US BANCORP \DE\ - 10-Q Quarterly Report

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(FORM 10-Q)

(USBANCORP LOGO)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from (not applicable)

Commission file number 1-6880

U.S. BANCORP

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of Incorporation or organization)		41-0255900 (I.R.S. Employer Identification Number)

800 Nicollet Mall

Minneapolis, Minnesota 55402

(Address of principal executive offices and zip code)

651-466-3000

(Registrant’s telephone number, including area code)

(not applicable)

(Former name, former address and former fiscal year,

if changed since last report)

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

YES X NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES X NO

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


Class Common Stock, $.01 Par Value		Outstanding as of July 31, 2004 1,879,282,790 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
Amendment of Employment Agreement-Jerry A. Grundhofer

Table of Contents and Form 10-Q Cross Reference Index


Part I — Financial Information
1)	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
		a)	Overview	3
		b)	Statement of Income Analysis	5
		c)	Balance Sheet Analysis	9
		d)	Accounting Changes	31
		e)	Critical Accounting Policies	31
		f)	Controls and Procedures (Item 4)	33
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	18
		f)	Market Risk Management	21
		g)	Liquidity Risk Management	21
		h)	Capital Management	23
3)	Line of Business Financial Review			24
4)	Financial Statements (Item 1)			36
Part II — Other Information
1)	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities (Item 2)			54
2)	Submission of Matters to a Vote of Security Holders (Item 4)			54
3)	Exhibits and Reports on Form 8-K (Item 6)			54
4)	Signature			55
5)	Exhibits			56

Forward-Looking Statements

This Form 10-Q contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following, in addition to those contained in U.S. Bancorp’s reports on file with the SEC: (i) general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for credit losses, or a reduced demand for credit or fee-based products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; (iii) inflation, changes in securities market conditions and monetary fluctuations could adversely affect the value or credit quality of our assets, or the availability and terms of funding necessary to meet our liquidity needs; (iv) changes in the extensive laws, regulations and policies governing financial services companies could alter our business environment or affect operations; (v) the potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could present operational issues or require significant capital spending; (vi) competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments or bank regulatory reform; (vii) changes in consumer spending and savings habits could adversely affect our results of operations; (viii) changes in the financial performance and condition of our borrowers could negatively affect repayment of such borrowers’ loans; (ix) acquisitions may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated, or may result in unforeseen integration difficulties; (x) capital investments in our businesses may not produce expected growth in earnings anticipated at the time of the expenditure; and (xi) acts or threats of terrorism, and/or political and military actions taken by the U.S. or other governments in response to acts or threats of terrorism or otherwise could adversely affect general economic or industry conditions. Forward-looking statements speak only as of the date they are made, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.


U.S. Bancorp	1

Table 1 Selected Financial Data



		Three Months Ended									Six Months Ended
		June 30,									June 30,


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

Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)		$	1,779.4		$	1,798.6			(1.1	)%	$	3,558.4		$	3,575.3			(.5	)%
Noninterest income			1,413.4			1,259.8			12.2			2,731.7			2,485.2			9.9
Securities gains (losses), net			(171.7	)		213.1			*			(171.7	)		353.8			*

	Total net revenue		3,021.1			3,271.5			(7.7	)		6,118.4			6,414.3			(4.6	)
Noninterest expense			1,232.6			1,546.6			(20.3	)		2,687.5			3,001.2			(10.5	)
Provision for credit losses			204.5			323.0			(36.7	)		439.5			658.0			(33.2	)

	Income from continuing operations before taxes		1,584.0			1,401.9			13.0			2,991.4			2,755.1			8.6
Taxable-equivalent adjustment			7.0			6.7			4.5			14.2			14.0			1.4
Applicable income taxes			540.1			480.2			12.5			931.9			942.0			(1.1	)

	Income from continuing operations		1,036.9			915.0			13.3			2,045.3			1,799.1			13.7
Discontinued operations (after-tax)			—			4.9			*			—			5.6			*

	Net income	$	1,036.9		$	919.9			12.7		$	2,045.3		$	1,804.7			13.3

Per Common Share
Earnings per share from continuing operations		$	.55		$	.48			14.6	%	$	1.07		$	.94			13.8	%
Diluted earnings per share from continuing operations			.54			.47			14.9			1.06			.93			14.0
Earnings per share			.55			.48			14.6			1.07			.94			13.8
Diluted earnings per share			.54			.48			12.5			1.06			.94			12.8
Dividends declared per share			.240			.205			17.1			.480			.410			17.1
Book value per share			9.91			10.14			(2.3	)
Market value per share			27.56			24.50			12.5
Average common shares outstanding			1,891.6			1,922.3			(1.6	)		1,903.5			1,920.6			(.9	)
Average common diluted shares outstanding			1,913.4			1,931.6			(.9	)		1,927.3			1,928.6			(.1	)
Financial Ratios
Return on average assets			2.19	%		1.97	%					2.16	%		1.96	%
Return on average equity			21.9			19.0						21.3			19.0
Net interest margin (taxable-equivalent basis)			4.28			4.52						4.28			4.56
Efficiency ratio (b)			38.6			50.6						42.7			49.5
Average Balances
Loans		$	121,161		$	117,803			2.9	%	$	119,985		$	117,061			2.5	%
Loans held for sale			1,987			3,728			(46.7	)		1,716			3,884			(55.8	)
Investment securities			42,489			36,142			17.6			43,617			35,187			24.0
Earning assets			166,990			159,425			4.7			166,674			157,784			5.6
Assets			190,430			187,055			1.8			190,046			185,375			2.5
Noninterest-bearing deposits			30,607			32,515			(5.9	)		29,815			32,669			(8.7	)
Deposits			117,116			116,151			.8			116,567			115,984			.5
Short-term borrowings			15,310			8,982			70.5			14,365			9,096			57.9
Long-term debt and junior subordinated debentures			30,354			32,273			(5.9	)		31,140			30,888			.8
Total shareholders’ equity			19,043			19,435			(2.0	)		19,314			19,122			1.0

		June 30, 2004			December 31, 2003

Period End Balances
Loans		$	122,830		$	118,235			3.9	%
Allowance for loan losses			2,244			2,369			(5.3	)
Investment securities			40,285			43,334			(7.0	)
Assets			190,230			189,286			.5
Deposits			119,927			119,052			.7
Long-term debt and junior subordinated debentures			33,665			33,816			(.4	)
Total shareholders’ equity			18,675			19,242			(2.9	)
Regulatory capital ratios
	Tangible common equity		6.3	%		6.5	%
	Tier 1 capital		8.7			9.1
	Total risk-based capital		12.9			13.6
	Leverage		7.8			8.0


*		Not meaningful
(a)		Interest and rates are presented on a fully-taxable equivalent basis utilizing a tax rate of 35 percent.
(b)		Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.


2	U.S. Bancorp

Management’s Discussion and Analysis

OVERVIEW

Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income of $1,036.9 million for the second quarter of 2004, or $.54 per diluted share, compared with $919.9 million, or $.48 per diluted share, for the second quarter of 2003. Return on average assets and return on average equity were 2.19 percent and 21.9 percent, respectively, for the second quarter of 2004, compared with returns of 1.97 percent and 19.0 percent, respectively, for the second quarter of 2003. The Company’s results for the second quarter of 2004 improved over the second quarter of 2003, primarily due to growth in fee-based products and services, as well as lower credit costs and controlled operating expenses. Included in the second quarter of 2004 were net losses on the sale of securities of $171.7 million, a net reduction of $384.8 million from net securities gains realized in the second quarter of 2003. The second quarter of 2004 also included a $171.1 million reparation of mortgage servicing rights (“MSR”), a $367.4 million favorable variance over the second quarter of 2003. Changes in interest rates relative to the end of the first quarter of 2004 drove the realization of the MSR reparation during the second quarter of 2004. The Company’s interest rate risk management practice of utilizing its securities portfolio to offset the impact of changes in MSR valuation was the primary factor in deciding to sell lower-yielding securities. Operating expenses for the second quarter of 2004 also reflected a reduction in pre-tax merger and restructuring-related items of $10.8 million ($7.2 million on an after-tax basis), compared with the second quarter of 2003. The $10.8 million decline in pre-tax merger and restructuring-related charges was primarily due to the completion in 2003 of integration activities associated with the acquisition of NOVA Corporation (“NOVA”) and other smaller acquisitions.

Total net revenue, on a taxable-equivalent basis, was $3,021.1 million for the second quarter of 2004, compared with $3,271.5 million for the second quarter of 2003, a decrease of $250.4 million (7.7 percent) from a year ago. The decline in net revenue was comprised of a 15.7 percent decline in noninterest income and a 1.1 percent decline in net interest income. The 15.7 percent decline in noninterest income was driven by a net reduction in gains (losses) on the sale of securities, partially offset by favorable fee-based revenue growth. Fee-based noninterest income experienced growth in all categories including increases in payment services revenue, merchant processing services, mortgage banking revenue, deposit service charges, trust and investment management fees and other income. The 1.1 percent decline in net interest income was driven by a lower net interest margin, partially offset by an increase in average earning assets. In the second quarter of 2004, average earning assets increased $7.6 billion (4.7 percent), compared with the same period in 2003, primarily due to increases in investment securities, residential mortgages and retail loans, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The net interest margin for the second quarter of 2004 was 4.28 percent, compared with 4.52 percent in the second quarter of 2003. The decline in the 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 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. (“Stellar”), a commercial loan conduit, onto the Company’s balance sheet beginning in the third quarter of 2003.

Total noninterest expense was $1,232.6 million in the second quarter of 2004, compared with $1,546.6 million in the second quarter of 2003. The year-over-year decline in noninterest expense of $314.0 million (20.3 percent) was primarily driven by the favorable change in MSR intangible valuations of $367.4 million and a $10.8 million reduction in merger and restructuring-related charges. These positive variances were partially offset by increases in incentive-based compensation, employee benefits, insurance and other operating expense. Refer to 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 38.6 percent for the second quarter of 2004, compared with 50.6 percent for the second quarter of 2003. The change in the efficiency ratio primarily reflects the impact of changes in MSR valuations.

The provision for credit losses was $204.5 million for the second quarter of 2004, and $323.0 million for the second quarter of 2003, a year-over-year decrease of $118.5 million (36.7 percent). Net charge-offs in the second quarter of 2004 were $204.5 million, compared with net charge-offs of $322.9 million during the


U.S. Bancorp	3

second quarter of 2003. The decline in the provision from a year ago primarily reflected lower nonperforming assets and lower commercial and retail losses, which were the result of an improving credit risk profile and collection efforts. 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 six months of 2004 was $2,045.3 million, or $1.06 per diluted share, compared with $1,804.7 million, or $.94 per diluted share, for the first six months of 2003. Return on average assets and return on average equity were 2.16 percent and 21.3 percent, respectively, for the first six months of 2004, compared with returns of 1.96 percent and 19.0 percent, respectively, for the first six months of 2003. The Company’s results for the first six months of 2004 improved over the first six months of 2003, primarily due to growth in fee-based products and services, as well as lower credit costs and controlled operating expenses. Included in the first six months of 2004 were net losses on the sale of securities of $171.7 million, a net reduction of $525.5 million from net securities gains realized in the first six months of 2003. A notable favorable item in the first six months of 2004 was a net $61.8 million reparation of MSR, a $379.0 million favorable variance over the first six months of 2003. Changes in interest rates relative to the end of the first quarter of 2004 drove the realization of the MSR reparation and the Company’s decision to sell lower-yielding securities. Net income for the first six months of 2004 also included a $90.0 million reduction in income tax expense recognized in the first quarter of 2004 related to the resolution of federal tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999. In addition, operating results for the first six months of 2004 included a $35.4 million debt prepayment charge recognized in the first quarter of 2004, partially offset by a reduction in pre-tax merger and restructuring-related items of $28.4 million ($18.7 million on an after-tax basis), compared with the first six months of 2003. The $28.4 million decline in pre-tax merger and restructuring-related charges was primarily due to the completion in 2003 of integration activities associated with the acquisition of NOVA and other smaller acquisitions.

Total net revenue, on a taxable-equivalent basis, was $6,118.4 million for the first six months of 2004, compared with $6,414.3 million for the first six months of 2003, a decrease of $295.9 million (4.6 percent) from a year ago. The decline in net revenue was comprised of a 9.8 percent decline in noninterest income and a ..5 percent decline in net interest income. The 9.8 percent decline in noninterest income was driven by a net reduction in gains (losses) on the sale of securities of $525.5 million, partially offset by increases in payment services revenue, deposit service charges, merchant processing services, mortgage banking revenue, trust and investment management fees and other income. The .5 percent decline in net interest income was driven by a lower net interest margin, partially offset by an increase in average earning assets. In the first six months of 2004, average earning assets increased $8.9 billion (5.6 percent), compared with the same period in 2003, primarily due to increases in investment securities, residential mortgages and retail loans, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The net interest margin for the first six months of 2004 was 4.28 percent, compared with 4.56 percent in the first six months of 2003. The decline in the 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 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, a commercial loan conduit, onto the Company’s balance sheet beginning in the third quarter of 2003.

