacturing industry sectors, as well as the Company’s asset workout strategies to reduce commitments to certain industries and customers. Net charge-offs decreased 2.2 percent, or $2.3 million, in


U.S. Bancorp	23

Table 10 Line of Business Financial Performance



			Wholesale							Consumer
			Banking							Banking


							Percent								Percent
For the Three Months Ended September 30 (Dollars in Millions)			2003		2002		Change			2003			2002		Change


Condensed Income Statement
Net interest income (taxable-equivalent basis)			$	492.1	$	481.6		2.2	%	$	944.8		$	862.4		9.6	%
Noninterest income				188.1		189.7		(.8	)		367.7			398.5		(7.7	)
Securities gains (losses), net				—		—		—			(108.7	)		66.5		*

	Total net revenue			680.2		671.3		1.3			1,203.8			1,327.4		(9.3	)
Noninterest expense				76.4		89.1		(14.3	)		445.8			438.7		1.6
Other intangible amortization				4.9		5.1		(3.9	)		(52.0	)		157.6		*

	Total noninterest expense			81.3		94.2		(13.7	)		393.8			596.3		(34.0	)

		Operating income (loss)		598.9		577.1		3.8			810.0			731.1		10.8
Provision for credit losses				101.9		104.2		(2.2	)		108.2			108.5		(.3	)

Operating earnings (loss) before income taxes				497.0		472.9		5.1			701.8			622.6		12.7
Income taxes and taxable-equivalent adjustment				180.9		172.1		5.1			255.4			226.6		12.7

Operating earnings (loss), before merger and restructuring-related items and cumulative effect of change in accounting principles			$	316.1	$	300.8		5.1		$	446.4		$	396.0		12.7

Merger and restructuring-related items (after-tax) Cumulative effect of change in accounting principles (after-tax)
Net income
Average Balance Sheet Data
Commercial			$	28,920	$	29,386		(1.6	)%	$	8,100		$	8,678		(6.7	)%
Commercial real estate				16,586		15,965		3.9			10,053			9,046		11.1
Residential mortgages				103		161		(36.0	)		11,805			8,105		45.7
Retail				50		112		(55.4	)		28,978			27,535		5.2

	Total loans			45,659		45,624		.1			58,936			53,364		10.4
Goodwill				1,225		1,209		1.3			2,242			1,826		22.8
Other intangible assets				104		124		(16.1	)		854			995		(14.2	)
Assets				52,675		51,517		2.2			69,715			61,273		13.8
Noninterest-bearing deposits				14,473		13,200		9.6			14,167			12,959		9.3
Savings products				11,897		5,437		*			41,521			35,328		17.5
Time deposits				4,050		2,702		49.9			17,867			22,165		(19.4	)

	Total deposits			30,420		21,339		42.6			73,555			70,452		4.4
Shareholders’ equity				5,170		5,267		(1.8	)		5,961			5,145		15.9



			Wholesale							Consumer
			Banking							Banking


							Percent							Percent
For the Nine Months Ended September 30 (Dollars in Millions)			2003		2002		Change			2003		2002		Change


Condensed Income Statement
Net interest income (taxable-equivalent basis)			$	1,449.1	$	1,409.0		2.8	%	$	2,746.8	$	2,522.2		8.9	%
Noninterest income				566.5		542.6		4.4			1,093.1		1,056.4		3.5
Securities gains (losses), net				—		—		—			193.4		69.5		*

	Total net revenue			2,015.6		1,951.6		3.3			4,033.3		3,648.1		10.6
Noninterest expense				248.7		269.8		(7.8	)		1,317.0		1,284.9		2.5
Other intangible amortization				14.7		15.5		(5.2	)		372.1		238.6		56.0

	Total noninterest expense			263.4		285.3		(7.7	)		1,689.1		1,523.5		10.9

		Operating income (loss)		1,752.2		1,666.3		5.2			2,344.2		2,124.6		10.3
Provision for credit losses				326.5		307.4		6.2			327.7		334.3		(2.0	)

Operating earnings (loss) before income taxes				1,425.7		1,358.9		4.9			2,016.5		1,790.3		12.6
Income taxes and taxable-equivalent adjustment				518.8		494.5		4.9			733.8		651.5		12.6

Operating earnings (loss), before merger and restructuring-related items and cumulative effect of change in accounting principles			$	906.9	$	864.4		4.9		$	1,282.7	$	1,138.8		12.6

Merger and restructuring-related items (after-tax) Cumulative effect of change in accounting principles (after-tax)
Net income
Average Balance Sheet Data
Commercial			$	28,665	$	30,406		(5.7	)%	$	8,194	$	8,948		(8.4	)%
Commercial real estate				16,444		15,735		4.5			9,847		8,879		10.9
Residential mortgages				129		158		(18.4	)		10,702		7,834		36.6
Retail				56		148		(62.2	)		28,780		26,659		8.0

	Total loans			45,294		46,447		(2.5	)		57,523		52,320		9.9
Goodwill				1,227		1,231		(.3	)		2,242		1,818		23.3
Other intangible assets				109		129		(15.5	)		911		927		(1.7	)
Assets				52,351		52,700		(.7	)		67,694		60,529		11.8
Noninterest-bearing deposits				15,382		12,461		23.4			13,710		12,706		7.9
Savings products				9,513		5,052		88.3			40,316		35,300		14.2
Time deposits				3,669		2,425		51.3			19,079		22,959		(16.9	)

	Total deposits			28,564		19,938		43.3			73,105		70,965		3.0
Shareholders’ equity				5,202		5,180		.4			5,840		4,888		19.5


*		Not meaningful


24	U.S. Bancorp



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


					Percent							Percent							Percent									Percent									Percent
	2003		2002		Change			2003		2002		Change			2003		2002		Change			2003			2002			Change			2003			2002			Change


	$	102.5	$	81.8		25.3	%	$	158.6	$	173.3		(8.5	)%	$	7.0	$	10.7		(34.6	)%	$	127.6		$	131.3			(2.8	)%	$	1,832.6		$	1,741.1			5.3	%
		237.9		218.6		8.8			432.4		441.9		(2.1	)		204.4		167.2		22.2			53.4			30.7			73.9			1,483.9			1,446.6			2.6
		—		—		—			—		—		—			—		—		—			(.2	)		52.5			*			(108.9	)		119.0			*

		340.4		300.4		13.3			591.0		615.2		(3.9	)		211.4		177.9		18.8			180.8			214.5			(15.7	)		3,207.6			3,306.7			(3.0	)
		113.3		113.9		(.5	)		150.9		154.3		(2.2	)		182.7		163.3		11.9			407.2			406.5			.2			1,376.3			1,365.8			.8
		16.6		7.8		*			39.8		40.6		(2.0	)		—		—		—			1.5			.3			*			10.8			211.4			(94.9	)

		129.9		121.7		6.7			190.7		194.9		(2.2	)		182.7		163.3		11.9			408.7			406.8			.5			1,387.1			1,577.2			(12.1	)

		210.5		178.7		17.8			400.3		420.3		(4.8	)		28.7		14.6		96.6			(227.9	)		(192.3	)		(18.5	)		1,820.5			1,729.5			5.3
		3.1		5.5		(43.6	)		98.4		111.7		(11.9	)		—		—		—			(1.6	)		.1			*			310.0			330.0			(6.1	)

		207.4		173.2		19.7			301.9		308.6		(2.2	)		28.7		14.6		96.6			(226.3	)		(192.4	)		(17.6	)		1,510.5			1,399.5			7.9
		75.5		63.0		19.8			109.9		112.3		(2.1	)		10.4		5.3		96.2			(113.2	)		(86.0	)		(31.6	)		518.9			493.3			5.2

	$	131.9	$	110.2		19.7		$	192.0	$	196.3		(2.2	)	$	18.3	$	9.3		96.8		$	(113.1	)	$	(106.4	)		(6.3	)		991.6			906.2			9.4

																																(6.7	)		(45.9	)
																																—			—

																															$	984.9		$	860.3

	$	1,826	$	1,879		(2.8	)%	$	2,908	$	2,829		2.8	%	$	—	$	224		*	%	$	226		$	220			2.7	%	$	41,980		$	43,216			(2.9	)%
		592		589		.5			—		—		—			—		—		—			166			218			(23.9	)		27,397			25,818			6.1
		314		239		31.4			—		—		—			—		—		—			12			8			50.0			12,234			8,513			43.7
		2,127		2,119		.4			7,169		7,280		(1.5	)		—		—		—			47			71			(33.8	)		38,371			37,117			3.4

		4,859		4,826		.7			10,077		10,109		(.3	)		—		224		*			451			517			(12.8	)		119,982			114,664			4.6
		741		289		*			1,814		1,812		.1			306		306		—			—			—			—			6,328			5,442			16.3
		389		224		73.7			670		765		(12.4	)		—		—		—			12			15			(20.0	)		2,029			2,123			(4.4	)
		6,678		5,833		14.5			13,823		13,431		2.9			2,540		3,011		(15.6	)		44,810			38,002			17.9			190,241			173,067			9.9
		3,241		2,253		43.9			173		227		(23.8	)		7		205		(96.6	)		(154	)		(6	)		*			31,907			28,838			10.6
		6,553		4,229		55.0			10		8		25.0			—		—		—			(7	)		13			*			59,974			45,015			33.2
		469		468		.2			—		—		—			—		—		—			3,689			5,724			(35.6	)		26,075			31,059			(16.0	)