Total noninterest expense was $2,687.5 million in the first six months of 2004, compared with $3,001.2 million in the first six months of 2003. The year-over-year decline in noninterest expense of $313.7 million (10.5 percent) was primarily driven by the favorable change in MSR intangible valuations of $379.0 million and a $28.4 million reduction in merger and restructuring-related charges. These positive variances were partially offset by increases in compensation, employee benefits, insurance and other operating expense, the latter of which included a $35.4 million charge related to debt prepayment in the first quarter of 2004. Refer to 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 42.7 percent for the first six months of 2004, compared with 49.5 percent for the first six months of 2003.

The provision for credit losses was $439.5 million for the first six months of 2004, and $658.0 million for the first six months of 2003, a year-over-year decrease


4	U.S. Bancorp

of $218.5 million (33.2 percent). Net charge-offs in the first six months of 2004 were $438.4 million, compared with net charge-offs of $656.7 million during the first six months of 2003. The decline in the provision from a year ago primarily reflected lower nonperforming assets and commercial and retail losses, the result of an improving credit risk profile and collection efforts. 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.

On December 31, 2003, the Company completed the spin-off of Piper Jaffray Companies (“Piper Jaffray”). In connection with the spin-off, accounting rules require that the Company’s financial statements be restated for all prior periods. Accordingly, historical financial results related to Piper Jaffray have been segregated and accounted for in the Company’s financial statements as discontinued operations. Net income for the second quarter and first six months of 2003 included after-tax income from the discontinued operations of Piper Jaffray of $4.9 million and $5.6 million, respectively, which had an impact on both periods of $.01 per diluted share. Refer to Note 3 of the Notes to Consolidated Financial Statements for additional information regarding discontinued operations.

STATEMENT OF INCOME ANALYSIS

Net Interest Income The second quarter of 2004 net interest income, on a taxable-equivalent basis, was $1,779.4 million, compared with $1,798.6 million in the second quarter of 2003, which represented a $19.2 million (1.1 percent) decrease from 2003. Net interest income for the first six months of 2004, on a taxable equivalent basis, was $3,558.4 million, compared with $3,575.3 million for the first six months of 2003, which represented a $16.9 million (.5 percent) decrease from a year ago. Average earning assets in the second quarter and first six months of 2004 increased $7.6 billion (4.7 percent) and $8.9 billion (5.6 percent), respectively, over the comparable periods of 2003. The increase in average earning assets for the second quarter and first six months of 2004, compared with the same periods of 2003, was primarily driven by increases in investment securities, residential mortgages and retail loans, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The net interest margin for both the second quarter and first six months of 2004 was 4.28 percent, compared with 4.52 percent and 4.56 percent, respectively, for the comparable periods of 2003. The year-over-year decline in the net interest margin for the second quarter and first six months of 2004 primarily reflected growth in lower-yielding investment securities as a percent of total earning assets, effects of loan


Table 2		Analysis of Net Interest Income



		Three Months Ended									Six Months Ended
		June 30,									June 30,



(Dollars in Millions)		2004			2003			Change			2004			2003			Change

Components of net interest income
	Income on earning assets (taxable-equivalent basis) (a)	$	2,243.2		$	2,334.5		$	(91.3	)	$	4,508.5		$	4,673.0		$	(164.5	)
	Expense on interest-bearing liabilities		463.8			535.9			(72.1	)		950.1			1,097.7			(147.6	)

Net interest income (taxable-equivalent basis)		$	1,779.4		$	1,798.6		$	(19.2	)	$	3,558.4		$	3,575.3		$	(16.9	)

Net interest income, as reported		$	1,772.4		$	1,791.9		$	(19.5	)	$	3,544.2		$	3,561.3		$	(17.1	)

Average yields and rates paid
	Earning assets yield (taxable-equivalent basis)		5.39	%		5.87	%		(.48	)%		5.43	%		5.96	%		(.53	)%
	Rate paid on interest-bearing liabilities		1.38			1.68			(.30	)		1.42			1.75			(.33	)

Gross interest margin (taxable-equivalent basis)			4.01	%		4.19	%		(.18	)%		4.01	%		4.21	%		(.20	)%

Net interest margin (taxable-equivalent basis)			4.28	%		4.52	%		(.24	)%		4.28	%		4.56	%		(.28	)%

Average balances
	Investment securities	$	42,489		$	36,142		$	6,347		$	43,617		$	35,187		$	8,430
	Loans		121,161			117,803			3,358			119,985			117,061			2,924
	Earning assets		166,990			159,425			7,565			166,674			157,784			8,890
	Interest-bearing liabilities		134,819			127,552			7,267			134,893			126,119			8,774
	Net free funds (b)		32,171			31,873			298			31,781			31,665			116


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


U.S. Bancorp	5

repricing, changes in loan mix and a decline in the margin benefit from net free funds due to lower interest rates, offset somewhat by a more favorable mix of funding. In addition, the net interest margin declined for the second quarter and first six months of 2004 as a result of consolidating high credit quality, low margin loans from the Stellar commercial loan conduit onto the Company’s balance sheet beginning in the third quarter of 2003.

Total average loans for the second quarter of 2004 were $3.4 billion (2.9 percent) higher than the second quarter of 2003, and year-to-date average loans were $2.9 billion (2.5 percent) higher than the first six months of 2003. During the second quarter and first six months of 2004, total average loan growth was driven by growth in average residential mortgages of $3.0 billion (27.6 percent) and $3.3 billion (30.9 percent), respectively, and average retail loan growth of $2.7 billion (7.0 percent) and $2.2 billion (5.8 percent), respectively. Total average commercial loans declined by $2.4 billion (5.7 percent) and $2.7 billion (6.5 percent) during the second quarter and first six months of 2004, respectively, while average commercial real estate loans increased by $27 million (.1 percent) and $.2 billion (.7 percent) over the same periods. Although the consolidation of loans from the Stellar commercial loan conduit had a positive impact on average loan balances year-over-year, soft economic conditions throughout much of 2003 led to the overall decrease in average commercial loans. During the second quarter of 2004, the Company began to experience growth in commercial loans as the economic recovery continues to accelerate. At June 30, 2004, total commercial loans were $40.1 billion, an increase of $1.1 billion, or an annualized growth rate of 10.9 percent from March 31, 2004. The Company expects to experience moderate growth in commercial loans over the next few quarters.

Average investment securities for the second quarter and first six months of 2004 were higher by $6.3 billion (17.6 percent) and $8.4 billion (24.0 percent), respectively, compared with the same periods of 2003, reflecting the reinvestment of proceeds from declining average commercial loan balances and deposit growth. As a general practice, the Company utilizes the investment portfolio as an economic hedge of the financial impact resulting from changes in MSR valuations. During the second quarter of 2004, the Company realized a $171.1 million reparation of the value of its MSR portfolio. In connection with realizing this change in MSR valuations, the Company made a decision to sell $3.8 billion of fixed-rate securities, classified as available-for-sale, recognizing a $171.7 million loss on the sale of securities. Also during the second quarter of 2004, the Company acquired $3.9 billion of securities, representing principally floating and shorter-term fixed-rate mortgage-backed securities, giving consideration to the Company’s overall asset/liability position. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of net interest income to changes in interest rates.

Average noninterest-bearing deposits for the second quarter and first six months of 2004 were lower by $1.9 billion (5.9 percent) and $2.9 billion (8.7 percent), respectively, compared with the same periods of 2003, primarily due to lower deposits associated with mortgage banking activities and a decline in Federal government deposits related to their decision in the third quarter of 2003 to pay fees for treasury management services rather than maintain compensating balances. Average interest-bearing deposits were higher by $2.9 billion for the second quarter of 2004 and $3.4 billion for the first six months of 2004, increases of 3.4 percent and 4.1 percent, respectively, compared with the same periods of 2003. The year-over-year increase in average interest-bearing deposits during the second quarter and first six months of 2004 was primarily driven by growth in average savings product balances of 11.1 percent and 14.9 percent, respectively. This increase was partially offset by a reduction in the average balances of higher cost time certificates of deposit less than $100,000 during the second quarter and first six months of 2004 of 17.5 percent and 19.3 percent, respectively, and a reduction in the average balances of time deposits greater than $100,000 during the second quarter and first six months of 2004 of 3.4 percent and 9.5 percent, respectively, compared with the same periods of 2003.

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

Provision for Credit Losses The provision for credit losses was $204.5 million and $323.0 million for the second quarter of 2004 and 2003, respectively, a year-over-year decrease of $118.5 million (36.7 percent). For the first six months of 2004 and 2003, the provision for credit losses was $439.5 million and $658.0 million, respectively, a decrease of $218.5 million (33.2 percent). The decline from a year ago was primarily the result of lower nonperforming assets and lower retail and commercial losses, the result of an improving credit risk profile due to more favorable economic conditions and collection efforts. 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


6	U.S. Bancorp

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

Noninterest Income Noninterest income during the second quarter of 2004 was $1,241.7 million, a decrease of $231.2 million (15.7 percent) from the second quarter of 2003. Noninterest income during the first six months of 2004 was $2,560.0 million, compared with $2,839.0 million for the first six months of 2003, which represented a decrease of $279.0 million (9.8 percent). The decline in noninterest income during the second quarter and first six months of 2004 was driven by a net reduction in gains (losses) on the sale of securities of $384.8 million and $525.5 million, respectively, partially offset by strong growth in fee-based revenue experienced in all other categories of noninterest income.

Credit and debit card revenue, corporate payment products revenue and ATM processing services revenue were higher in the second quarter and first six months of 2004 by $31.3 million (11.4 percent) and $54.3 million (10.2 percent), respectively, compared with the same periods of 2003. Although credit and debit card revenue grew year-over-year, the growth was somewhat muted due to the impact of the settlement of the antitrust litigation brought against VISA USA and Mastercard by Wal-Mart Stores, Inc., Sears Roebuck & Co. and other retailers, which lowered interchange rates on signature debit transactions beginning in August 2003. The year-over-year impact of VISA’s settlement on debit card revenue for the second quarter and first six months of 2004 was approximately $7.4 million and $15.6 million, respectively. This change in the interchange rate, 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 favorable variance in ATM processing services revenue was primarily due to higher transaction volumes. Merchant processing services revenue was higher in the second quarter and first six months of 2004 by $23.3 million (16.4 percent) and $37.1 million (13.8 percent), respectively, compared with the same periods of 2003, primarily due to an increase in transaction volumes. The purchase of two European merchant acquiring businesses in the second quarter of 2004 contributed approximately $7.1 million of the increase. The favorable variance in trust and investment management fees in the second quarter and first six months of 2004 of $12.8 million (5.4 percent) and $32.8 million (7.0 percent), respectively, compared with the same periods of 2003, was principally driven by improving equity market conditions year-over-year, as well as new account growth. Deposit service charges increased in the second quarter and first six months of 2004 by $23.1 million (12.9 percent) and $45.1 million (13.2 percent), respectively, compared with the same periods of 2003, primarily due to account growth and revenue enhancement initiatives. Treasury management fees grew by $9.7 million (8.7 percent) and $15.2 million (6.8 percent) in the second quarter and first six months of 2004, respectively, compared with the same periods of 2003. The increase in treasury management fees during the second quarter and first six months of 2004 was primarily 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


Table 3		Noninterest Income



		Three Months Ended								Six Months Ended
		June 30,								June 30,


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

Credit and debit card revenue		$	158.8		$	142.3		11.6	%	$	300.6		$	269.7		11.5	%
Corporate payment products revenue			102.7			90.9		13.0			197.5			176.9		11.6
ATM processing services			44.9			41.9		7.2			87.1			84.3		3.3
Merchant processing services			165.1			141.8		16.4			306.2			269.1		13.8
Trust and investment management fees			251.7			238.9		5.4			500.3			467.5		7.0
Deposit service charges			202.1			179.0		12.9			387.3			342.2		13.2
Treasury management fees			121.5			111.8		8.7			239.0			223.8		6.8
Commercial products revenue			107.4			100.0		7.4			217.8			204.2		6.7
Mortgage banking revenue			109.9			90.3		21.7			204.1			185.7		9.9
Investment products fees and commissions			42.2			38.1		10.8			81.5			73.2		11.3
Securities gains (losses), net			(171.7	)		213.1		*			(171.7	)		353.8		*
Other			107.1			84.8		26.3			210.3			188.6		11.5

	Total noninterest income	$	1,241.7		$	1,472.9		(15.7	)%	$	2,560.0		$	2,839.0		(9.8	)%


*		Not meaningful


U.S. Bancorp	7

quarter of 2003. During the second quarter and first six months of 2004, year-over-year commercial products revenue increased $7.4 million (7.4 percent) and $13.6 million (6.7 percent), respectively, principally driven by international product fees, foreign exchange revenue, capital markets fees and leasing revenue, partially offset by declines in servicing income resulting from the consolidation of the commercial loan conduit onto the balance sheet beginning in the third quarter of 2003. Mortgage banking revenue increased $19.6 million (21.7 percent) and $18.4 million (9.9 percent) during the second quarter and first six months of 2004, respectively, compared with the same periods of 2003, primarily due to higher loan production sales and loan servicing revenue. Investment products fees and commissions revenue increased in the second quarter and first six months of 2004 by $4.1 million (10.8 percent) and $8.3 million (11.3 percent), respectively, compared with the same periods of 2003, primarily due to higher sales activities in the Consumer Banking business line. Other income was higher year-over-year by $22.3 million (26.3 percent) and $21.7 million (11.5 percent), during the second quarter and first six months of 2004, respectively, principally due to lower end-of-term retail lease residual losses and higher year-over-year income from equity investments.