		10,263		6,950		47.7			183		235		(22.1	)		7		205		(96.6	)		3,528			5,731			(38.4	)		117,956			104,912			12.4
		2,140		1,344		59.2			3,099		3,174		(2.4	)		645		640		.8			2,002			1,705			17.4			19,017			17,275			10.1



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


					Percent							Percent							Percent									Percent									Percent
	2003		2002		Change			2003		2002		Change			2003		2002		Change			2003			2002			Change			2003			2002			Change


	$	291.1	$	244.2		19.2	%	$	481.5	$	507.5		(5.1	)%	$	20.2	$	18.3		10.4	%	$	433.6		$	400.1			8.4	%	$	5,422.3		$	5,101.3			6.3	%
		697.9		665.4		4.9			1,252.6		1,212.7		3.3			570.2		539.7		5.7			138.7			131.9			5.2			4,319.0			4,148.7			4.1
		—		—		—			—		—		—			—		—		—			51.5			124.2			(58.5	)		244.9			193.7			26.4

		989.0		909.6		8.7			1,734.1		1,720.2		.8			590.4		558.0		5.8			623.8			656.2			(4.9	)		9,986.2			9,443.7			5.7
		341.3		333.3		2.4			449.2		473.5		(5.1	)		536.4		514.3		4.3			1,178.5			1,129.1			4.4			4,071.1			4,004.9			1.7
		49.7		23.3		*			117.3		118.0		(.6	)		—		—		—			4.4			.9			*			558.2			396.3			40.9

		391.0		356.6		9.6			566.5		591.5		(4.2	)		536.4		514.3		4.3			1,182.9			1,130.0			4.7			4,629.3			4,401.2			5.2

		598.0		553.0		8.1			1,167.6		1,128.7		3.4			54.0		43.7		23.6			(559.1	)		(473.8	)		(18.0	)		5,356.9			5,042.5			6.2
		4.4		7.3		(39.7	)		311.6		348.5		(10.6	)		—		—		—			(2.2	)		2.5			*			968.0			1,000.0			(3.2	)

		593.6		545.7		8.8			856.0		780.2		9.7			54.0		43.7		23.6			(556.9	)		(476.3	)		(16.9	)		4,388.9			4,042.5			8.6
		216.0		198.6		8.8			311.5		283.9		9.7			19.6		15.9		23.3			(285.9	)		(219.5	)		(30.3	)		1,513.8			1,424.9			6.2

	$	377.6	$	347.1		8.8		$	544.5	$	496.3		9.7		$	34.4	$	27.8		23.7		$	(271.0	)	$	(256.8	)		(5.5	)		2,875.1			2,617.6			9.8

																																(25.4	)		(141.0	)
																																—			(37.2	)

																															$	2,849.7		$	2,439.4

	$	1,817	$	1,844		(1.5	)%	$	2,851	$	2,779		2.6	%	$	38	$	224		(83.0	)%	$	194		$	133			45.9	%	$	41,759		$	44,334			(5.8	)%
		593		594		(.2	)		—		—		—			—		—		—			208			205			1.5			27,092			25,413			6.6
		287		227		26.4			—		—		—			—		—		—			13			6			*			11,131			8,225			35.3
		2,119		2,009		5.5			7,059		7,294		(3.2	)		—		—		—			50			53			(5.7	)		38,064			36,163			5.3

		4,816		4,674		3.0			9,910		10,073		(1.6	)		38		224		(83.0	)		465			397			17.1			118,046			114,135			3.4
		740		289		*			1,814		1,815		(.1	)		306		306		—			—			—			—			6,329			5,459			15.9
		407		230		77.0			680		779		(12.7	)		—		—		—			24			9			*			2,131			2,074			2.7
		6,603		5,775		14.3			13,438		13,269		1.3			2,544		3,094		(17.8	)		44,385			34,650			28.1			187,015			170,017			10.0
		3,023		2,302		31.3			327		234		39.7			27		207		(87.0	)		(57	)		(38	)		50.0			32,412			27,872			16.3
		5,623		4,272		31.6			9		7		28.6			—		—		—			4			169			(97.6	)		55,465			44,800			23.8
		468		452		3.5			—		—		—			—		—		—			5,556			4,631			20.0			28,772			30,467			(5.6	)

		9,114		7,026		29.7			336		241		39.4			27		207		(87.0	)		5,503			4,762			15.6			116,649			103,139			13.1
		2,122		1,346		57.7			3,085		3,140		(1.8	)		635		637		(.3	)		1,978			1,449			36.5			18,862			16,640			13.4


U.S. Bancorp	25

the third quarter of 2003, compared with the third quarter of 2002. Nonperforming assets within the Wholesale Banking line of business continued to be at elevated levels. Nonperforming assets within Wholesale Banking were $934.8 million at September 30, 2003, compared with $971.3 million at September 30, 2002. 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, small business banking, consumer lending, mortgage banking, workplace banking, student banking, 24-hour banking and investment product and insurance sales. Consumer Banking contributed $446.4 million of the Company’s operating earnings for the third quarter of 2003 and $1,282.7 million for the first nine months of 2003, a 12.7 percent and 12.6 percent increase, respectively, over the same periods of 2002.

Total net revenue decreased 9.3 percent and increased 10.6 percent in the third quarter of 2003 and first nine months of 2003, respectively, compared with the same periods of 2002. Fee-based revenue declined by 7.7 percent for the third quarter of 2003 and increased 3.5 percent for the first nine months of 2003, compared with the same periods of 2002. Securities gains (losses) decreased $175.2 million for the third quarter of 2003 and increased $123.9 million for the first nine months of 2003, compared with the same periods of 2002.

Net interest income, on a taxable-equivalent basis, increased 9.6 percent for the third quarter of 2003 and increased 8.9 percent for the first nine months of 2003, compared with the same periods of 2002. The year-over-year increase in net interest income was due to growth in average loan balances and residential mortgages held for sale, improved spreads on retail and commercial loans, lower funding costs on non-earning asset balances, growth in interest-bearing and noninterest-bearing deposit balances and acquisitions. Partially offsetting these increases was the impact of declining interest rates on the funding benefit of consumer deposits. The increase in average loan balances of 10.4 percent reflected retail loan growth of 5.2 percent and residential mortgage growth of 45.7 percent in the third quarter of 2003, compared with the same period of 2002. Residential mortgages include home equity loans with first liens which accounted for 31.6 percent of the growth in residential mortgages. Commercial and commercial real estate loan balances increased 2.4 percent during the same period. The year-over-year increase in average deposits included growth in noninterest-bearing, interest checking, savings and money market account balances, partially offset by a reduction in balances associated with time deposits. The decline in lower margin time deposits primarily reflected a shift in product mix towards savings products.

The decline in fee-based revenue in the third quarter of 2003 was the result of lower mortgage banking revenue and higher end-of-term lease residual losses, compared with the same period of 2002. Fee-based revenue growth in the first nine months of 2003, compared with the same period of 2002, was driven by mortgage banking revenue, deposit service charges, and investment product fees and commissions, partially offset by lower commercial products revenue and higher end-of-term lease residual losses. The year-over-year growth in mortgage banking revenue was partially attributable to the acquisition of Leader in the second quarter of 2002, which contributed $48.3 million in the first nine months of 2003.

The $108.7 million of losses on the sale of securities recognized by the business line in the third quarter of 2003 represented an economic hedge to the reparation of MSR impairment caused by rising interest rates and a reduction in prepayments. The $193.4 million of net gains on the sale of securities recognized by the business line in the first nine months of 2003 represented an economic hedge to the net MSR impairment of $208.7 million caused by the impacts of declining interest rates and higher related prepayments due to refinancing activity.

Noninterest expense was $393.8 million in the third quarter of 2003 and $1,689.1 million for the first nine months of 2003, compared with $596.3 million and $1,523.5 million for the same periods of 2002, respectively. The decrease in noninterest expense for the third quarter of 2003 was attributable to the reparation of MSR impairment of $108.5 million, offset by higher loan origination costs and the Bay View Bank acquisition. The year-over-year increase in noninterest expense for the first nine months of 2003 was attributable to the increase in MSR impairment of $76.7 million, higher loan origination and repossession costs and the Bay View Bank and Leader acquisitions.

The provision for credit losses decreased $.3 million (.3 percent) for the third quarter of 2003 and decreased $6.6 million (2.0 percent) for the first nine months of 2003, compared with the same periods of 2002. The improvement in the provision for credit losses in the third quarter of 2003 was primarily attributable to


26	U.S. Bancorp

lower retail net charge-offs resulting from ongoing collection efforts and risk management.

Private Client, Trust and Asset Management provides trust, private banking, financial advisory, investment management and mutual fund processing 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 $131.9 million of the Company’s operating earnings for the third quarter of 2003 and $377.6 million for the first nine months of 2003, increases of 19.7 percent and 8.8 percent, respectively, over the same periods of 2002.

Total net revenue was $340.4 million in the third quarter of 2003 and $989.0 million in the first nine months of 2003, increases of 13.3 percent and 8.7 percent, respectively, compared with the same periods of 2002. Net interest income, on a taxable-equivalent basis, increased $20.7 million (25.3 percent) in the third quarter of 2003 and $46.9 million (19.2 percent) in the first nine months of 2003, compared with the same periods of 2002. The increase in net interest income in the third quarter of 2003 was due to growth in total deposits of 47.7 percent attributable to growth in noninterest-bearing deposits, savings products and the State Street Corporate Trust acquisition, partially offset by the impact of declining rates on the funding benefit of deposits. Noninterest income increased $19.3 million (8.8 percent) in the third quarter of 2003 and $32.5 million (4.9 percent) in the first nine months of 2003, compared with the same periods of 2002, due to the impact of account growth and the State Street Corporate Trust acquisition. This growth was partially offset by a decrease in the value of assets under management driven by adverse capital market conditions relative to the same periods of 2002.

Noninterest expense increased $8.2 million (6.7 percent) in the third quarter of 2003 and $34.4 million (9.6 percent) in the first nine months of 2003, compared with the same periods of 2002, primarily attributable to the State Street Corporate Trust acquisition, offset in part by expense savings.

The provision for credit losses decreased $2.4 million (43.6 percent) in the third quarter of 2003 and decreased $2.9 million (39.7 percent) in the first nine months of 2003, compared with the same periods of 2002. The year-over-year decrease in the provision for credit losses for the third quarter of 2003 was primarily due to lower retail loan net charge-offs.

Payment Services includes consumer and business credit cards, corporate and purchasing card services, consumer lines of credit, ATM processing, merchant processing and debit cards. Payment Services contributed $192.0 million of the Company’s operating earnings for the third quarter of 2003 and $544.5 million for the first nine months of 2003, a 2.2 percent decrease and a 9.7 percent increase, respectively, over the same periods of 2002.

Total net revenue was $591.0 million in the third quarter of 2003 and $1,734.1 million in the first nine months of 2003, a 3.9 percent decrease and a ..8 percent increase, respectively, over the same periods of 2002. Net interest income decreased 8.5 percent in the third quarter of 2003 and decreased 5.1 percent in the first nine months of 2003, compared with the same periods of 2002, primarily due to a reduction in customer late fees and two portfolio loan sales. During late 2002, the Company sold two co-branded credit card portfolios, reducing year-over-year net interest income for this business line by approximately $6.5 million in the third quarter of 2003 and $22.7 million in the first nine months of 2003. Noninterest income decreased 2.1 percent in the third quarter of 2003 and increased 3.3 percent in the first nine months of 2003, compared with the same periods of 2002. The decline in noninterest revenue for the third quarter of 2003 was primarily attributable to the gain on sale of a co-branded credit card portfolio in the third quarter of 2002, which was partially offset by growth in credit card and debit card revenue and corporate payment products revenue. The growth in credit and debit card revenue was muted somewhat by the $6.8 million impact of the debit card antitrust settlement by VISA USA and Mastercard which lowered interchange rates on signature debit transactions. The increase in noninterest income for the first nine months of 2003 was due to growth in credit and debit card revenue, corporate payment products revenue and ATM servicing revenue, partially offset by a reduction in merchant processing revenue and the gain on sale of a co-branded credit card portfolio in the third quarter of 2002. Merchant processing revenue declined due to lower processing spreads resulting from a change in the mix of merchants which offset the favorable impact of increased processing volume.

Noninterest expense was $190.7 million in the third quarter of 2003 and $566.5 million in the first nine months of 2003, decreases of $4.2 million (2.2 percent) and $25.0 million (4.2 percent), respectively, compared with the same periods of 2002. The decrease in noninterest expense was primarily attributable to lower fraud losses and third-party merchant processing costs partially offset by increased marketing costs.

The provision for credit losses was $98.4 million for the third quarter of 2003 and $311.6 million for the


U.S. Bancorp	27

first nine months of 2003, decreases of $13.3 million (11.9 percent) and $36.9 million (10.6 percent), respectively, compared with the same periods of 2002, due to lower net charge-offs resulting from improvement in ongoing collection efforts, risk management and the sale of two co-branded credit card portfolios during late 2002.

Capital Markets engages in equity and fixed income trading activities, offers investment banking and underwriting services for corporate and public sector customers and provides financial advisory services and securities, mutual funds, annuities and insurance products to consumers and regionally based businesses through a network of brokerage offices. Capital Markets contributed $18.3 million of the Company’s operating earnings for the third quarter of 2003 and $34.4 million for the first nine months of 2003, increases of $9.0 million (96.8 percent) and $6.6 million (23.7 percent), respectively, compared with the same periods of 2002.

Total net revenue was $211.4 million in the third quarter of 2003 and $590.4 million in the first nine months of 2003, an increase of $33.5 million (18.8 percent) and $32.4 million (5.8 percent), respectively, compared with the same periods of 2002. Net interest income decreased $3.7 million in the third quarter of 2003 due to lower balances and related spreads on trading account portfolio earning assets, compared with the third quarter of 2002. The $37.2 million increase in noninterest income for the third quarter of 2003 was primarily due to higher investment banking revenue and trading account profits. Noninterest expense increased $19.4 million (11.9 percent) for the third quarter of 2003 primarily related to compensation costs associated with the corresponding increases in noninterest income.

During the first quarter of 2003, the Company announced that its Board of Directors approved a plan to effect a spin-off of its capital markets business unit, including investment banking and brokerage activities primarily conducted by its wholly-owned subsidiary, U.S. Bancorp Piper Jaffray Companies Inc., pending SEC registration and approvals of other regulatory bodies. While it is anticipated that the spin-off will be completed in late 2003, the Company has no obligation to consummate the distribution, whether or not the conditions are satisfied. Refer to the “Planned Spin-Off of Piper Jaffray Companies” section for further information.

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 business activities managed on a corporate basis, including enterprise-wide operations and administrative support functions. Treasury and Corporate Support recorded operating losses of $113.1 million for the third quarter of 2003 and $271.0 million for the first nine months of 2003, increases of 6.3 percent and 5.5 percent, respectively, compared with the same periods of 2002.

Total net revenue was $180.8 million and $623.8 million in the third quarter and first nine months of 2003, respectively, compared with total net revenue of $214.5 million and $656.2 million, respectively, for the same periods of 2002. The year-over-year decline of $33.7 million (15.7 percent) in total net revenue for the third quarter of 2003 was attributable to an increase in noninterest income of $22.7 million offset by a decrease in net interest income of $3.7 million and a reduction in securities gains of $52.7 million. Noninterest expense was $408.7 million in the third quarter of 2003 and $1,182.9 million in the first nine months of 2003, increases of $1.9 million (.5 percent) and $52.9 million (4.7 percent), respectively, compared with the same periods of 2002. The increase year-over-year for the first nine months of 2003 was primarily the result of higher costs associated with employee pension benefits, corporate insurance, communications and charitable contributions.

The provision for credit losses for this business unit represents the residual aggregate of the credit losses allocated to the reportable business units and the Company’s recorded provision determined in accordance with generally accepted accounting principles in the United States. The provision for credit losses was a net recovery of $1.6 million in the third quarter of 2003 and $2.2 million for the first nine months of 2003, compared with a net charge of $.1 million and $2.5 million for the same periods of 2002, 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.

ACCOUNTING CHANGES

Note 2 of the Notes to Consolidated Financial Statements discusses new accounting policies adopted by the Company during 2003 and 2002 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


28	U.S. Bancorp

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 reported results of operations. 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, 2002. 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 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 Company’s Annual Report on Form 10-K for the year-ended December 31, 2002. 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 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 loss rates applied to risk categories and utilizes the results of this analysis to determine loss projections. This analysis is then considered in determining the level of the allowance for credit losses. Refer to the “Analysis


U.S. Bancorp	29

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 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 fair value is less than the carrying 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, 2003, to immediate 25 and 50 basis point decline in interest rates would be approximately $57 million and $90 million, respectively. An upward movement in interest rates at September 30, 2003, of 25 and 50 basis points would increase the fair value of the MSRs by approximately $69 million and $128 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 and technology, changes in discount rates and specific industry and market conditions. In determining the reasonableness of cash flow estimates, the Company reviews historical 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 operating segments, 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. This is particularly relevant to estimating future cash flows for the capital markets segment due to the volatile nature of the securities markets. Also, management often utilizes other information to validate the reasonableness of its valuations including public market comparables, 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


30	U.S. Bancorp

consider competitive differences including size, operating leverage and other factors. The carrying amount of an operating segment is determined based on the capital required to support the business segment’s activities including its tangible and intangible assets. The determination of a segment’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 2003. Based on the results of this assessment, no goodwill impairment was required to be recognized.

DISCLOSURE 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 Rule 15(d)-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 in making them aware on a timely basis of the material information relating to the Company required to be included in the Company’s periodic filings with the Securities and Exchange Commission.

During the period covered by this report, there was no change made in the Company’s internal controls over financial reporting (as defined in Rule 15(d)-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.