Noninterest Expense Second quarter of 2004 noninterest expense was $1,232.6 million, a decrease of $314.0 million (20.3 percent) from the second quarter of 2003. For the first six months of 2004, noninterest expense was $2,687.5 million, a reduction of $313.7 million (10.5 percent) from the first six months of 2003. The year-over-year decline in noninterest expense during the second quarter and first six months of 2004, was primarily due to the favorable change in MSR valuations and the reduction in merger and restructuring-related charges. The year-over-year decrease in MSR impairment for the second quarter and first six months of 2004 of $367.4 million and $379.0 million, respectively, was driven by changes in valuations in each reporting period reflecting fluctuations in mortgage interest rates and related prepayment speeds from refinancing activities. Refer to Note 6 of the Notes to Consolidated Financial Statements for a sensitivity analysis on the fair value of MSR to future changes in interest rates. The favorable variance in merger and restructuring-related charges in the second quarter and first six months of 2004 of $10.8 million and $28.4 million, respectively, was primarily due to the completion of integration activities associated with NOVA and other smaller acquisitions in 2003. Partially offsetting these favorable variances in the second quarter and first six months of 2004, were increases in compensation, employee benefits, professional services and other expense. Compensation expense increased during the second quarter and first six months of 2004, compared with the same periods of 2003, primarily due to an increase in salaries, performance-based incentives and stock-based compensation, offset somewhat by lower contract labor costs. Employee benefits increased primarily as a result of higher pension expense, training, education and recruitment costs and payroll taxes. Pension and retirement expense increased by $5.5 million and $7.3 million, during the second quarter and first six months of 2004, respectively, compared with the same periods of 2003. Professional services rose year-over-


Table 4		Noninterest Expense



		Three Months Ended									Six Months Ended
		June 30,									June 30,


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

Compensation		$	572.6		$	547.6			4.6	%	$	1,108.4		$	1,093.6			1.4	%
Employee benefits			91.2			79.6			14.6			191.4			171.3			11.7
Net occupancy and equipment			153.4			159.5			(3.8	)		309.1			320.8			(3.6	)
Professional services			34.7			32.9			5.5			67.1			59.3			13.2
Marketing and business development			48.7			51.1			(4.7	)		84.0			80.9			3.8
Technology and communications			102.4			104.1			(1.6	)		204.1			209.0			(2.3	)
Postage, printing and supplies			60.5			61.8			(2.1	)		122.1			122.2			(.1	)
Other intangibles			(47.6	)		312.3			*			178.5			547.4			(67.4	)
Merger and restructuring-related charges			—			10.8			*			—			28.4			*
Other			216.7			186.9			15.9			422.8			368.3			14.8

	Total noninterest expense	$	1,232.6		$	1,546.6			(20.3	)%	$	2,687.5		$	3,001.2			(10.5	)%

Efficiency ratio (a)			38.6	%		50.6	%					42.7	%		49.5	%


*		Not meaningful
(a)		Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.


8	U.S. Bancorp

year by $1.8 million (5.5 percent) and $7.8 million (13.2 percent) in the second quarter and first six months of 2004, respectively, primarily related to revenue enhancement initiatives. Other expense increased $29.8 million and $54.5 million in the second quarter and first six months of 2004, respectively, compared with the same periods of 2003. This year-over-year increase during the second quarter of 2004 was primarily due to higher charge-back exposure associated with the Company’s airline merchant processing portfolio, insurance costs, higher deposit fraud losses, and processing expenses associated with the growth in payment services revenue. The year-over-year increase during the first six months of 2004 also included a $35.4 million charge taken in the first quarter of 2004 related to the prepayment of a portion of the Company’s long-term debt.

Income Tax Expense The provision for income taxes was $540.1 million (an effective rate of 34.2 percent) for the second quarter of 2004 and $931.9 million (an effective rate of 31.3 percent) for the first six months of 2004, compared with $480.2 million (an effective rate of 34.4 percent) and $942.0 million (an effective rate of 34.4 percent) for the same periods of 2003. The improvement in the effective tax rate in the first six months of 2004 primarily reflected a $90.0 million reduction in income tax expense in the first quarter of 2004 related to the resolution of federal tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999.

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

BALANCE SHEET ANALYSIS

Loans The Company’s total loan portfolio was $122.8 billion at June 30, 2004, compared with $118.2 billion at December 31, 2003, an increase of $4.6 billion (3.9 percent). The increase in total loans was driven by growth in retail loans, commercial loans and residential mortgages. Commercial loans, including lease financing, totaled $40.1 billion at June 30, 2004, compared with $38.5 billion at December 31, 2003, an increase of $1,539 million (4.0 percent). The increase in commercial loans was driven by increased utilization under lines of credit and fundings under discretionary facilities by commercial customers and increases in corporate card balances. The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction loans, was $27.2 billion at both June 30, 2004 and December 31, 2003.

Residential mortgages held in the loan portfolio were $14.4 billion at June 30, 2004, compared with $13.5 billion at December 31, 2003, an increase of $.9 billion (6.9 percent). The increase in residential mortgages was primarily the result of decisions to retain a greater portion of the consumer finance and traditional branch floating-rate loan production.

Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, were $41.2 billion at June 30, 2004, compared with $39.0 billion at December 31, 2003. The $2.2 billion (5.6 percent) increase was driven by an increase in home equity lines of credit, credit card receivables, and automobile loans and leases. This growth was partially offset by a slight decrease in student loans.

Loans Held for Sale Loans held for sale, consisting of residential mortgages to be sold in the secondary markets, were $1,383 million at June 30, 2004, compared with $1,433 million at December 31, 2003. The slight decrease of $50 million (3.5 percent) was primarily due to the timing of loan originations and sales during the first six months of 2004. Mortgage loan production is highly correlated to changes in interest rates with declines in balances during a period of rising interest rates.

Investment Securities At June 30, 2004, investment securities, both available-for-sale and held-to-maturity, totaled $40.3 billion, compared with $43.3 billion at December 31, 2003. The $3.0 billion (7.0 percent) decrease primarily reflected the sale of $3.8 billion of lower-yielding fixed-rate securities, along with maturities and prepayments across the investment portfolio, partially offset by purchases of primarily floating-rate securities. At June 30, 2004, approximately 29.5 percent of the investment securities portfolio represented adjustable-rate financial instruments, compared with 22.2 percent as of December 31, 2003. Adjustable-rate financial instruments include variable-rate collateralized mortgage obligations, mortgage-backed securities, agency securities, adjustable-rate money market sweep accounts and asset-backed securities.

Deposits Total deposits were $119.9 billion at June 30, 2004, compared with $119.1 billion at December 31, 2003, an increase of $875 million (.7 percent). The increase in total deposits was primarily the result of increases in time deposits greater than $100,000 and noninterest-bearing deposits, partially offset by decreases in savings products and time certificates of deposit less than $100,000. Noninterest-bearing deposits were $32.8 billion at June 30, 2004, compared with $32.5 billion at December 31, 2003, an increase of $.3 billion (1.0 percent), primarily due to seasonality of corporate trust deposits.


U.S. Bancorp	9

Interest-bearing deposits totaled $87.1 billion at June 30, 2004, compared with $86.6 billion at December 31, 2003, an increase of $559 million (.6 percent). The increase in interest-bearing deposits was primarily driven by increases in time deposits greater than $100,000 of $4.0 billion (33.8 percent). These increases were partially offset by a decline in time certificates of deposits less than $100,000 (7.6 percent), along with declines in money market accounts (5.5 percent) and interest checking accounts (4.5 percent). Time certificates of deposits are largely viewed as purchased funds and are managed to levels deemed appropriate given alternative funding sources. The decline in time certificates of deposits less than


Table 5		Investment Securities



			Available-for-Sale									Held-to-Maturity


							Weighted-									Weighted-
							Average		Weighted-							Average		Weighted-
			Amortized		Fair		Maturity in		Average			Amortized		Fair		Maturity in		Average
June 30, 2004 (Dollars in Millions)			Cost		Value		Years		Yield			Cost		Value		Years		Yield

U.S. Treasury and agencies
	Maturing in one year or less		$	46	$	46		.55		2.77	%	$	—	$	—		—		—	%
	Maturing after one year through five years			176		181		2.13		4.47			—		—		—		—
	Maturing after five years through ten years			1,736		1,715		9.82		3.56			—		—		—		—
	Maturing after ten years			1,150		1,095		19.00		2.55			—		—		—		—

		Total	$	3,108	$	3,037		12.64		3.23	%	$	—	$	—		—		—	%

Mortgage-backed securities
	Maturing in one year or less		$	888	$	887		.64		3.33	%	$	—	$	—		—		—	%
	Maturing after one year through five years			17,450		17,086		3.78		4.39			12		12		3.06		5.30
	Maturing after five years through ten years			16,899		16,266		6.82		4.33			—		—		—		—
	Maturing after ten years			1,562		1,544		13.95		2.79			—		—		—		—

		Total	$	36,799	$	35,783		5.53		4.27	%	$	12	$	12		3.06		5.30	%

Asset-backed securities
	Maturing in one year or less		$	23	$	22		.23		4.71	%	$	—	$	—		—		—	%
	Maturing after one year through five years			119		120		1.99		5.69			—		—		—		—
	Maturing after five years through ten years			—		—		—		—			—		—		—		—
	Maturing after ten years			—		—		—		—			—		—		—		—

		Total	$	142	$	142		1.71		5.54	%	$	—	$	—		—		—	%

Obligations of state and political subdivisions
	Maturing in one year or less		$	127	$	129		.48		7.47	%	$	11	$	11		.48		5.58	%
	Maturing after one year through five years			121		126		2.53		7.25			36		38		2.78		6.54
	Maturing after five years through ten years			12		13		6.01		7.76			25		26		6.93		6.46
	Maturing after ten years			—		—		—		—			41		41		14.24		6.46

		Total	$	260	$	268		1.69		7.38	%	$	113	$	116		7.63		6.40	%

Other debt securities:
	Maturing in one year or less		$	2	$	2		.48		6.47	%	$	—	$	—		—		—	%
	Maturing after one year through five years			116		116		2.43		10.29			—		—		—		—
	Maturing after five years through ten years			6		5		5.87		2.17			—		—		—		—
	Maturing after ten years			499		493		22.83		1.98			—		—		—		—

		Total	$	623	$	616		18.81		3.55	%	$	—	$	—		—		—	%

Other investments			$	309	$	314		—		—	%	$	—	$	—		—		—	%

Total investment securities			$	41,241	$	40,160		6.24		4.21	%	$	125	$	128		7.19		6.30	%

Note:

Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments. Average yields are presented on a fully-taxable equivalent basis. Yields on available-for-sale and held-to-maturity securities are computed based on historical cost balances. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity.

The weighted-average maturity of the available-for-sale investment securities was 6.24 years at June 30, 2004, compared with 5.12 years at December 31, 2003. The corresponding weighted-average yields were 4.21% and 4.27%, respectively. The weighted-average maturity of the held-to-maturity investment securities was 7.19 years at June 30, 2004, compared with 6.16 years at December 31, 2003. The corresponding weighted-averaged yields were 6.30% and 6.05%, respectively.