U.S. Bancorp	31

U.S. Bancorp

Consolidated Balance Sheet


				September 30,			December 31,
(Dollars in Millions)				2003			2002


				(Unaudited)
Assets
Cash and due from banks				$	9,187		$	10,758
Money market investments					536			434
Trading securities					1,138			898
Investment securities
	Held-to-maturity (fair value $188 and $240, respectively)				180			233
	Available-for-sale				34,835			28,255
Loans held for sale					3,640			4,159
Loans
	Commercial				41,170			41,944
	Commercial real estate				27,242			26,867
	Residential mortgages				12,976			9,746
	Retail				38,494			37,694

		Total loans			119,882			116,251
			Less allowance for credit losses		(2,368	)		(2,422	)

			Net loans		117,514			113,829
Premises and equipment					2,028			1,697
Customers’ liability on acceptances					143			140
Goodwill					6,329			6,325
Other intangible assets					2,138			2,321
Other assets					11,167			10,978

		Total assets		$	188,835		$	180,027

Liabilities and Shareholders’ Equity
Deposits
	Noninterest-bearing			$	32,441		$	35,106
	Interest-bearing				74,419			68,214
	Time deposits greater than $100,000				8,183			12,214

		Total deposits			115,043			115,534
Short-term borrowings					12,864			7,806
Long-term debt					31,603			28,588
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company					2,605			2,994
Acceptances outstanding					143			140
Other liabilities					7,151			6,864

		Total liabilities			169,409			161,926
Shareholders’ equity
	Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares issued: 9/30/03 — 1,972,643,007 shares; 12/31/02 — 1,972,643,060 shares				20			20
	Capital surplus				4,800			4,850
	Retained earnings				15,385			13,719
	Less cost of common stock in treasury: 9/30/03 — 45,245,971 shares; 12/31/02 — 55,686,500 shares				(1,031	)		(1,272	)
	Other comprehensive income				252			784

		Total shareholders’ equity			19,426			18,101

		Total liabilities and shareholders’ equity		$	188,835		$	180,027

See Notes to Consolidated Financial Statements.


32	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)			2003			2002		2003		2002


Interest Income
Loans			$	1,818.3		$	1,961.2	$	5,476.1	$	5,830.0
Loans held for sale				59.5			37.3		170.9		113.1
Investment securities
	Taxable			403.6			372.2		1,222.1		1,066.1
	Non-taxable			6.7			10.9		23.1		35.8
Money market investments				1.6			3.3		8.2		8.8
Trading securities				7.5			9.7		22.8		27.3
Other interest income				24.5			25.4		80.8		77.1

		Total interest income		2,321.7			2,420.0		7,004.0		7,158.2
Interest Expense
Deposits				256.4			370.3		851.5		1,141.6
Short-term borrowings				47.7			56.4		133.9		203.6
Long-term debt				169.4			226.8		540.7		635.7
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company				23.6			34.7		79.5		103.4

		Total interest expense		497.1			688.2		1,605.6		2,084.3

Net interest income				1,824.6			1,731.8		5,398.4		5,073.9
Provision for credit losses				310.0			330.0		968.0		1,000.0

Net interest income after provision for credit losses				1,514.6			1,401.8		4,430.4		4,073.9
Noninterest Income
Credit and debit card revenue				137.6			132.8		407.3		373.3
Corporate payment products revenue				95.7			87.6		272.6		245.3
ATM processing services				41.3			42.9		125.6		118.9
Merchant processing services				146.3			147.3		415.4		425.3
Trust and investment management fees				241.9			225.2		714.1		684.4
Deposit service charges				187.0			186.5		529.2		503.9
Cash management fees				126.2			105.8		350.0		314.3
Commercial products revenue				97.8			125.0		302.0		370.9
Mortgage banking revenue				89.5			111.8		275.2		241.8
Trading account profits and commissions				56.2			52.6		184.7		152.0
Investment products fees and commissions				104.5			105.0		314.0		323.5
Investment banking revenue				75.0			35.7		169.4		159.4
Securities gains (losses), net				(108.9	)		119.0		244.9		193.7
Other				84.9			88.4		259.5		235.7

		Total noninterest income		1,375.0			1,565.6		4,563.9		4,342.4
Noninterest Expense
Salaries				623.3			606.0		1,850.4		1,801.9
Employee benefits				90.9			93.8		295.1		281.3
Net occupancy				101.3			103.2		304.6		305.1
Furniture and equipment				72.7			75.7		218.1		229.6
Professional services				45.9			39.8		112.8		103.5
Communication				49.5			46.6		151.2		136.4
Postage				45.0			44.3		136.3		135.3
Other intangible assets				10.8			211.4		558.2		396.3
Merger and restructuring-related charges				10.2			70.4		38.6		216.2
Other				347.7			356.4		1,002.6		1,011.8

		Total noninterest expense		1,397.3			1,647.6		4,667.9		4,617.4

Income before income taxes and cumulative effect of change in accounting principles				1,492.3			1,319.8		4,326.4		3,798.9
Applicable income taxes				507.4			459.5		1,476.7		1,322.3

Income before cumulative effect of change in accounting principles				984.9			860.3		2,849.7		2,476.6
Cumulative effect of change in accounting principles				—			—		—		(37.2	)

Net income			$	984.9		$	860.3	$	2,849.7	$	2,439.4

Earnings Per Share
	Income before cumulative effect of change in accounting principles		$	.51		$	.45	$	1.48	$	1.29
	Cumulative effect of change in accounting principles			—			—		—		(.02	)

	Net income		$	.51		$	.45	$	1.48	$	1.27

Diluted Earnings Per Share
	Income before cumulative effect of change in accounting principles		$	.51		$	.45	$	1.47	$	1.29
	Cumulative effect of change in accounting principles			—			—		—		(.02	)

	Net income		$	.51		$	.45	$	1.47	$	1.27

Dividends declared per share			$	.205		$	.195	$	.615	$	.585

Average common shares				1,926.0			1,915.0		1,922.4		1,916.0
Average diluted common shares				1,940.8			1,923.3		1,933.5		1,926.7

See Notes to Consolidated Financial Statements.


U.S. Bancorp	33

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, 2001			1,951,709,512		$	19.7	$	4,906.2		$	11,918.0		$	(478.1	)	$	95.4		$	16,461.2
Net income											2,439.4									2,439.4
Unrealized gain on securities available for sale																	876.5			876.5
Unrealized gain on derivatives																	259.7			259.7
Foreign currency translation adjustment																	4.9			4.9
Realized gain on derivatives																	63.2			63.2
Reclassification adjustment for gains realized in net income																	(212.9	)		(212.9	)
Income taxes																	(376.5	)		(376.5	)

	Total comprehensive income																			3,054.3
Cash dividends declared on common stock											(1,114.5	)								(1,114.5	)
Issuance of common and treasury stock			8,362,415					(51.6	)					196.6						145.0
Purchase of treasury stock			(45,246,685	)										(1,040.2	)					(1,040.2	)
Shares reserved to meet deferred compensation obligations			(111,025	)				3.3						(3.3	)					—
Amortization of restricted stock								12.3												12.3

Balance September 30, 2002			1,914,714,217		$	19.7	$	4,870.2		$	13,242.9		$	(1,325.0	)	$	710.3		$	17,518.1

Balance December 31, 2002			1,916,956,560		$	19.7	$	4,850.4		$	13,718.6		$	(1,272.1	)	$	784.0		$	18,100.6
Net income											2,849.7									2,849.7
Unrealized loss on securities available for sale																	(520.6	)		(520.6	)
Unrealized loss on derivatives																	(273.2	)		(273.2	)
Foreign currency translation adjustment																	16.7			16.7
Realized gain on derivatives																	199.0			199.0
Reclassification adjustment for gains realized in net income																	(279.0	)		(279.0	)
Income taxes																	325.5			325.5

	Total comprehensive income																			2,318.1
Cash dividends declared on common stock											(1,182.9	)								(1,182.9	)
Issuance of common and treasury stock			11,195,691					(52.2	)					257.7						205.5
Shares reserved to meet deferred compensation obligations			(755,215	)				(7.5	)					(16.7	)					(24.2	)
Amortization of restricted stock								9.3												9.3

Balance September 30, 2003			1,927,397,036		$	19.7	$	4,800.0		$	15,385.4		$	(1,031.1	)	$	252.4		$	19,426.4

See Notes to Consolidated Financial Statements.


34	U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Cash Flows



		Nine Months Ended
		September 30,

(Dollars in Millions)
(Unaudited)		2003			2002


Operating Activities
	Net cash provided by (used in) operating activities	$	4,534.9		$	4,929.4
Investing Activities
Proceeds from sales of investment securities			17,097.6			11,201.5
Maturities of investment securities			15,873.1			5,556.8
Purchases of investment securities			(40,018.8	)		(17,759.2	)
Net (increase) decrease in loans outstanding (a)			(5,674.4	)		(3,577.9	)
Proceeds from sales of loans			1,715.5			1,635.2
Purchases of loans			(554.5	)		(136.5	)
Proceeds from sales of premises and equipment			33.2			185.5
Purchases of premises and equipment			(603.8	)		(358.4	)
Acquisitions, net of cash acquired			—			(62.7	)
Other, net			(192.9	)		(123.2	)

	Net cash provided by (used in) investing activities		(12,325.0	)		(3,438.9	)
Financing Activities
Net increase (decrease) in deposits			(490.9	)		2,217.8
Net increase (decrease) in short-term borrowings			5,057.3			(7,614.2	)
Principal payments on long-term debt			(5,362.0	)		(5,246.2	)
Proceeds from issuance of long-term debt			8,449.5			10,621.7
Redemption of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company			(350.0	)		—
Proceeds from issuance of common stock			179.0			121.8
Repurchase of common stock			—			(1,040.2	)
Cash dividends paid			(1,161.7	)		(1,107.0	)

	Net cash provided by (used in) financing activities		6,321.2			(2,046.3	)

	Change in cash and cash equivalents		(1,468.9	)		(555.8	)
Cash and cash equivalents at beginning of period			11,192.1			9,745.3

	Cash and cash equivalents at end of period	$	9,723.2		$	9,189.5

See Notes to Consolidated Financial Statements.


(a)		Includes $648.8 million of loans transferred to Stellar Funding Group, Inc. (the “loan conduit”) and $235.9 million of loans repurchased from the loan conduit during the nine months ended September 30, 2003. Also includes a $1.9 billion increase in loans as a result of consolidating the loan conduit during the third quarter of 2003. System constraints make it impractical to collect information on the gross cash flows between the Company and the loan conduit for 2002.


U.S. Bancorp	35

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, 2002. 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 10 “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

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Company adopted SFAS 150 for financial instruments entered into or modified after May 31, 2003, and adopted for all other financial instruments as of July 1, 2003. The adoption of SFAS 150 did not have a material impact on the Company’s financial statements.

Derivative Instruments and Hedging Activities In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149 (“SFAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” In particular, SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and clarifies when a derivative contains a financing component. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the Company’s financial statements.

Consolidation of Variable Interest Entities In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” (“VIEs”), an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to improve financial reporting of special purpose and other entities. In accordance with FIN 46, business enterprises that represent the primary beneficiary of another entity by retaining a controlling financial interest in that entity’s assets, liabilities and results of operating activities must consolidate the entity in its financial statements. Prior to the issuance of FIN 46, consolidation generally occurred when an enterprise controlled another entity through voting interests. Certain VIEs that are qualifying special purpose entities (“QSPEs”) subject to the reporting requirements of Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” will not be required to be consolidated under the provisions of FIN 46. The consolidation provisions of FIN 46 apply to VIEs created or entered into after January 31, 2003. For VIEs created before February 1, 2003, the effective date of applying the provisions of FIN 46 was deferred to periods ending after December 15, 2003. The Company plans to adopt FIN 46 for VIE’s that existed prior to February 2003 during the fourth quarter of 2003.


36	U.S. Bancorp

The Company has relationships with several SPEs. Because the Company’s investment securities conduit and the asset-backed securitizations are QSPEs, which are exempted from consolidation under the provisions of FIN 46, the Company does not believe that FIN 46 requires the consolidation of that conduit or the securitizations in its financial statements. During the third quarter of 2003, the Company elected not to reissue more than 90 percent of the commercial paper funding of Stellar Funding Group, Inc., the Company’s commercial loan conduit. This action caused the conduit to lose its status as a qualifying special purpose entity. As a result, the Company recorded all of Stellar’s assets and liabilities at fair value and the results of operations in the consolidated financial statements of the Company. Given the floating rate nature and high credit quality of the assets of Stellar, the impact to the Company’s financial statements was not significant. In the third quarter of 2003, average commercial loan balances increased by approximately $2 billion and the resulting increase in net interest income was offset by a similar decline in conduit fee income within commercial products revenue. Prior to December 31, 2003, the remaining commercial paper borrowings held by third-party investors will mature and the conduit will be legally dissolved.

With respect to other interests in entities subject to FIN 46, including low-income housing investments and guarantor trusts, the adoption of FIN 46 will not have a material impact on the Company’s financial statements. The Company has determined that the provisions of FIN 46 may require de-consolidation of the subsidiary grantor trusts, which issue mandatorily redeemable preferred securities (“Trust Preferred Securities”). The Company currently consolidates the grantor trusts, and its balance sheet includes the mandatorily redeemable preferred securities of the grantor trusts. At adoption of FIN 46, the grantor trusts may be de-consolidated and the junior subordinated debentures of the Company owned by the grantor trusts would be disclosed as an unconsolidated variable interest interest entity. The Trust Preferred Securities currently qualify as Tier 1 capital of the Company for regulatory capital purposes. The banking regulatory agencies have issued guidance that would continue the current capital treatment for Trust Preferred Securities until further notice.

Stock-Based Compensation In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure,” an amendment of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 requires prominent disclosures in interim as well as annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported net income. SFAS 148 is effective for fiscal years ending after December 15, 2002. The Company continues to account for stock-based employee compensation under the intrinsic based method and to provide disclosure of the impact of the fair value based method on reported income. Employee stock options have characteristics that are significantly different from those of traded options, including vesting provisions and transferability restrictions that impact their liquidity. Therefore, the existing option pricing models do not necessarily provide a reliable measure of the fair value of employee stock options. Refer to Note 11 of the Notes to Consolidated Financial Statements for proforma disclosure of the impact of stock options utilizing the Black-Scholes valuation method.

Guarantees In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to clarify accounting and disclosure requirements relating to a guarantor’s issuance of certain types of guarantees. FIN 45 requires entities to disclose additional information about certain guarantees, or group of similar guarantees, even if the likelihood of the guarantor’s having to make any payments under the guarantee is remote. The disclosure provisions are effective for interim and annual financial statements for the first reporting period ending after December 15, 2002. For certain guarantees, the interpretation also requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. The Company adopted the initial recognition and measurement provision effective January 1, 2003, which did not have a material impact on the Company’s financial statements. Refer to Note 12 of the Notes to Consolidated Financial Statements for further information on guarantees.

Business Combinations and Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations,” and Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 141 mandates that the purchase method of accounting be used for all business combinations initiated after


U.S. Bancorp	37

June 30, 2001, and established specific criteria for the recognition of intangible assets separately from goodwill. SFAS 142 addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The Company adopted SFAS 142 on January 1, 2002. The most significant changes made by SFAS 142 are that goodwill and indefinite lived intangible assets are no longer amortized and are to be tested for impairment at least annually. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the amortization provisions of SFAS 142 were effective upon adoption of SFAS 142.

Applying the provisions of SFAS 141 to recent acquisitions and the provisions of SFAS 142 to purchase acquisitions completed prior to July 1, 2001, increased after-tax income for the year ended December 31, 2002, by $205.6 million, or $.11 per diluted share. During the first quarter of 2002, the Company completed its initial impairment test as required by SFAS 142. As a result of this initial impairment test, the Company recognized an after-tax goodwill impairment charge of $37.2 million as a “cumulative effect of change in accounting principles” in the income statement in the first quarter of 2002. The impairment was primarily related to the purchase of a transportation leasing company in 1998 by the equipment leasing business. Banking regulations exclude 100 percent of goodwill from the determination of capital adequacy; therefore, the impact of this impairment on the Company’s capital adequacy was not significant.


Note 3		Business Combinations and Divestitures

On April 1, 2002, the Company acquired Cleveland-based The Leader Mortgage Company, LLC, a wholly-owned subsidiary of First Defiance Corp., in a cash transaction. The transaction represented total assets acquired of $531 million and total liabilities assumed of $446 million. Included in total assets were mortgage servicing rights and other intangibles of $173 million and goodwill of $18 million. Leader specializes in acquiring servicing of loans originated for state and local housing authorities.

On November 1, 2002, the Company acquired 57 branches and a related operations facility in northern California from Bay View Bank, a wholly-owned subsidiary of Bay View Capital Corporation, in a cash transaction. The transaction represented total assets acquired of $853 million and total liabilities assumed of $3.3 billion (primarily retail and small business deposits). Included in total assets were approximately $336 million in selected loans primarily with depository relationships, core deposit intangibles of $56 million and goodwill of $427 million.

On December 31, 2002, the Company acquired the corporate trust business of State Street Bank and Trust Company in a cash transaction valued at $725 million. State Street Corporate Trust was a leading provider, particularly in the Northeast, of corporate trust and agency services to a variety of municipalities, corporations, government agencies and other financial institutions serving approximately 20,000 client issuances representing over $689 billion of assets under administration. With this acquisition, the Company is among the nation’s leading providers of a full range of corporate trust products and services. The transaction represented total assets acquired of $682 million and total liabilities assumed of $39 million at the closing date. Included in total assets were contract and other intangibles with a fair value of $218 million and goodwill of $449 million. The goodwill reflected the strategic value of the combined organization’s leadership position in the corporate trust business and processing economies of scale resulting from the transaction. As part of the purchase price, $75 million was placed in escrow for up to eighteen months with payment contingent on the successful transition of business relationships.

The following table summarizes acquisitions by the Company completed since January 1, 2002:


						Goodwill and
						Other	Cash Paid/			Accounting
(Dollars and Shares in Millions)	Date	Assets (a)		Deposits		Intangibles	(Received)			Method


Corporate trust business of State Street Bank and Trust Company	December 2002	$	13	$	—	$667	$	643		Purchase
Bay View Bank branches	November 2002		362		3,305	483		(2,494	)	Purchase
The Leader Mortgage Company, LLC	April 2002		517		—	191		85		Purchase


(a)		Assets acquired do not include purchase accounting adjustments.