		June 30, 2004					December 31, 2003


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

U.S. Treasury and agencies		$	3,108		7.5	%	$	1,634		3.7	%
Mortgage-backed securities			36,811		89.0			40,243		92.3
Asset-backed securities			142		.3			250		.6
Obligations of states and political subdivisions			373		.9			473		1.1
Other securities and investments			932		2.3			993		2.3

	Total investment securities	$	41,366		100.0	%	$	43,593		100.0	%


10	U.S. Bancorp

$100,000 reflected a shift in customer demand given alternative investment opportunities in 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 $11.6 billion at June 30, 2004, compared with $10.9 billion at December 31, 2003. Short-term funding is managed to levels deemed appropriate given alternative funding sources. The increase of $.7 billion (6.8 percent) in short-term borrowings reflected the impact of funding earning assets. Long-term debt was $31.0 billion at June 30, 2004, a decrease of $.2 billion (.6 percent), compared with $31.2 billion at December 31, 2003. The decrease in long-term debt during the first six months of 2004 was primarily driven by maturities of $3.3 billion, and prepayments of $2.2 billion of Federal Home Loan Bank (“FHLB”) advances. The first six months of 2004 also included the issuance of $5.5 billion of bank notes. The prepayment of FHLB advances during the first quarter of 2004 and the issuance of predominantly fixed-rate funding was done in connection with asset/liability management activities. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

CORPORATE RISK PROFILE

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

Credit Risk Management The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans experiencing deterioration of credit quality. The Company strives to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels for probable loan losses inherent in the portfolio. Commercial banking operations rely on a strong credit culture that combines prudent credit policies and individual lender accountability. Lenders are assigned lending grades based on their level of experience and customer service requirements. Lending grades represent the level of approval authority for the amount of credit exposure and level of risk. Credit officers reporting independently to Credit Administration have higher levels of lending grades and support the business units in their credit decision process. Loan decisions are documented as to the borrower’s business, purpose of the loan, evaluation of the repayment source and the associated risks, evaluation of collateral, covenants and monitoring requirements, and risk rating rationale. The Company utilizes a credit risk rating system to measure the credit quality of individual commercial loan transactions. The Company uses the risk rating system for regulatory reporting, determining the frequency of review of the credit exposures, and evaluation and determination of the adequacy of the allowance for credit losses. The Company regularly forecasts potential changes in risk ratings, nonperforming status and potential for loss and the estimated impact on the allowance for credit losses. In the Company’s retail banking operations, standard credit scoring systems are used to assess credit risks of consumer, small business and small-ticket leasing customers and to price these products accordingly. The Company conducts the underwriting and collections of its retail products in loan underwriting and servicing centers specializing in certain retail products. Forecasts of delinquency levels, bankruptcies and losses in conjunction with projection of estimated losses by delinquency


U.S. Bancorp	11

categories and vintage information are regularly prepared and are used to evaluate underwriting and collection and determine the adequacy of the allowance for credit losses for these products. The Company also engages in non-lending activities that may give rise to credit risk, including interest rate swap and option contracts for balance sheet hedging purposes, foreign exchange transactions, deposit overdrafts, and interest rate swap contracts for customers, and settlement risk, including Automated Clearing House transactions, and the processing of credit card transactions for merchants. These activities are also subject to credit review, analysis and approval processes.

In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of


Table 6		Nonperforming Assets (a)



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

Commercial
	Commercial			$	415.7		$	623.5
	Lease financing				111.0			113.3

		Total commercial			526.7			736.8
Commercial real estate
	Commercial mortgages				163.8			177.6
	Construction and development				41.3			39.9

		Total commercial real estate			205.1			217.5
Residential mortgages					41.7			40.5
Retail
	Retail leasing				.1			.4
	Other retail				18.3			24.8

		Total retail			18.4			25.2

			Total nonperforming loans		791.9			1,020.0
Other real estate					70.0			72.6
Other assets					49.0			55.5

			Total nonperforming assets	$	910.9		$	1,148.1

Restructured loans accruing interest (b)				$	4.2		$	18.0
Accruing loans 90 days or more past due (c)				$	293.2		$	329.4
Nonperforming loans to total loans					.64	%		.86	%
Nonperforming assets to total loans plus other real estate					.74	%		.97	%

Changes in Nonperforming Assets



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

Balance December 31, 2003					$	1,082.4		$	65.7		$	1,148.1
	Additions to nonperforming assets
		New nonaccrual loans and foreclosed properties				366.8			24.1			390.9
		Advances on loans				25.8			—			25.8

			Total additions			392.6			24.1			416.7
	Reductions in nonperforming assets
		Paydowns, payoffs				(287.7	)		(17.4	)		(305.1	)
		Net sales				(73.6	)		—			(73.6	)
		Return to performing status				(55.6	)		(10.4	)		(66.0	)
		Charge-offs (d)				(204.5	)		(4.7	)		(209.2	)

			Total reductions			(621.4	)		(32.5	)		(653.9	)

				Net reductions in nonperforming assets		(228.8	)		(8.4	)		(237.2	)

Balance June 30, 2004					$	853.6		$	57.3		$	910.9


(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 adequately secured by collateral and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status.
(d)		Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.
(e)		Residential mortgage information excludes changes related to residential mortgages serviced by others.


12	U.S. Bancorp

allowance coverage and macroeconomic factors. Economic conditions during the second quarter of 2004 have improved from the second quarter of 2003, as reflected in higher levels of employment, stronger corporate earnings and lower credit delinquencies and business bankruptcies.

Analysis of Nonperforming Assets Nonperforming assets represent a key indicator, among other considerations, of the potential for future credit losses. Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms and other real estate and other nonperforming assets owned by the Company. Interest payments on nonperforming assets are typically applied against the principal balance and not recorded as income. At June 30, 2004, total nonperforming assets were $910.9 million, compared with $1,148.1 million at December 31, 2003. The ratio of total nonperforming assets to total loans and other real estate decreased to .74 percent at June 30, 2004, compared with .97 percent at December 31, 2003. The improvement in credit quality has been broad-based across most industry categories reflecting continued improvement in economic conditions. While nonperforming assets levels have declined, the relative level of nonperforming assets reflects the general impact of soft economic conditions since late 2000, continued economic stress in the transportation sector, and the more pronounced effect of the economy on highly leveraged enterprise-value refinancings. Given the Company’s ongoing efforts to reduce the overall risk profile of the organization and with continued strength in the economy, nonperforming assets are expected to continue to trend lower during the remainder of 2004.

The Company had restructured loans of $71.5 million as of June 30, 2004, compared with $58.5 million as of December 31, 2003. Commitments to lend additional funds under restructured loans were $11.0 million as of June 30, 2004, compared with $8.2 million as of December 31, 2003. Restructured loans performing under the restructured terms beyond a specific timeframe may be reported as accruing. Of the Company’s total restructured loans at June 30, 2004, $4.2 million were reported as accruing.

Accruing loans 90 days or more past due totaled $293.2 million at June 30, 2004, compared with $329.4 million at December 31, 2003. These loans were not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. The ratio of delinquent loans to total loans declined to ..24 percent at June 30, 2004, compared with ..28 percent at December 31, 2003. Improving economic conditions and the Company’s continued focus on the credit process are the primary factors for the favorable change from December 31, 2003. Given the relative level of loans 90 days or more past due, the Company does not anticipate significant reductions in future periods.


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



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

Commercial
	Commercial				.06	%		.06	%
	Lease financing				.02			.04

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

		Total commercial real estate			.01			.02
Residential mortgages					.50			.61
Retail
	Credit card				1.78			1.68
	Retail leasing				.10			.14
	Other retail				.29			.41

		Total retail			.48			.56

			Total loans		.24	%		.28	%


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

Commercial			1.37	%		1.97	%
Commercial real estate			.76			.82
Residential mortgages			.79			.91
Retail			.52			.62

	Total loans		.88	%		1.14	%


U.S. Bancorp	13

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



								As a Percent of Ending
				Amount				Loan Balances


				June 30,		December 31,		June 30,			December 31,
(Dollars in millions)				2004		2003		2004			2003

Residential Mortgages
		30-89 days		$	95.7	$	102.9		.67	%		.76	%
		90 days or more			72.5		82.5		.50			.61
		Nonperforming			41.7		40.5		.29			.30

			Total	$	209.9	$	225.9		1.46	%		1.68	%

Retail
	Credit Card
		30-89 days		$	133.2	$	150.9		2.19	%		2.54	%
		90 days or more			108.3		99.5		1.78			1.68
		Nonperforming			—		—		—			—

			Total	$	241.5	$	250.4		3.97	%		4.22	%
	Retail Leasing
		30-89 days		$	64.2	$	78.8		.97	%		1.31	%
		90 days or more			6.5		8.2		.10			.14
		Nonperforming			.1		.4		—			.01

			Total	$	70.8	$	87.4		1.07	%		1.45	%
	Other Retail
		30-89 days		$	249.1	$	311.9		.88	%		1.15	%
		90 days or more			82.5		110.2		.29			.41
		Nonperforming			18.3		24.8		.06			.09

			Total	$	349.9	$	446.9		1.23	%		1.65	%

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

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

Analysis of Net Loan Charge-offs Total loan net charge-offs were $204.5 million and $438.4 million during the second quarter and first six months of 2004, respectively, compared with net charge-offs of $322.9 million and $656.7 million, respectively, for the same periods of 2003. The ratio of total loan net charge-offs to average loans in the second quarter and first six months of 2004 was .68 percent and .73 percent, respectively, compared with 1.10 percent and 1.13 percent, respectively, for the same periods of 2003. The overall level of net charge-offs in the second quarter and first six months of 2004 reflected the Company’s ongoing efforts to reduce the overall risk profile of the organization, improved economic conditions, refinancings by customers and higher asset valuations. Net charge-offs are expected to continue to trend modestly lower throughout 2004.

Commercial and commercial real estate loan net charge-offs for the second quarter of 2004 were $57.1 million (.35 percent of average loans outstanding), compared with $161.6 million (.94 percent of average loans outstanding) for the second quarter of 2003. Commercial and commercial real estate loan net charge-offs for the first six months of 2004 were $141.3 million (.43 percent of average loans outstanding), compared with $326.4 million (.96 percent of average loans outstanding) for the first six months of 2003. The year-over-year decline in commercial loan net charge-offs of $95.2 million during the second quarter of 2004 continues to be broad-based across most industries within the commercial loan portfolio. The year-over-year decline in commercial real estate loan net charge-offs of $9.3 million during the second quarter of 2004 primarily reflects improvements in business owner occupied commercial real estate.

Retail loan net charge-offs for the second quarter of 2004 were $140.1 million (1.39 percent of average loans outstanding), compared with $154.8 million (1.63 percent of average loans outstanding) for the second quarter of 2003. Retail loan net charge-offs for the first six months of 2004 were $282.5 million (1.42 percent of average loans outstanding), compared


14	U.S. Bancorp

with $317.9 million (1.69 percent of average loans outstanding) for the same period in 2003. Lower levels of retail loan net charge-offs principally reflected changes by the Company in underwriting, ongoing collection efforts and other risk management activities. The decline also reflected lower delinquency ratios from a year ago as the economy continues to improve.

The Company’s retail lending business utilizes several distinct business processes and channels to originate retail credit including traditional branch credit, indirect lending, student lending and a consumer finance division. Each distinct underwriting and origination activity manages unique credit risk characteristics and prices its loan production commensurate with the differing risk profiles. Within Consumer Banking, U.S. Bank Consumer Finance (“USBCF”), participates in all facets of the Company’s consumer lending activities. The consumer finance division specializes in serving channel-specific and alternative lending markets in residential mortgages, home equity and installment loan financing. The consumer finance division manages loans originated through a broker network, correspondent relationships and U.S. Bank branch offices. Generally, loans managed by the Company’s consumer finance division exhibit higher credit risk characteristics, but are priced commensurate with the differing risk profile.

The following table provides an analysis of net charge-offs as a percentage of average loans outstanding managed by the consumer finance division, compared with traditional branch-related loans:



		Three Months Ended June 30										Six Months Ended June 30



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


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

Consumer finance (a)
	Residential mortgages	$	4,410	$	3,282		.47	%		.51	%	$	4,294	$	3,133		.44	%		.50	%
	Home equity and second mortgages		2,264		2,417		2.31			2.37			2,219		2,483		2.35			2.36
	Other retail		415		352		4.72			4.43			409		334		4.85			4.46
Traditional branch
	Residential mortgages	$	9,642	$	7,730		.09	%		.12	%	$	9,537	$	7,437		.11	%		.13	%
	Home equity and second mortgages		11,511		10,899		.25			.35			11,356		10,909		.24			.37
	Other retail		14,000		13,182		1.22			1.52			13,856		13,037		1.25			1.57
Total Company
	Residential mortgages	$	14,052	$	11,012		.21	%		.24	%	$	13,831	$	10,570		.21	%		.24	%
	Home equity and second mortgages		13,775		13,316		.59			.72			13,575		13,392		.59			.74
	Other retail		14,415		13,534		1.32			1.59			14,265		13,371		1.35			1.64


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

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


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



				Three Months Ended						Six Months Ended
				June 30,						June 30,



				2004			2003			2004			2003

Commercial
	Commercial				.42	%		1.35	%		.53	%		1.44	%
	Lease financing				1.57			2.11			1.66			1.94

		Total commercial			.56			1.44			.67			1.50
Commercial real estate
	Commercial mortgages				.04			.19			.06			.12
	Construction and development				.04			.14			.16			.10

		Total commercial real estate			.04			.17			.09			.12
Residential mortgages					.21			.24			.21			.24
Retail
	Credit card				4.21			4.80			4.27			4.98
	Retail leasing				.61			.88			.66			.93
	Home equity and second mortgages				.59			.72			.59			.74
	Other retail				1.32			1.59			1.35			1.64

		Total retail			1.39			1.63			1.42			1.69

			Total loans		.68	%		1.10	%		.73	%		1.13	%


U.S. Bancorp	15

each element and the overall allowance is based on a continuing assessment of problem loans and related off-balance sheet items, recent loss experience and other factors, including regulatory guidance and economic conditions.