On February 19, 2003, the Company announced that its Board of Directors approved a plan to effect a spin-off of its capital markets business unit, including the investment banking and brokerage activities primarily conducted by its wholly-owned subsidiary, U.S. Bancorp Piper Jaffray Companies Inc. As of September 30, 2003, Piper Jaffray Companies had assets of $2.6 billion. During the first nine months of 2003, Piper Jaffray Companies generated


38	U.S. Bancorp

revenue of $584.9 million (5.9 percent of total consolidated revenue) and contributed $29.3 million of net income, representing 1.0 percent of the Company’s consolidated net income. The Company intends to execute this plan as a tax-free distribution of 100 percent of its ownership interests in the capital markets business and plans to retain approximately $180 million of subordinated debt of the broker-dealer subsidiary, subject to regulatory approval. The distribution is subject to certain conditions including SEC registration, regulatory review and approval and a determination that the distribution will be tax-free to the Company and its shareholders. While the spin-off is expected to be completed in late 2003, the Company has no obligation to consummate the distribution, whether or not these conditions are satisfied. This distribution does not include brokerage, financial advisory or asset management services offered to customers through the Company’s other business units. The Company will continue to provide asset management services to its customers through its Private Client, Trust and Asset Management business units and access to investment products and services through its extensive network of licensed financial advisors within the retail brokerage platform of the Consumer Banking business unit.


Note 4		Merger and Restructuring-Related Items

The Company recorded pre-tax merger and restructuring-related items of $38.6 million in the first nine months of 2003. In 2003, merger and restructuring-related items were primarily incurred in connection with the July 2001 acquisition of NOVA and with acquisitions of State Street Corporate Trust and Bay View Bank. Refer to Note 3 of the Notes to Consolidated Financial Statements for additional information regarding business combinations.

The components of the merger and restructuring-related items are shown below:



		Nine Months Ended
		September 30, 2003



(Dollars in Millions)		NOVA		Other (a)		Total


Severance and employee-related		$	.8	$	—	$	.8
Systems conversions and integration			21.7		6.3		28.0
Asset write-downs and lease terminations			6.8		3.0		9.8

	Total	$	29.3	$	9.3	$	38.6


(a)		Includes the acquisitions of State Street Corporate Trust, Bay View Bank and other smaller acquisitions.

The Company determines merger and restructuring-related items and related accruals based on its integration strategy and formulated plans. These plans are established as of the acquisition date and are regularly evaluated during the integration process.

Severance and employee-related charges include the cost of severance, other benefits and outplacement costs associated with the termination of employees primarily in branch offices and centralized corporate support and data processing functions. The severance amounts are determined based on the Company’s existing severance pay programs and are paid out over a benefit period of up to two years from the time of termination. The total number of employees included in severance accrual amounts were approximately 400 for NOVA, 140 for State Street Corporate Trust and 40 for Bay View Bank. Severance and employee-related costs for groups of acquired employees identified at the time of closing were included in the determination of goodwill. Severance and employee-related costs were recorded as incurred for groups of employees not specifically identified at the time of closing.

Systems conversions and integration costs are recorded as incurred and are associated with the preparation and mailing of numerous customer communications for the acquisitions and conversion of customer accounts, printing and distribution of training materials and policy and procedure manuals, outside consulting fees, and other expenses related to systems conversions and the integration of acquired branches and operations.

Asset write-downs and lease terminations represent lease termination costs and impairment of assets for redundant office space and branches that will be vacated and equipment disposed of as part of the integration plan. These costs are recognized in the accounting period that contract terminations occur or the asset becomes impaired and is abandoned.


U.S. Bancorp	39

The following table presents a summary of activity with respect to merger and restructuring-related accruals:



(Dollars in Millions)		USBM (a)			NOVA			Other (b)			Total


Balance at December 31, 2002		$	18.6		$	15.1		$	18.4		$	52.1
	Provision charged to operating expense		—			29.3			9.3			38.6
	Additions related to purchase acquisitions		—			—			(1.4	)		(1.4	)
	Cash outlays		(10.3	)		(23.3	)		(12.2	)		(45.8	)
	Noncash write-downs and other		—			—			(6.4	)		(6.4	)

Balance at September 30, 2003		$	8.3		$	21.1		$	7.7		$	37.1


(a)		Represents the organization created by the February 2001 acquisition by Firstar Corporation of the former U.S. Bancorp of Minneapolis, Minnesota.
(b)		Includes the acquisitions of State Street Corporate Trust, Bay View Bank and other smaller acquisitions.

The adequacy of accrued liabilities is reviewed regularly taking into consideration actual and projected payments. Adjustments are made to increase or decrease the accruals as needed. Reversals of expenses can reflect a lower utilization of benefits by affected staff, changes in initial assumptions as a result of subsequent mergers and alterations of business plans.

The components of the merger and restructuring-related accruals for all acquisitions were as follows:



		September 30,		December 31,
(Dollars in Millions)		2003		2002


Severance and employee-related		$	13.7	$	33.3
Lease termination and facility costs			18.5		17.2
Other			4.9		1.6

	Total	$	37.1	$	52.1


Note 5		Loans

The composition of the loan portfolio was as follows:



				September 30, 2003					December 31, 2002



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


Commercial
	Commercial			$	36,164		30.2	%	$	36,584		31.5	%
	Lease financing				5,006		4.2			5,360		4.6

		Total commercial			41,170		34.4			41,944		36.1
Commercial real estate
	Commercial mortgages				20,001		16.7			20,325		17.5
	Construction and development				7,241		6.0			6,542		5.6

		Total commercial real estate			27,242		22.7			26,867		23.1
Residential mortgages					12,976		10.8			9,746		8.4
Retail
	Credit card				5,532		4.6			5,665		4.9
	Retail leasing				5,825		4.8			5,680		4.9
	Home equity and second mortgages				13,022		10.9			13,572		11.6
	Other retail
		Revolving credit			2,520		2.1			2,650		2.3
		Installment			2,540		2.1			2,258		1.9
		Automobile			7,270		6.1			6,343		5.5
		Student			1,785		1.5			1,526		1.3

			Total other retail		14,115		11.8			12,777		11.0

		Total retail			38,494		32.1			37,694		32.4

			Total loans	$	119,882		100.0	%	$	116,251		100.0	%

Loans are presented net of unearned interest and deferred fees and costs, which amounted to $1.5 billion and $1.8 billion at September 30, 2003, and December 31, 2002, respectively.


40	U.S. Bancorp


Note 6		Mortgage Servicing Rights

The Company’s portfolio of residential mortgages serviced for others was $51.0 billion and $43.1 billion at September 30, 2003, and December 31, 2002, respectively.

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



		September 30,			December 31,
(Dollars in Millions)		2003			2002


Initial carrying value, net of amortization		$	809		$	849
Impairment valuation allowance			(181	)		(207	)

	Net carrying value	$	628		$	642

Changes in capitalized mortgage servicing rights are summarized as follows:


		Nine Months Ended			Year Ended
(Dollars in Millions)		September 30, 2003			December 31, 2002


Balance at beginning of period		$	642		$	360
	Rights purchased		45			229
	Rights capitalized		263			357
	Amortization		(113	)		(94	)
	Rights sold		—			(24	)
	Impairment (a)		(209	)		(186	)

	Balance at end of period	$	628		$	642


(a)		Mortgage servicing rights reparation of $108.5 million and impairment of $117.7 million were recognized during the third quarter of 2003 and 2002, 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)	2003			2002


Fair value	$	628		$	655
Expected weighted-average life (in years)		5.3			4.8
Discount rate		9.6	%		9.8	%

The estimated sensitivity of the fair value of the mortgage servicing rights portfolio to changes in interest rates at September 30, 2003, was as follows:



	Down Scenario						Up Scenario


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


Fair value	$	(90	)	$	(57	)	$	69	$	128

The Company utilizes the investment portfolio as an economic hedge against possible adverse interest rate changes. The Company also, from time to time, purchases principal-only securities that act as a partial economic hedge. The Company is able to recognize reparations from increases in fair value of servicing rights when impairment reserves are released.

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 The Leader Mortgage Company, LLC (a wholly-owned subsidiary) and U.S.


U.S. Bancorp	41

Bank Home Mortgage. A summary of the Company’s mortgage servicing rights and related characteristics by segment as of September 30, 2003, was as follows:



				U.S. Bank Home Mortgage

	Leader
(Dollars in Millions)	Mortgage			Conventional			Government			Total


Servicing portfolio	$	8,097		$	34,114		$	8,817		$	51,028
Fair market value	$	103		$	387		$	138		$	628
Value (bps)		127			113			157			123
Weighted-average servicing fees (bps)		45			34			47			38
Multiple (value/servicing fees)		2.82			3.32			3.34			3.24
Weighted-average note rate		6.61	%		5.95	%		6.62	%		6.19	%
Age (in years)		3.3			1.4			2.1			1.8
Expected life (in years)		3.8			5.7			5.3			5.3
Discount rate		10.0	%		9.2	%		11.0	%		9.6	%

The Leader Mortgage Company, LLC 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. As a result of the slower prepayment characteristics of the state and local loan programs, the Leader portfolio normally has a longer expected life relative to other servicing portfolios.

The U.S. Bank Home Mortgage servicing portfolio is predominantly comprised of fixed-rate agency loans (FNMA, FHLMC, GNMA, FHLB and various housing agencies) with limited adjustable-rate or jumbo mortgage loans.