At June 30, 2004, the allowance for credit losses was $2,369.7 million (1.93 percent of loans), compared with an allowance of $2,368.6 million (2.00 percent of loans) at December 31, 2003. The ratio of the allowance for credit losses to nonperforming loans was 299 percent at June 30, 2004, compared with 232 percent at December 31, 2003. The ratio of the allowance for credit losses to annualized loan net charge-offs was 288 percent at June 30, 2004, compared with 189 percent at December 31, 2003.

Several factors were taken into consideration in evaluating the allowance for credit losses at June 30, 2004, including the risk profile of the portfolios and loan net charge-offs during the period, the level of nonperforming assets, the accruing loans 90 days or more past due, and the lease financing, commercial real estate, residential mortgages and retail delinquency categories from December 31, 2003. Management also considered the uncertainty related to certain industry sectors, including the transportation sector, the extent of credit exposure to highly leveraged enterprise-value borrowers within the portfolio and the fact that nonperforming assets remain at elevated levels despite recent improvements. Finally, the Company considered the improving economic trends, including improving corporate earnings, changes in unemployment rates, the level of bankruptcies and general economic indicators.

Residual Risk Management The Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. Commercial lease originations are subject to the same well-defined underwriting standards referred to in the “Credit Risk Management” section which includes an evaluation of the residual risk. Retail lease residual risk is mitigated further by originating longer-term vehicle leases and effective end-of-term marketing of off-lease vehicles. Also, to reduce the financial risk of potential changes in vehicle residual values, the Company maintains residual value insurance. The catastrophic insurance maintained by the Company provides for the potential recovery of losses on individual vehicle sales in an amount equal to the difference between: (a) 105 percent or 110 percent of the average wholesale auction price for the vehicle at the time of sale and (b) the vehicle residual value specified by the Automotive Lease Guide (an authoritative industry source) at the inception of the lease. The potential recovery is calculated for each individual vehicle sold in a particular policy year and is reduced by any gains realized on vehicles sold during the same period. The Company will receive claim proceeds under this insurance program if, in the aggregate, there is a net loss for such period. In addition, the Company obtains separate residual value insurance for all vehicles at lease inception where end of lease term settlement is based solely on the residual value of the individual leased vehicles. Under this program, the potential recovery is computed for each individual vehicle sold and does not allow the insurance carrier to offset individually determined losses with gains from other leases. This individual vehicle coverage is included in the calculation of minimum lease payments when making the capital lease assessment. To reduce the risk associated with collecting insurance claims, the Company monitors the financial viability of the insurance carrier based on insurance industry ratings and available financial information.

Included in the retail leasing portfolio was approximately $3.6 billion of retail leasing residuals at June 30, 2004, compared with $3.3 billion at December 31, 2003. At June 30, 2004, the commercial leasing portfolio had $778 million of residuals, compared with $816 million at December 31, 2003. No significant change in the concentration of the portfolios has occurred since December 31, 2003.

Operational Risk Management Operational risk represents the risk of loss resulting from the Company’s operations, including, but not limited to, the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements and business continuation and disaster recovery. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business


16	U.S. Bancorp

Table 9 Summary of Allowance for Credit Losses



					Three Months Ended						Six Months Ended
					June 30,						June 30,



(Dollars in Millions)					2004			2003			2004		2003

Balance at beginning of period					$	2,369.7		$	2,408.5		$	2,368.6	$	2,422.0
Charge-offs
	Commercial
		Commercial				65.9			134.2			148.3		283.2
		Lease financing				28.0			39.3			60.5		79.8

			Total commercial			93.9			173.5			208.8		363.0
	Commercial real estate
		Commercial mortgages				4.8			12.5			13.9		18.2
		Construction and development				1.4			3.0			6.3		5.1

			Total commercial real estate			6.2			15.5			20.2		23.3
	Residential mortgages					8.2			7.1			16.6		14.1
	Retail
		Credit card				70.5			71.4			141.2		146.2
		Retail leasing				11.8			14.4			24.7		29.7
		Home equity and second mortgages				23.5			26.8			45.9		54.6
		Other retail				60.2			66.9			121.7		137.3

			Total retail			166.0			179.5			333.5		367.8

				Total charge-offs		274.3			375.6			579.1		768.2
Recoveries
	Commercial
		Commercial				30.2			11.3			59.0		22.4
		Lease financing				9.1			12.4			20.3		29.9

			Total commercial			39.3			23.7			79.3		52.3
	Commercial real estate
		Commercial mortgages				3.0			3.2			7.5		6.0
		Construction and development				.7			.5			.9		1.6

			Total commercial real estate			3.7			3.7			8.4		7.6
	Residential mortgages					.9			.6			2.0		1.7
	Retail
		Credit card				7.8			6.9			15.1		13.0
		Retail leasing				2.0			1.8			3.9		3.2
		Home equity and second mortgages				3.3			2.9			6.2		5.3
		Other retail				12.8			13.1			25.8		28.4

			Total retail			25.9			24.7			51.0		49.9

				Total recoveries		69.8			52.7			140.7		111.5
Net Charge-offs
	Commercial
		Commercial				35.7			122.9			89.3		260.8
		Lease financing				18.9			26.9			40.2		49.9

			Total commercial			54.6			149.8			129.5		310.7
	Commercial real estate
		Commercial mortgages				1.8			9.3			6.4		12.2
		Construction and development				.7			2.5			5.4		3.5

			Total commercial real estate			2.5			11.8			11.8		15.7
	Residential mortgages					7.3			6.5			14.6		12.4
	Retail
		Credit card				62.7			64.5			126.1		133.2
		Retail leasing				9.8			12.6			20.8		26.5
		Home equity and second mortgages				20.2			23.9			39.7		49.3
		Other retail				47.4			53.8			95.9		108.9

			Total retail			140.1			154.8			282.5		317.9

				Total net charge-offs		204.5			322.9			438.4		656.7

Provision for credit losses						204.5			323.0			439.5		658.0
Acquisitions and other changes						—			(41.0	)		—		(55.7	)

Balance at end of period					$	2,369.7		$	2,367.6		$	2,369.7	$	2,367.6

Components
	Allowance for loan losses				$	2,244.4		$	2,266.2		$	2,244.4	$	2,266.2
	Liability for unfunded credit commitments (a)					125.3			101.4			125.3		101.4

		Total allowance for credit losses			$	2,369.7		$	2,367.6		$	2,369.7	$	2,367.6

Allowance for credit losses as a percentage of
	Period-end loans					1.93	%		1.98	%
	Nonperforming loans					299			194
	Nonperforming assets					260			174
	Annualized net charge-offs					288			183


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


U.S. Bancorp	17

decisions or their implementation, and customer attrition due to potential negative publicity.

The Company operates in many different businesses in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of the Company’s objectives. In the event of a breakdown in the internal control system, improper operation of systems or employees’ improper actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation.

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

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

Customer-related business conditions may also increase operational risk or the level of operational losses in certain transaction processing business units, including merchant processing activities. Ongoing risk monitoring of customer activities and their financial condition and operational processes serve to mitigate customer-related operational risk. Refer to Note 13 of the Notes to Consolidated Financial Statements for further discussion on merchant processing.

While the Company believes that it has designed effective methods to minimize operational risks, there is no absolute assurance that business disruption or operational losses would not occur in the event of a disaster. On an ongoing basis, management makes process changes and investments to enhance its systems of internal controls and business continuity and disaster recovery plans.

Interest Rate Risk Management In the banking industry, a significant risk exists related to changes in interest rates. To minimize the volatility of net interest income and of the market value of assets and liabilities, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Policy Committee (“ALPC”) and approved by the Board of Directors. ALPC has the responsibility for approving and ensuring compliance with ALPC management policies, including interest rate risk exposure. The Company uses Net Interest Income Simulation Analysis and Market Value of Equity Modeling for measuring and analyzing consolidated interest rate risk.

Net Interest Income Simulation Analysis One of the primary tools used to measure interest rate risk and the effect of interest rate changes on rate sensitive income and net interest income is simulation analysis. The monthly analysis incorporates substantially all of the Company’s assets and liabilities and off-balance sheet instruments, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on interest rate sensitive income of a 300 basis point upward or downward gradual change of market interest rates over a one-year period. The simulations also estimate the effect of immediate and sustained parallel shifts in the yield curve of 50 basis points as well as the effect of immediate and sustained flattening or steepening of the yield curve. These simulations include assumptions about how the balance sheet is likely to be affected by changes in loan and deposit growth. Assumptions are made to project interest rates for new loans and deposits based on historical analysis, management’s outlook and repricing strategies. These assumptions are validated on a periodic basis. A sensitivity analysis is provided for key variables of the simulation. The results are reviewed by ALPC monthly and are used to guide hedging strategies. ALPC policy guidelines limit the estimated change in interest rate sensitive income to


18	U.S. Bancorp

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

The table below summarizes the interest rate risk of net interest income and rate sensitive income based on forecasts over the succeeding 12 months. At June 30, 2004, the Company’s overall interest rate risk position was substantially neutral to changes in interest rates. Rate sensitive income includes net interest income as well as other income items that are sensitive to interest rates, including asset management fees, mortgage banking and the impact from compensating deposit balances. The Company manages its interest rate risk position by holding assets on the balance sheet with desired interest rate risk characteristics, implementing certain pricing strategies for loans and deposits and through the selection of derivatives and various funding and investment portfolio strategies. The Company manages the overall interest rate risk profile within policy limits. At June 30, 2004, and December 31, 2003, the Company was within its policy guidelines.

Sensitivity of Net Interest Income and Rate Sensitive Income:



	June 30, 2004												December 31, 2003

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

Net interest income		(.19)	%		(.11)	%		*	%		(.30)	%		1.30	%		.19%		*	%		(.02	)%
Rate sensitive income		(.16)	%		(.28)	%		*	%		(.81)	%		.74	%		.01%		*	%		(.54	)%


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

Market Value of Equity Modeling The Company also utilizes the market value of equity as a measurement tool in managing interest rate sensitivity. The market value of equity measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. ALPC guidelines limit the change in market value of equity in a 200 basis point parallel rate shock to 15 percent of the market value of equity assuming interest rates at June 30, 2004. Given the low level of current interest rates, the down 200 basis point scenario cannot be computed. The up 200 basis point scenario resulted in a 3.7 percent decrease in the market value of equity at June 30, 2004, compared with a 3.1 percent decrease at December 31, 2003. ALPC reviews other down rate scenarios to evaluate the impact of falling interest rates. The down 100 basis point scenario resulted in a .9 percent increase at June 30, 2004, and a 1.3 percent increase at December 31, 2003. At June 30, 2004, and December 31, 2003, the Company was within its policy guidelines.

The valuation analysis is dependent upon certain key assumptions about the nature of indeterminate maturity of assets and liabilities. Management estimates the average life and rate characteristics of asset and liability accounts based upon historical analysis and management’s expectation of rate behavior. These assumptions are validated on a periodic basis. A sensitivity analysis of key variables of the valuation analysis is provided to ALPC monthly and is used to guide hedging strategies. The results of the valuation analysis as of June 30, 2004, were well within policy guidelines. The Company also uses duration of equity as a measure of interest rate risk. The duration of equity is a measure of the net market value sensitivity of the assets, liabilities and derivative positions of the Company. The duration of assets was 1.91 years at both June 30, 2004 and December 31, 2003. The duration of liabilities was 2.19 years at June 30, 2004, compared to 2.18 years at December 31, 2003. After giving effect to the Company’s derivative positions, the estimated duration of equity at June 30, 2004 was 1.28 years, compared to 1.35 years at December 31, 2003. The duration of equity measure shows that sensitivity of the market value of equity of the Company was relatively neutral to changes in interest rates.

Use of Derivatives to Manage Interest Rate and Foreign Currency Risk In the ordinary course of business, the Company enters into derivative transactions to manage its interest rate, prepayment, and foreign currency risks (“asset and liability management positions”) and to accommodate the business requirements of its customers (“customer-related positions”). To manage its interest rate risk, the Company may enter into interest rate swap agreements and interest rate options such as caps and floors. Interest rate swaps involve the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. Interest rate caps protect against rising interest rates while interest rate floors protect against declining interest rates. In connection with its mortgage banking operations, the Company enters into forward commitments to sell mortgage loans related to fixed-rate mortgage loans held for sale and fixed-rate mortgage loan commitments. The Company also acts as a seller and buyer of interest rate contracts and foreign exchange rate contracts on behalf of customers. The Company minimizes its market and liquidity risks by taking similar offsetting positions.

All interest rate derivatives that qualify for hedge accounting are recorded at fair value as other assets or


U.S. Bancorp	19

liabilities on the balance sheet and are designated as either “fair value” or “cash flow” hedges. The Company performs an assessment, both at inception and quarterly thereafter, when required, to determine whether these derivatives are highly effective in offsetting changes in the value of the hedged items. Hedge ineffectiveness for both cash flow and fair value hedges is immediately recorded in noninterest income. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income until income from the cash flows of the hedged items is realized. Customer-related interest rate swaps, foreign exchange rate contracts, and all other derivative contracts that do not qualify for hedge accounting are recorded at fair value and resulting gains or losses are recorded in trading account gains or losses or mortgage banking revenue.

By their nature, derivative instruments are subject to market risk. The Company does not utilize derivative instruments for speculative purposes. Of the Company’s $29.5 billion of total notional amount of asset and liability management derivative positions at June 30, 2004, $27.1 billion was designated as either fair value or cash flow hedges. The cash flow hedge positions are interest rate swaps that hedge the forecasted cash flows from the underlying variable-rate LIBOR loans and floating-rate debt. The fair value hedges are primarily interest rate contracts that hedge the change in fair value related to interest rate changes of underlying fixed-rate debt, subordinated obligations and deposit obligations. In addition, the Company uses forward commitments to sell residential mortgage loans to hedge its interest rate risk related to residential mortgage loans held for sale. The Company commits to sell the loans at specified prices in a future period, typically within 90 days. The Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market. Related to its mortgage banking operations, the Company held $1.2 billion of forward commitments to sell mortgage loans and $1.2 billion of unfunded mortgage loan commitments that were derivatives in accordance with the provisions of the Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedge Activities.” The unfunded mortgage loan commitments are reported at fair value as options in Table 10.

Derivative instruments are also subject to credit risk associated with counterparties to the derivative contracts. Credit risk associated with derivatives is measured based on the replacement cost should the counterparties with contracts in a gain position to the Company fail to perform under the terms of the contract. The Company manages this risk through diversification of its derivative positions among various counterparties, requiring collateral agreements with credit-rating thresholds, entering into master netting agreements in certain cases and entering into interest rate swap risk participation agreements. These agreements are credit derivatives that transfer the credit risk related to interest rate swaps from the Company to an unaffiliated third-party. The Company also provides credit protection to third-parties with risk participation agreements, for a fee, as part of a loan syndication transaction.

At June 30, 2004, the Company had $81.7 million in accumulated other comprehensive income related to unrealized gains on derivatives classified as cash flow hedges. The unrealized gains will be reflected in earnings when the related cash flows or hedged transactions occur and will offset the related performance of the hedged items. The estimated amount of gain to be reclassified from accumulated other comprehensive income into earnings during the remainder of 2004 and the next 12 months is $19.8 million and $41.0 million, respectively.

Gains or losses on customer-related derivative positions were not material for the second quarter and first six months of 2004. The change in fair value of forward commitments attributed to hedge ineffectiveness recorded in noninterest income was an increase of $3.4 million and a decrease of $4.6 million for the second quarter and first six months of 2004, respectively. The change in the fair value of all other asset and liability management derivative positions attributed to hedge ineffectiveness was not material for the second quarter and first six months of 2004.

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


20	U.S. Bancorp

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

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

VaR modeling of trading activities is subject to certain limitations. Additionally, it should be recognized that there are assumptions and estimates associated with VaR modeling, and actual results could differ from those assumptions and estimates. The Company mitigates these uncertainties through regular monitoring of trading activities by management and other risk management practices, including stop-loss and position limits related to its trading activities. Stress-test models are used to provide management with perspectives on market events that VaR models do not capture.

The Company establishes market risk limits, subject to approval by the Company’s Board of Directors. The Company’s VaR limit was $20 million at June 30, 2004, compared with $40 million at December 31, 2003. The market valuation risk inherent in its customer-based derivative trading, mortgage banking pipeline and foreign exchange, as estimated by the VaR analysis, was $1.5 million at both June 30, 2004 and December 31, 2003.

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


Table 10		Derivative Positions


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


Asset and Liability Management Positions

	Interest rate contracts
		Receive fixed/pay floating swaps		$	19,793	$	258			5.33
		Pay fixed/receive floating swaps			5,775		39			1.58
		Futures and forwards			2,700		3			.15
		Options
			Written		1,199		5			.20
	Equity contracts				49		2			4.75

Customer-related Positions

	Interest rate contracts
		Receive fixed/pay floating swaps		$	6,259	$	41			4.58
		Pay fixed/receive floating swaps			6,259		(8	)		4.58
		Options
			Purchased		846		11			3.58
			Written		846		(11	)		3.58
	Risk participation agreements (a)
		Purchased			125		—			7.75
		Written			69		—			2.79
	Foreign exchange rate contracts
		Forwards, spots and swaps
			Buy		2,075		50			.72
			Sell		2,023		(44	)		.73
		Options
			Purchased		5		—			.24
			Written		5		—			.24


(a)		At June 30, 2004, the credit equivalent amount was $1 million and $6 million for purchased and written risk participation agreements, respectively.


U.S. Bancorp	21

funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. The Company’s performance in these areas has enabled it to develop a large and reliable base of core funding within its market areas and in domestic and global capital markets. Liquidity management is viewed from long-term and short-term perspectives, as well as from an asset and liability perspective. Management monitors liquidity through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk.

The Company maintains strategic liquidity and contingency plans that are subject to the availability of asset liquidity in the balance sheet. Monthly, ALPC reviews the Company’s ability to meet funding requirements that could arise as a result of adverse business events. These funding needs are then matched with specific asset-based sources to ensure sufficient funds are available. Also, strategic liquidity policies require diversification of wholesale funding sources to avoid concentrations in any one market source. Subsidiary banks are members of various FHLBs that provide a source of funding through FHLB advances. The Company maintains a Grand Cayman branch for issuing eurodollar time deposits. The Company also establishes relationships with dealers to issue national market retail and institutional savings certificates and short- and medium-term bank notes. Also, the Company’s subsidiary banks have significant correspondent banking networks and corporate accounts. Accordingly, the Company has access to national fed funds, funding through repurchase agreements and sources of more stable, regionally based certificates of deposit.

The parent company’s routine funding requirements consist primarily of operating expenses, dividends to shareholders, debt service, repurchases of common stock and funds used for acquisitions. The parent company obtains funding to meet its obligations from dividends collected from its subsidiaries and the issuance of debt securities.

At June 30, 2004, parent company long-term debt outstanding was $4.6 billion, compared with $5.2 billion at December 31, 2003. The change in long-term debt in the first six months of 2004 was driven by medium-term note maturities of $.6 billion. Total parent company debt scheduled to mature in the remainder of 2004 is $323 million. These debt obligations may be met through medium-term note issuances and dividends from subsidiaries, as well as from parent company cash and cash equivalents. Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. The amount of dividends available to the parent company from its banking subsidiaries was approximately $1.6 billion at June 30, 2004.

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

In the ordinary course of business, the Company enters into an array of commitments to extend credit, letters of credit, lease commitments and various forms of guarantees that may be considered off-balance sheet arrangements. The nature and extent of these arrangements are provided in Note 13 of the Notes to Consolidated Financial Statements.

Asset securitization and conduits represent a source of funding for the Company through off-balance sheet structures. Credit, liquidity, operational and legal structural risks exist due to the nature and complexity of asset securitizations and other off-balance sheet structures. ALPC regularly monitors the performance of each off-balance sheet structure in an effort to minimize these risks and ensure compliance with the requirements of the structures. The Company utilizes its credit risk management systems to evaluate the credit quality of underlying assets and regularly forecasts cash flows to evaluate any potential impairment of retained interests. Also, regulatory guidelines require consideration of asset securitizations in the determination of risk-based capital ratios. The Company does not rely significantly on off-balance sheet arrangements for liquidity or capital resources.

The Company sponsors an off-balance sheet conduit to which it transferred high-grade investment securities, funded by the issuance of commercial paper. The conduit held assets of $6.5 billion at June 30, 2004, and $7.3 billion at December 31, 2003. These investment securities include primarily (i) private label asset-backed securities, which are insurance “wrapped” by AAA/Aaa-rated monoline insurance companies and (ii) government agency mortgage-backed securities and collateralized mortgage obligations. The conduit had commercial paper liabilities of $6.5 billion at June 30, 2004, and $7.3 billion at December 31, 2003.

The Company provides a liquidity facility to the conduit. Utilization of the liquidity facility would be


22	U.S. Bancorp

triggered if the conduit is unable to, or does not, issue commercial paper to fund its assets. A liability for the estimate of the potential risk of loss the Company has as the liquidity facility provider is recorded on the balance sheet in other liabilities. The liability is adjusted downward over time as the underlying assets pay down with the offset recognized as other noninterest income. The liability for the liquidity facility was $38.2 million at June 30, 2004 and $47.3 million at December 31, 2003. In addition, the Company recorded at fair value its retained residual interest in the investment securities conduit of $72.4 million at June 30, 2004, and $89.5 million at December 31, 2003.

The Company also has an asset-backed securitization to fund an unsecured small business credit product. The unsecured small business credit securitization trust held assets of $439.0 million at June 30, 2004, of which the Company retained $99.4 million of subordinated securities, transferor’s interests of $11.0 million and a residual interest-only strip of $38.6 million. This compared with $497.5 million in assets at December 31, 2003, of which the Company retained $112.4 million of subordinated securities, transferor’s interests of $12.4 million and a residual interest-only strip of $34.4 million. The securitization trust issued asset-backed variable funding notes in various tranches. The Company provides credit enhancement in the form of subordinated securities and reserve accounts. The Company’s risk, primarily from losses in the underlying assets, was considered in determining the fair value of the Company’s retained interests in this securitization. The Company recognized income from subordinated securities, an interest-only strip and servicing fees from this securitization of $8.8 million and $14.9 million during the second quarter and first six months of 2004, respectively, and $7.3 million and $17.3 million, respectively, during the same periods of 2003. The unsecured small business credit securitization held average assets of $455.8 million and $590.2 million in the second quarter of 2004 and 2003, respectively.

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

Capital Management The Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. The Company has targeted returning 80 percent of earnings to our shareholders through a combination of dividends and share repurchases. In keeping with this target, the Company returned 97 percent of earnings and 118 percent of earnings during the second quarter and first six months of 2004, respectively. Total shareholders’ equity was $18.7 billion at June 30, 2004, compared with $19.2 billion at December 31, 2003. The decrease was the result of corporate earnings offset by share repurchases, dividends and changes in other comprehensive income principally reflecting changes in securities valuations from year-end.

Tangible common equity to assets was 6.3 percent at June 30, 2004, compared with 6.5 percent at December 31, 2003. The Tier 1 capital ratio was 8.7 percent at June 30, 2004, compared with 9.1 percent at December 31, 2003. The total risk-based capital ratio was 12.9 percent at June 30, 2004, compared with 13.6 percent at December 31, 2003. The leverage ratio was 7.8 percent at June 30, 2004, compared with 8.0 percent at December 31, 2003. All regulatory ratios continue to be in excess of stated “well capitalized” requirements.


Table 11		Capital Ratios



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

Tangible common equity		$	11,526		$	11,858
	As a percent of tangible assets		6.3	%		6.5	%
Tier 1 capital		$	14,294		$	14,623
	As a percent of risk-weighted assets		8.7	%		9.1	%
	As a percent of adjusted quarterly average assets (leverage ratio)		7.8	%		8.0	%
Total risk-based capital		$	21,255		$	21,710
	As a percent of risk-weighted assets		12.9	%		13.6	%


U.S. Bancorp	23

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


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


April		6,795,105	$	26.39		101,379,092
May		7,547,284		26.56		93,831,808
June		6,440,523		28.23		87,391,285

Total		20,782,912	$	27.03		87,391,285


(a)		All shares purchased during the second quarter of 2004 were purchased under the publicly announced December 16, 2003 repurchase authorization.

LINE OF BUSINESS FINANCIAL REVIEW

Within the Company, financial performance is measured by major lines of business, which include Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management, Payment Services and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance.