Note 7		Intangible Assets

The following table reflects the changes in the carrying value of goodwill for the nine months ended September 30, 2003:


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


Balance at December 31, 2002		$	1,332		$	2,139		$	736	$	1,813	$	305	$	6,325
	Goodwill acquired		—			1			5		2		1		9
	Disposal		(5	)		—			—		—		—		(5	)
	Reclass		2			(2	)		—		—		—		—

Balance at September 30, 2003		$	1,329		$	2,138		$	741	$	1,815	$	306	$	6,329

Amortizable intangible assets consisted of the following:


		Estimated		Amortization		September 30,		December 31,
(Dollars in Millions)		Life (a)		Method (b)		2003		2002


Merchant processing contracts			8 years		AC	$	567	$	596
Core deposit benefits			10 years/6 years		SL/AC		439		505
Mortgage servicing rights			5 years		AC		628		642
Trust relationships			15 years/8 years		SL/AC		324		371
Other identified intangibles			8 years/9 years		SL/AC		180		207

	Total					$	2,138	$	2,321


(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


42	U.S. Bancorp

Aggregate amortization expense consisted of the following:



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


(Dollars in Millions)		2003			2002		2003		2002


Merchant processing contracts		$	33.4		$	34.0	$	98.1	$	98.4
Core deposit benefits			22.0			19.4		66.2		59.2
Mortgage servicing rights (a)			(68.8	)		143.7		321.4		195.9
Trust relationships			13.3			4.8		39.9		14.5
Other identified intangibles			10.9			9.5		32.6		28.3

	Total	$	10.8		$	211.4	$	558.2	$	396.3


(a)		Includes mortgage servicing rights reparation of $108.5 million and a $117.7 million impairment for the three months ended September 30, 2003 and 2002, respectively, and impairments of $208.7 million and $132.0 million for the nine months ended September 30, 2003 and 2002, respectively.

Below is the estimated amortization expense for the years ending:


(Dollars in Millions)


Remaining 2003	$	120.3
2004		395.4
2005		334.3
2006		278.3
2007		238.0


Note 8		Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Junior Subordinated Debentures of the Parent Company

The following table is a summary of the Trust Preferred Securities as of September 30, 2003:

Trust

Preferred

Issuance

Securities

Debentures

Rate

Redemption

Issuance Trust (Dollars in Millions)

Date

Amount (a)

Amount

Type (b)

Rate

Maturity Date

Date (c)

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

1.91

(d)

June 2027

June 15, 2007

Mercantile Capital Trust I

February 1997

150

155

Variable

1.97

(e)

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)		Company-obligated Mandatorily Redeemable Securities of Subsidiary Trusts at September 30, 2003, are recorded on the balance sheet at fair value. Carrying value includes a fair value adjustment of $60 million related to hedges on certain retail and institutional obligated trust securities, as well as prepaid issuance fees of $(5) million.
(b)		The variable-rate Trust Preferred Securities reprice quarterly.
(c)		Earliest date of redemption.
(d)		Three-month LIBOR +76.5 basis points
(e)		Three-month LIBOR +85.0 basis points

On April 1, 2003, USB Capital II, a subsidiary company of U.S. Bancorp, redeemed 100 percent, or $350 million of its 7.20 percent Trust Preferred Securities. On May 2, 2003, USB Capital II was legally dissolved.

Refer to Note 2 with respect to the potential impact of the adoption of FIN 46 relative to Trust Preferred Securities.


Note 9		Shareholders’ Equity

At September 30, 2003, and December 31, 2002, the Company had authority to issue 4 billion shares of common stock and 10 million shares of preferred stock. The Company had 1,927.4 million and 1,917.0 million shares of common stock outstanding at September 30, 2003, and December 31, 2002, respectively.

On December 18, 2001, the Board of Directors approved an authorization to repurchase 100 million shares of outstanding common stock through 2003. Under this program, the Company has repurchased 8.5 million shares of common stock through September 30, 2003.


U.S. Bancorp	43


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)		2003		2002		2003		2002


Income before cumulative effect of change in accounting principles		$	984.9	$	860.3	$	2,849.7	$	2,476.6
Cumulative effect of change in accounting principles			—		—		—		(37.2	)

	Net income	$	984.9	$	860.3	$	2,849.7	$	2,439.4

Weighted-average common shares outstanding			1,926.0		1,915.0		1,922.4		1,916.0
Net effect of the assumed purchase of stock based on the treasury stock method for options and stock plans			14.8		8.3		11.1		10.7

	Weighted-average diluted common shares outstanding		1,940.8		1,923.3		1,933.5		1,926.7

Earnings per share
	Income before cumulative effect of change in accounting principles	$	.51	$	.45	$	1.48	$	1.29
	Cumulative effect of change in accounting principles		—		—		—		(.02	)

	Net income	$	.51	$	.45	$	1.48	$	1.27

Diluted earnings per share
	Income before cumulative effect of change in accounting principles	$	.51	$	.45	$	1.47	$	1.29
	Cumulative effect of change in accounting principles		—		—		—		(.02	)

	Net income	$	.51	$	.45	$	1.47	$	1.27

For the three months ended September 30, 2003 and 2002, options to purchase 56 million and 128 million shares, respectively, and 92 million and 119 million shares for the nine months ended 2003 and 2002, respectively, were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.


Note 11		Stock-Based Compensation

The following table shows proforma compensation expense, net income and earnings per share adjusted as if the Company had applied the fair value recognition provisions of SFAS 123.



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



(Dollars in Millions, Except Per Share Data)			2003			2002			2003			2002


Reported net income			$	984.9		$	860.3		$	2,849.7		$	2,439.4
	Stock-based compensation expense included in reported net income, net of tax			2.2			2.5			7.6			8.6
	Total stock-based compensation expense under the fair value method for all awards, net of tax			(26.6	)		(32.4	)		(84.5	)		(100.5	)

		Proforma net income	$	960.5		$	830.4		$	2,772.8		$	2,347.5
Earnings per share
	Reported net income		$	.51		$	.45		$	1.48		$	1.27
	Stock-based compensation, net of tax			(.01	)		(.02	)		(.04	)		(.05	)

		Proforma net income	$	.50		$	.43		$	1.44		$	1.22
Diluted earnings per share
	Reported net income		$	.51		$	.45		$	1.47		$	1.27
	Stock-based compensation, net of tax			(.01	)		(.02	)		(.04	)		(.05	)

		Proforma net income	$	.50		$	.43		$	1.43		$	1.22


Note 12		Guarantees and Contingent Liabilities

Guarantees and contingent liabilities of the Company as of September 30, 2003, include:

LETTERS OF CREDIT

Standby letters of credit are conditional 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


44	U.S. Bancorp

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, real estate, accounts receivable and inventory. 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, 2003, were approximately $9.5 billion with a weighted-average term of approximately 24 months. The estimated fair value of standby letters of credit was approximately $81.7 million at September 30, 2003.

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; synthetic lease guarantees; 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 $114 million at September 30, 2003.

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 2014. The maximum potential future payments guaranteed by the Company under these arrangements was approximately $1.6 billion at September 30, 2003. The Company’s recorded liabilities as of September 30, 2003, included $43.2 million representing outstanding amounts owed to these third-parties and required to be recorded on balance sheet in accordance with generally accepted accounting principles.

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 was approximately $12.9 billion at September 30, 2003, and represented the market value of the securities lent to third-parties. At September 30, 2003, the Company held assets with a market value of $13.3 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 $940.1 million at September 30, 2003, 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.

Merchant Processing The Company, through its subsidiary NOVA Information Systems, Inc., 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


U.S. Bancorp	45

“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 later 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 four months preceding September 30, 2003, this amount totaled approximately $37.2 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, 2003, the Company held as collateral $28.5 million of merchant escrow deposits.

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, 2003, the value of future delivery airline tickets purchased was approximately $1.4 billion, and the Company held collateral of $232.0 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, 2003, the Company recorded a liability for potential losses of $23.6 million.

Contingent Consideration Arrangements The Company has contingent payment obligations related to certain business combination transactions. Payments must be made as long as certain post-acquisition performance-based criteria are met or customer relationships are maintained. At September 30, 2003, the maximum potential future payments required to be made by the Company under these arrangements was approximately $75.0 million and primarily represented contingent payments related to the acquisition of State Street Corporate Trust business on December 31, 2002. If required, these contingent payments would be payable within the next 3 to 9 months.

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 was approximately $7.8 billion at September 30, 2003. The recorded fair value of the Company’s liability for the credit enhancement recourse obligation and liquidity facilities was $26.7 million at September 30, 2003, 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 September 2004. The maximum potential future payments guaranteed by the Company under these arrangements was approximately $49.2 million at September 30, 2003. At September 30, 2003, the Company had a recorded liability of $44.2 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 industry-wide investigations of research analyst independence issues, the Company’s Capital Markets business line established a $50.0 million liability for probable claims that, in part, included a settlement with certain governmental and regulatory agencies of $25.0 million for investment banking regulatory matters and $7.5 million for funding independent analyst research for its customers.