Basis for Financial Presentation Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. Funds transfer-pricing methodologies are utilized to allocate a cost of funds used or credit for funds provided to all business line assets and liabilities using a matched funding concept. Also, the business unit is allocated the taxable-equivalent benefit of tax-exempt products. Noninterest income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct costs are accounted for within each segment’s financial results in a manner similar to the consolidated financial statements. Occupancy costs are allocated based on utilization of facilities by the lines of business. Noninterest expenses incurred by centrally managed operations or business lines that directly support another business line’s operations are charged to the applicable business line based on its utilization of those services primarily measured by the volume of customer activities. These allocated expenses are reported as net shared services expense. Certain corporate activities that do not directly support the operations of the lines of business are not charged to the lines of business. Goodwill and other intangible assets are assigned to the lines of business based on the mix of business of the acquired entity. The provision for credit losses within the Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management and Payment Services lines of business is based on net charge-offs, while Treasury and Corporate Support reflects the residual component of the Company’s total consolidated provision for credit losses determined in accordance with accounting principles generally accepted in the United States. Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support. Merger and restructuring-related charges, discontinued operations and cumulative effects of changes in accounting principles are not identified by or allocated to lines of business. Within the Company, capital levels are evaluated and managed centrally; however, capital is allocated to the operating segments to support evaluation of business performance. Capital allocations to the business lines are based on the amount of goodwill and other intangibles, the extent of off-balance sheet managed assets and lending commitments and the ratio of on-balance sheet assets relative to the total Company. Certain lines of business, such as Trust and Asset Management, have no significant balance sheet components. For these business units, capital is allocated taking into consideration fiduciary and operational risk, capital levels of independent organizations operating similar businesses, and regulatory requirements.

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

Wholesale Banking offers lending, depository, treasury management and other financial services to middle market, large corporate and public sector clients. Wholesale Banking contributed $265.7 million of the Company’s operating earnings for the second quarter of 2004 and $515.6 million for the first six months of


24	U.S. Bancorp

2004, increases of $55.2 million (26.2 percent) and $92.4 million (21.8 percent), respectively, compared with the same periods of 2003. The increase in operating earnings in the second quarter of 2004 and the first six months of 2004, compared with the same periods of 2003, was driven by reductions in total noninterest expense and provision for credit losses, partially offset by a decline in total net revenue.

Total net revenue decreased $21.6 million (3.5 percent) in the second quarter of 2004 and $56.6 million (4.6 percent) in the first six months of 2004, compared with the same periods of 2003. Net interest income, on a taxable-equivalent basis, decreased 4.9 percent and 6.0 percent, respectively, compared with the second quarter of 2003 and the first six months of 2003 as average loans decreased $2.4 billion (5.2 percent) and $2.5 billion (5.6 percent) over the same periods. The decline in average loans was driven, in part, by soft customer loan demand through early 2004, in addition to the Company’s decisions to tighten credit availability to certain types of lending products, industries and customers and reductions due to asset workout activities. The decline in average loans was partially offset by the consolidation of the commercial loan conduit onto the Company’s balance sheet during the third quarter of 2003. While average total deposits increased 4.7 percent during the second quarter of 2004, the net interest spread from deposits declined due to a shift in mix of deposits from lower cost noninterest-bearing deposits balances (a 14.5 percent decline) into interest-bearing deposit balances. The decrease in noninterest-bearing deposits year-over-year was primarily driven by declines in mortgage escrow deposits and government deposits, primarily due to a decision by the Federal government to pay fees for treasury management services rather than maintain compensating balances.

Noninterest income decreased $1.1 million (.6 percent) and $7.1 million (1.8 percent) in the second quarter of 2004 and the first six months of 2004, respectively, compared with the same periods of 2003. The decrease in noninterest income in the second quarter of 2004 and the first six months of 2004 was primarily due to declines in commercial products revenue resulting from the consolidation of the commercial loan conduit onto the Company’s balance sheet, as well as lower other fee revenue. These declines were partially offset by growth in treasury management-related fees, international banking, foreign exchange and syndication fees, compared with the same periods of 2003. The increase in treasury management-related fees was primarily driven by a change in the Federal government’s payment methodology for these services from compensating balances, reflected in net interest income, to fees during the third quarter of 2003.

Total noninterest expense was $162.4 million in the second quarter of 2004 and $322.4 million in the first six months 2004, compared with $168.0 million in the second quarter of 2003 and $340.6 million in the first six months of 2003, declines of $5.6 million (3.3 percent) and $18.2 million (5.3 percent), respectively. The $5.6 million decrease (3.3 percent) in the second quarter of 2004 compared to the same period of 2003 was primarily due to cost savings initiatives that reduced personnel-related costs, software expenses and other expenses. Loan workout expenses declined in the second quarter of 2004, compared with the second quarter of 2003, as the credit quality of the loan portfolio has improved. In addition, noninterest expense for the business segment in the second quarter of 2003 included $2.8 million of equipment financing related repossessed inventory write-downs. Net shared services costs increased in the second quarter of 2004, compared with the second quarter of 2003, due to higher transaction processing costs. The $18.2 million decrease for the first six months of 2004 was primarily driven by lower loan workout expenses and equipment financing related inventory write-downs, partially offset by increases in net shared services expense due to higher transaction processing costs.

The provision for credit losses was $8.6 million and $42.6 million in the second quarter of 2004 and first six months of 2004, respectively, compared with $111.4 million and $226.3 million for the same periods of 2003, declines of $102.8 million (92.3 percent) and $183.7 million (81.2 percent) year-over-year. The favorable change in the provision for credit losses for the Wholesale Banking business segment was due to improving net charge-offs which declined to .08 percent of average loans in the second quarter of 2004, compared with ..99 percent of average loans in the second quarter of 2003. The reduction in net charge-offs was attributable to improvements in credit quality driven by initiatives taken by the Company during the past three years, including asset workout activities and reductions in commitments to certain industries and customers. Nonperforming assets within Wholesale Banking were $523.8 million at June 30, 2004, compared with $618.0 million at March 31, 2004, and $950.4 million at June 30, 2003. Nonperforming assets as a percentage of end-of-period loans were 1.21 percent, 1.44 percent and 2.10 percent as of June 30, 2004, March 31, 2004, and June 30, 2003,


U.S. Bancorp	25

Table 12 Line of Business Financial Performance



		Wholesale							Consumer
		Banking							Banking


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

Condensed Income Statement
Net interest income (taxable-equivalent basis)		$	399.3	$	419.8		(4.9	)%	$	900.4		$	891.9		1.0	%
Noninterest income			189.4		190.5		(.6	)		462.0			390.7		18.2
Securities gains (losses), net			—		—		*			(171.1	)		196.3		*

	Total net revenue		588.7		610.3		(3.5	)		1,191.3			1,478.9		(19.4	)
Noninterest expense			157.8		163.1		(3.2	)		585.7			598.7		(2.2	)
Other intangibles			4.6		4.9		(6.1	)		(108.0	)		250.5		*

	Total noninterest expense		162.4		168.0		(3.3	)		477.7			849.2		(43.7	)

Operating earnings before provision and income taxes			426.3		442.3		(3.6	)		713.6			629.7		13.3
Provision for credit losses			8.6		111.4		(92.3	)		93.4			105.9		(11.8	)

Operating earnings before income taxes			417.7		330.9		26.2			620.2			523.8		18.4
Income taxes and taxable-equivalent adjustment			152.0		120.4		26.2			225.7			190.6		18.4

Operating earnings		$	265.7	$	210.5		26.2		$	394.5		$	333.2		18.4

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

Average Balance Sheet Data
Commercial		$	26,670	$	28,417		(6.1	)%	$	7,796		$	8,390		(7.1	)%
Commercial real estate			15,833		16,387		(3.4	)		10,532			9,896		6.4
Residential mortgages			69		120		(42.5	)		13,677			10,638		28.6
Retail			49		51		(3.9	)		30,903			28,983		6.6

	Total loans		42,621		44,975		(5.2	)		62,908			57,907		8.6
Goodwill			1,225		1,228		(.2	)		2,243			2,242		—
Other intangible assets			90		109		(17.4	)		1,058			900		17.6
Assets			49,335		52,187		(5.5	)		71,161			67,640		5.2
Noninterest-bearing deposits			13,266		15,517		(14.5	)		14,192			13,639		4.1
Savings products			10,754		9,809		9.6			42,204			39,801		6.0
Time deposits			6,247		3,592		73.9			15,934			18,983		(16.1	)

	Total deposits		30,267		28,918		4.7			72,330			72,423		(.1	)
Shareholders’ equity			4,986		5,118		(2.6	)		6,100			5,861		4.1



		Wholesale							Consumer
		Banking							Banking


						Percent								Percent
Six Months Ended June 30 (Dollars in Millions)		2004		2003		Change			2004			2003		Change

Condensed Income Statement
Net interest income (taxable-equivalent basis)		$	794.3	$	844.7		(6.0	)%	$	1,781.0		$	1,767.8		.7	%
Noninterest income			380.4		387.5		(1.8	)		879.0			771.5		13.9
Securities gains (losses), net			.9		—		*			(171.1	)		302.1		*

	Total net revenue		1,175.6		1,232.2		(4.6	)		2,488.9			2,841.4		(12.4	)
Noninterest expense			313.0		330.8		(5.4	)		1,159.7			1,184.0		(2.1	)
Other intangibles			9.4		9.8		(4.1	)		62.3			424.0		(85.3	)

	Total noninterest expense		322.4		340.6		(5.3	)		1,222.0			1,608.0		(24.0	)

Operating earnings before provision and income taxes			853.2		891.6		(4.3	)		1,266.9			1,233.4		2.7
Provision for credit losses			42.6		226.3		(81.2	)		200.5			217.3		(7.7	)

Operating earnings before income taxes			810.6		665.3		21.8			1,066.4			1,016.1		5.0
Income taxes and taxable-equivalent adjustment			295.0		242.1		21.9			388.1			369.7		5.0

Operating earnings		$	515.6	$	423.2		21.8		$	678.3		$	646.4		4.9

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

Average Balance Sheet Data
Commercial		$	26,383	$	28,403		(7.1	)%	$	7,804		$	8,389		(7.0	)%
Commercial real estate			15,899		16,344		(2.7	)		10,458			9,785		6.9
Residential mortgages			69		137		(49.6	)		13,463			10,189		32.1
Retail			50		54		(7.4	)		30,442			28,852		5.5

	Total loans		42,401		44,938		(5.6	)		62,167			57,215		8.7
Goodwill			1,225		1,229		(.3	)		2,243			2,242		—
Other intangible assets			92		112		(17.9	)		1,022			956		6.9
Assets			48,891		52,112		(6.2	)		70,040			67,243		4.2
Noninterest-bearing deposits			12,942		15,875		(18.5	)		13,864			13,489		2.8
Savings products			11,097		9,135		21.5			42,054			39,088		7.6
Time deposits			5,878		3,542		66.0			16,188			19,662		(17.7	)

	Total deposits		29,917		28,552		4.8			72,106			72,239		(.2	)
Shareholders’ equity			5,069		5,047		.4			6,192			5,745		7.8


*		Not meaningful


26	U.S. Bancorp



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


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

$	87.7	$	76.0		15.4	%	$	141.5	$	144.8		(2.3	)%	$	250.5		$	266.1			(5.9	)%	$	1,779.4		$	1,798.6			(1.1	)%
	253.9		241.4		5.2			463.8		405.4		14.4			44.3			31.8			39.3			1,413.4			1,259.8			12.2
	—		—		—			—		—		—			(.6	)		16.8			*			(171.7	)		213.1			*

	341.6		317.4		7.6			605.3		550.2		10.0			294.2			314.7			(6.5	)		3,021.1			3,271.5			(7.7	)
	146.4		146.0		.3			193.3		181.0		6.8			197.0			134.7			46.3			1,280.2			1,223.5			4.6
	15.0		16.6		(9.6	)		39.3		38.9		1.0			1.5			1.4			7.1			(47.6	)		312.3			*

	161.4		162.6		(.7	)		232.6		219.9		5.8			198.5			136.1			45.8			1,232.6			1,535.8			(19.7	)

	180.2		154.8		16.4			372.7		330.3		12.8			95.7			178.6			(46.4	)		1,788.5			1,735.7			3.0
	8.8		1.5		*			94.8		104.9		(9.6	)		(1.1	)		(.7	)		57.1			204.5			323.0			(36.7	)

	171.4		153.3		11.8			277.9		225.4		23.3			96.8			179.3			(46.0	)		1,584.0			1,412.7			12.1
	62.4		55.8		11.8			101.1		82.0		23.3			5.9			41.7			(85.9	)		547.1			490.5			11.5

$	109.0	$	97.5		11.8		$	176.8	$	143.4		23.3		$	90.9		$	137.6			(33.9	)		1,036.9			922.2			12.4

																								—			(7.2	)
																								—			4.9

																							$	1,036.9		$	919.9

$	1,645	$	1,839		(10.5	)%	$	3,039	$	2,903		4.7	%	$	180		$	153			17.6	%	$	39,330		$	41,702			(5.7	)%
	604		586		3.1			—		—		—			147			220			(33.2	)		27,116			27,089			.1
	297		241		23.2			—		—		—			9			13			(30.8	)		14,052			11,012			27.6
	2,208		1,933		14.2			7,454		6,981		6.8			49			52			(5.8	)		40,663			38,000			7.0