46	U.S. Bancorp

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 13		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)			2003		2002


Acquisitions and divestitures
	Assets acquired		$	—	$	534.6
	Liabilities assumed			—		(446.2	)

		Net	$	—	$	88.4

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)		2003		2002


Interest-bearing deposits		$	186	$	102
Federal funds sold			66		61
Securities purchased under agreements to resell			284		271

	Total money market investments	$	536	$	434


U.S. Bancorp	47

U.S. Bancorp


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



			For the Three Months Ended September 30,

			2003								2002


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


Assets
Money market investments			$	500		$	1.6		1.28	%	$	683		$	3.3		1.92	%		(26.8	)%
Trading securities				788			8.6		4.36			915			11.0		4.79			(13.9	)
Taxable securities				37,221			403.6		4.34			29,321			372.2		5.08			26.9
Non-taxable securities				556			9.7		7.00			898			15.5		6.86			(38.1	)
Loans held for sale				4,460			59.5		5.34			2,264			37.3		6.59			97.0
Loans (b)
	Commercial			41,980			579.7		5.49			43,216			663.1		6.10			(2.9	)
	Commercial real estate			27,397			391.5		5.67			25,818			412.2		6.33			6.1
	Residential mortgages			12,234			181.5		5.91			8,513			150.6		7.06			43.7
	Retail			38,371			669.5		6.92			37,117			738.7		7.90			3.4

		Total loans		119,982			1,822.2		6.03			114,664			1,964.6		6.80			4.6
Other earning assets				1,658			24.5		5.84			1,591			25.4		6.34			4.2

		Total earning assets		165,165			2,329.7		5.61			150,336			2,429.3		6.43			9.9
Allowance for credit losses				(2,451	)							(2,545	)							(3.7	)
Unrealized gain (loss) on available-for-sale securities				(544	)							536								*
Other assets				28,071								24,740								13.5

		Total assets	$	190,241							$	173,067								9.9

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits			$	31,907							$	28,838								10.6
Interest-bearing deposits
	Interest checking			20,148			20.3		.40			15,534			25.8		.66			29.7
	Money market accounts			33,980			78.9		.92			24,512			80.5		1.30			38.6
	Savings accounts			5,846			5.2		.36			4,969			6.6		.52			17.6
	Time certificates of deposit less than $100,000			14,824			105.1		2.81			18,710			177.0		3.75			(20.8	)
	Time deposits greater than $100,000			11,251			46.9		1.66			12,349			80.4		2.58			(8.9	)

		Total interest-bearing deposits		86,049			256.4		1.18			76,074			370.3		1.93			13.1
Short-term borrowings				12,584			47.7		1.50			9,641			56.4		2.32			30.5
Long-term debt				31,433			169.4		2.14			32,089			226.8		2.81			(2.0	)
Company-obligated mandatorily redeemable preferred securities				2,576			23.6		3.65			2,954			34.7		4.65			(12.8	)

		Total interest-bearing liabilities		132,642			497.1		1.49			120,758			688.2		2.26			9.8
Other liabilities				6,675								6,196								7.7
Shareholders’ equity				19,017								17,275								10.1

		Total liabilities and shareholders’ equity	$	190,241							$	173,067								9.9 %

Net interest income						$	1,832.6							$	1,741.1

Gross interest margin									4.12	%							4.17	%

Gross interest margin without taxable-equivalent increments									4.10								4.15

Percent of Earning Assets
Interest income									5.61	%							6.43	%
Interest expense									1.20								1.82

Net interest margin									4.41								4.61

Net interest margin without taxable-equivalent increments									4.39	%							4.59	%


*		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.


48	U.S. Bancorp

U.S. Bancorp


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



			For the Nine Months Ended September 30,

			2003								2002


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


Assets
Money market investments			$	559		$	8.2		1.96	%	$	725		$	8.8		1.62	%		(22.9	)%
Trading securities				894			25.8		3.85			947			29.6		4.16			(5.6	)
Taxable securities				35,429			1,222.1		4.60			27,321			1,066.1		5.20			29.7
Non-taxable securities				630			33.1		7.00			979			50.7		6.90			(35.6	)
Loans held for sale				4,078			170.9		5.59			2,256			113.1		6.69			80.8
Loans (b)
	Commercial			41,759			1,752.7		5.61			44,334			2,003.3		6.04			(5.8	)
	Commercial real estate			27,092			1,192.5		5.89			25,413			1,222.8		6.43			6.6
	Residential mortgages			11,131			516.0		6.19			8,225			441.5		7.16			35.3
	Retail			38,064			2,025.8		7.12			36,163			2,172.6		8.03			5.3

		Total loans		118,046			5,487.0		6.21			114,135			5,840.2		6.84			3.4
Other earning assets				1,649			80.8		6.54			1,629			77.1		6.33			1.2

		Total earning assets		161,285			7,027.9		5.82			147,992			7,185.6		6.49			9.0
Allowance for credit losses				(2,476	)							(2,542	)							(2.6	)
Unrealized gain (loss) on available-for-sale securities				250								310								(19.4	)
Other assets				27,956								24,257								15.2

		Total assets	$	187,015							$	170,017								10.0

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits			$	32,412							$	27,872								16.3
Interest-bearing deposits
	Interest checking			18,601			64.4		.46			15,336			77.5		.68			21.3
	Money market accounts			31,285			238.4		1.02			24,563			232.4		1.27			27.4
	Savings accounts			5,579			16.5		.40			4,901			19.7		.54			13.8
	Time certificates of deposit less than $100,000			15,936			353.3		2.96			19,602			584.2		3.98			(18.7	)
	Time deposits greater than $100,000			12,836			178.9		1.86			10,865			227.8		2.80			18.1

		Total interest-bearing deposits		84,237			851.5		1.35			75,267			1,141.6		2.03			11.9
Short-term borrowings				10,854			133.9		1.65			11,934			203.6		2.28			(9.0	)
Long-term debt				31,214			540.7		2.31			29,584			635.7		2.87			5.5
Company-obligated mandatorily redeemable preferred securities				2,738			79.5		3.88			2,886			103.4		4.79			(5.1	)

		Total interest-bearing liabilities		129,043			1,605.6		1.66			119,671			2,084.3		2.33			7.8
Other liabilities				6,698								5,834								14.8
Shareholders’ equity				18,862								16,640								13.4

		Total liabilities and shareholders’ equity	$	187,015							$	170,017								10.0 %

Net interest income						$	5,422.3							$	5,101.3

Gross interest margin									4.16	%							4.16	%

Gross interest margin without taxable-equivalent increments									4.14								4.14

Percent of Earning Assets
Interest income									5.82	%							6.49	%
Interest expense									1.33								1.89

Net interest margin									4.49								4.60

Net interest margin without taxable-equivalent increments									4.47	%							4.58	%


(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.


U.S. Bancorp	49

Part II — Other Information

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

12 Computation of Ratio of Earnings to Fixed Charges

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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, dated November 14, 2003.

(b) Reports on Form 8-K

During the quarter ended September 30, 2003, and through the date of this report, the Company filed the following Current Reports on Form 8-K:

• Form 8-K dated July 15, 2003, relating to the Company’s second quarter, 2003 financial results.

• Form 8-K dated October 21, 2003, relating to the Company’s third quarter, 2003 financial results.

• Form 8-K dated October 23, 2003, announcing the names of six individuals expected to serve as outside members of the board of directors of Piper Jaffray Companies.

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 14, 2003


50	U.S. Bancorp

EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges



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


Earnings
	1. Income before cumulative effect of change in accounting principles	$	984.9	$	2,849.7
	2. Applicable income taxes		507.4		1,476.7

	3. Income before income taxes and cumulative effect of change in accounting principles (1 + 2)	$	1,492.3	$	4,326.4

	4. Fixed charges:
	a. Interest expense excluding interest on deposits	$	240.7	$	754.1
	b. Portion of rents representative of interest and amortization of debt expense		18.1		56.8

	c. Fixed charges excluding interest on deposits (4a + 4b)		258.8		810.9
	d. Interest on deposits		256.4		851.5

	e. Fixed charges including interest on deposits (4c + 4d)	$	515.2	$	1,662.4

	5. Amortization of interest capitalized	$	—	$	—
	6. Earnings excluding interest on deposits (3 + 4c + 5)		1,751.1		5,137.3
	7. Earnings including interest on deposits (3 + 4e + 5)		2,007.5		5,988.8
	8. Fixed charges excluding interest on deposits (4c)		258.8		810.9
	9. Fixed charges including interest on deposits (4e)		515.2		1,662.4

Ratio of Earnings to Fixed Charges
10. Excluding interest on deposits (line 6/line 8)			6.77		6.34
11. Including interest on deposits (line 7/line 9)			3.90		3.60


U.S. Bancorp	51

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-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 our 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 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 14, 2003


52	U.S. Bancorp

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

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 14, 2003


U.S. Bancorp	53

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 section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), 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, 2003 (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 Chief Executive Officer		David M. Moffett Chief Financial Officer

Dated: November 14, 2003


54	U.S. Bancorp



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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 dividend reinvestment plan 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 ServicesDirect^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 a plan 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

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)


	12	Computation of Ratio of Earnings to Fixed Charges
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	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, dated November 14, 2003.


	•	Form 8-K dated July 15, 2003, relating to the Company’s second quarter, 2003 financial results.
	•	Form 8-K dated October 21, 2003, relating to the Company’s third quarter, 2003 financial results.
	•	Form 8-K dated October 23, 2003, announcing the names of six individuals expected to serve as outside members of the board of directors of Piper Jaffray Companies.



	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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-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 our 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.


	/s/ JERRY A. GRUNDHOFER

	Jerry A. Grundhofer
	Chief Executive Officer


	/s/ DAVID M. MOFFETT

	David M. Moffett
	Chief Financial Officer


(1)	The Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (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.