	4,754		4,599		3.4			10,493		9,884		6.2			385			438			(12.1	)		121,161			117,803			2.9
	813		741		9.7			1,823		1,814		.5			—			306			*			6,104			6,331			(3.6	)
	342		406		(15.8	)		763		669		14.1			8			13			(38.5	)		2,261			2,097			7.8
	6,471		6,367		1.6			13,405		13,066		2.6			50,058			47,795			4.7			190,430			187,055			1.8
	3,250		3,056		6.3			109		337		(67.7	)		(210	)		(34	)		*			30,607			32,515			(5.9	)
	7,930		5,216		52.0			10		10		—			19			2			*			60,917			54,838			11.1
	499		443		12.6			—		—		—			2,912			5,780			(49.6	)		25,592			28,798			(11.1	)

	11,679		8,715		34.0			119		347		(65.7	)		2,721			5,748			(52.7	)		117,116			116,151			.8
	2,239		1,993		12.3			3,109		2,986		4.1			2,609			3,477			(25.0	)		19,043			19,435			(2.0	)



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


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

$	170.6	$	151.0		13.0	%	$	290.2	$	304.7		(4.8	)%	$	522.3		$	507.1			3.0	%	$	3,558.4		$	3,575.3			(.5	)%
	503.7		468.9		7.4			874.9		777.4		12.5			93.7			79.9			17.3			2,731.7			2,485.2			9.9
	—		—		—			—		—		—			(1.5	)		51.7			*			(171.7	)		353.8			*

	674.3		619.9		8.8			1,165.1		1,082.1		7.7			614.5			638.7			(3.8	)		6,118.4			6,414.3			(4.6	)
	290.3		293.5		(1.1	)		373.0		356.7		4.6			373.0			260.4			43.2			2,509.0			2,425.4			3.4
	30.0		33.1		(9.4	)		73.9		77.6		(4.8	)		2.9			2.9			—			178.5			547.4			(67.4	)

	320.3		326.6		(1.9	)		446.9		434.3		2.9			375.9			263.3			42.8			2,687.5			2,972.8			(9.6	)

	354.0		293.3		20.7			718.2		647.8		10.9			238.6			375.4			(36.4	)		3,430.9			3,441.5			(.3	)
	9.7		1.9		*			187.4		213.3		(12.1	)		(.7	)		(.8	)		(12.5	)		439.5			658.0			(33.2	)

	344.3		291.4		18.2			530.8		434.5		22.2			239.3			376.2			(36.4	)		2,991.4			2,783.5			7.5
	125.3		106.1		18.1			193.1		158.1		22.1			(55.4	)		89.7			*			946.1			965.7			(2.0	)

$	219.0	$	185.3		18.2		$	337.7	$	276.4		22.2		$	294.7		$	286.5			2.9			2,045.3			1,817.8			12.5

																								—			(18.7	)
																								—			5.6

																							$	2,045.3		$	1,804.7

$	1,654	$	1,812		(8.7	)%	$	2,934	$	2,823		3.9	%	$	155		$	219			(29.2	)%	$	38,930		$	41,646			(6.5	)%
	601		578		4.0			—		—		—			155			230			(32.6	)		27,113			26,937			.7
	288		231		24.7			—		—		—			11			13			(15.4	)		13,831			10,570			30.9
	2,159		1,948		10.8			7,414		7,004		5.9			46			50			(8.0	)		40,111			37,908			5.8

	4,702		4,569		2.9			10,348		9,827		5.3			367			512			(28.3	)		119,985			117,061			2.5
	791		740		6.9			1,819		1,813		.3			—			306			*			6,078			6,330			(4.0	)
	350		417		(16.1	)		706		685		3.1			9			14			(35.7	)		2,179			2,184			(.2	)
	6,437		6,336		1.6			13,239		13,058		1.4			51,439			46,626			10.3			190,046			185,375			2.5
	3,124		2,886		8.2			112		407		(72.5	)		(227	)		12			*			29,815			32,669			(8.7	)
	7,901		4,933		60.2			11		9		22.2			18			8			*			61,081			53,173			14.9
	479		434		10.4			—		—		—			3,126			6,504			(51.9	)		25,671			30,142			(14.8	)

	11,504		8,253		39.4			123		416		(70.4	)		2,917			6,524			(55.3	)		116,567			115,984			.5
	2,181		1,973		10.5			3,067		2,987		2.7			2,805			3,370			(16.8	)		19,314			19,122			1.0


U.S. Bancorp	27

respectively. While nonperforming asset levels continue to be elevated relative to the 1990’s, significant improvement in credit quality has been achieved with broad-based reductions across most industry sectors. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.

Consumer Banking delivers products and services to the broad consumer market and small businesses through banking offices, telemarketing, on-line services, direct mail and automated teller machines (“ATMs”). It encompasses community banking, metropolitan banking, branch ATM banking, small business banking, including lending guaranteed by the Small Business Administration, small-ticket leasing, consumer lending, mortgage banking, workplace banking, student banking, 24-hour banking and investment product and insurance sales. Consumer Banking contributed $394.5 million of the Company’s operating earnings for the second quarter of 2004 and $678.3 million for the first six months of 2004, an increase of $61.3 million (18.4 percent) and $31.9 million (4.9 percent), respectively, compared with the same periods of 2003. While the retail banking business grew operating earnings by 22.4 percent in the second quarter of 2004 and 21.2 percent in the first six months of 2004, the contribution of the mortgage banking business declined 3.4 percent and 90.4 percent, respectively, compared with the same periods of 2003. The decrease in operating earnings within the mortgage banking business for the second quarter and first six months of 2004, compared with 2003, was primarily the result of a decline in net interest income resulting from lower loans held for sale balances as mortgage production has declined. Also, operating results include an increase in noninterest expense associated with increased amortization of mortgage servicing rights resulting from growth in the servicing portfolio from a year ago.

Total net revenue decreased $287.6 million (19.4 percent) in the second quarter of 2004 and decreased $352.5 million (12.4 percent) in the first six months of 2004, compared with the same periods of 2003. The declines were due to a reduction in net securities gains (losses), partially offset by increases in net interest income and noninterest income. Net interest income, on a taxable-equivalent basis, increased $8.5 million (1.0 percent) and $13.2 million (.7 percent) in the second quarter of 2004 and the first six months of 2004, respectively, compared with the same periods of 2003. Fee-based revenue increased $71.3 million (18.2 percent) and net securities gains (losses) decreased $367.4 million in the second quarter of 2004, while fee-based revenue increased $107.5 million (13.9 percent) and net securities gains (losses) decreased $473.2 million in the first six months of 2004, compared with the same periods of 2003.

The increase in net interest income for the second quarter of 2004 and the first six months of 2004, compared with the same periods of 2003, was due to growth in average loan balances, changes in the mix of average deposit balances and improved spreads on commercial loans. Partially offsetting these increases were the impact of declining interest rates on the funding benefit of consumer deposits and the reduction in mortgage loans held for sale attributable to the changing interest rate environment resulting in lower mortgage refinance activity. The increase in the average loan balances of 8.6 percent for the second quarter of 2004 reflected retail loan growth of 6.6 percent and growth in residential mortgages of 28.6 percent, compared with the second quarter of 2003. Included within the retail loan category are second-lien home equity loans which had a growth rate of 2.5 percent. The category of residential mortgages includes first-lien home equity loans, which had a growth rate of 32.0 percent in the second quarter of 2004, compared with the second quarter of 2003. On a combined basis, first and second-lien home equity products increased $1.7 billion, or 10.3 percent, compared with a year ago. The year-over-year growth of traditional residential mortgages was 26.2 percent. Commercial real estate loan balances increased 6.4 percent, while commercial loan balances decreased 7.1 percent during the second quarter of 2004, compared with the second quarter of 2003. Average deposits included growth in noninterest-bearing, interest checking, savings and money market account balances, offset by a reduction in balances associated with time deposits in the second quarter of 2004, compared with the second quarter of 2003. The decline in lower margin time deposits primarily reflected a shift in product mix towards savings products.

Fee-based noninterest income was $462.0 million in the second quarter of 2004 and $879.0 million in the first six months of 2004, an increase of $71.3 million (18.2 percent) and $107.5 million (13.9 percent), respectively, compared with the same periods of 2003. This growth was driven by deposit service charges, commercial products revenue, mortgage banking revenue, investment products fees and commissions and other revenue, partially offset by lower treasury management fees. The second quarter 2004 growth in fee-based revenue was attributable to new deposit account growth, pricing enhancements, increased sales, higher mortgage servicing revenue and lower end-of-term lease losses.


28	U.S. Bancorp

Total noninterest expense was $477.7 million in the second quarter of 2004 and $1,222.0 million in the first six months of 2004, compared with $849.2 million and $1,608.0 million for the same periods of 2003, decreases of $371.5 million (43.7 percent) and $386.0 million (24.0 percent), respectively. The decrease in noninterest expense was primarily attributable to an increase in MSR values during the second quarter of 2004 resulting in a MSR reparation of $171.1 million, compared with a MSR impairment of $196.3 million in 2003. In addition to the net reduction in MSR impairments of $367.4 million, noninterest expense declined due to lower net shared services costs and loan origination costs, partially offset by increases in compensation costs related to new in-store branch expansion and higher amortization costs from growth in the mortgage servicing portfolio. Noninterest expense for the first six months of 2004 included reparation of MSR impairment of $61.8 million in the first six months of 2004, compared with a MSR impairment of $317.2 million in 2003. The change in MSR valuations was driven by rising interest rates and slower prepayment speeds in the second quarter of 2004, compared with the declining interest rates and refinancing activities in the first six months of 2003 and the first quarter of 2004.

The provision for credit losses decreased $12.5 million and $16.8 million in the second quarter of 2004 and the first six months of 2004, respectively, compared with the same periods of 2003. The improvement in the provision for credit losses in the second quarter of 2004 and the first six months of 2004, compared with the same periods of 2003, was primarily attributable to lower retail loan net charge-offs. As a percentage of average loans, net charge-offs declined to ..60 percent in the second quarter of 2004, compared with ..74 percent in the second quarter of 2003. Retail loan net charge-offs continued to decline primarily a result of ongoing collection efforts and risk management. Nonperforming assets within Consumer Banking were $377.6 million at June 30, 2004, compared with $418.6 million at March 31, 2004, and $399.0 million at June 30, 2003. The decrease in nonperforming assets in the second quarter of 2004 was a result of declines in nonperforming loans and other real estate owned primarily associated with small business and community banking-based borrowers. Nonperforming assets as a percentage of end-of-period loans were .63 percent, ..72 percent and .72 percent as of June 30, 2004, March 31, 2004, and June 30, 2003, respectively. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.

Private Client, Trust and Asset Management provides trust, private banking, financial advisory, investment management and mutual fund and alternative investment product services through five businesses: Private Client Group, Corporate Trust, Asset Management, Institutional Trust and Custody and Fund Services, LLC. Private Client, Trust and Asset Management contributed $109.0 million of the Company’s operating earnings for the second quarter of 2004 and $219.0 for the first six months of 2004, increases of 11.8 percent and 18.2 percent, respectively, compared with the same periods of 2003. The period-over-period increases for the second quarter of 2004 and first six months of 2004 were attributable to growth in total net revenue (7.6 percent and 8.8 percent, respectively) and a reduction in noninterest expense (.7 percent and 1.9 percent, respectively), partially offset by an increase in provision for credit losses.

Total net revenue was $341.6 million in the second quarter of 2004 and $674.3 million in the first six months of 2004, increases of 7.6 percent and 8.8 percent, respectively, compared with the same periods of 2003. Net interest income, on a taxable-equivalent basis, increased $11.7 million (15.4 percent) in the second quarter of 2004 and $19.6 million (13.0 percent) in the first six months of 2004, compared with the same periods of 2003. The increase in net interest income in the second quarter of 2004 was due to growth in total deposits of 34.0 percent, attributable to growth in noninterest-bearing deposits, savings products and time deposits, partially offset by the impact of declining interest rates on the funding benefit of deposits. Noninterest income increased $12.5 million (5.2 percent) in the second quarter of 2004 and $34.8 million (7.4 percent) in the first six months of 2004, compared with the same periods of 2003. The increases in noninterest income were primarily attributable to improvement in equity capital market conditions and an increase in assets under management and related fees.

Total noninterest expense decreased $1.2 million (.7 percent) in the second quarter of 2004 and $6.3 million (1.9 percent) in the first six months of 2004, compared with the same periods of 2003, primarily due to reductions in intangible amortization and net shared services expense.

The provision for credit losses increased $7.3 million in the second quarter of 2004 and $7.8 million in the first six months of 2004, compared with the same periods of 2003. The increase in the provision for credit losses was due to increases within commercial and retail loan net charge-offs. Net charge-offs as a percentage of average loans were .74 percent


U.S. Bancorp	29

in the second quarter of 2004, compared with ..13 percent in the second quarter of 2003. Net charge-offs are expected to return to historical levels in the third quarter of 2004.

Payment Services includes consumer and business credit cards, debit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. Payment Services contributed $176.8 million of the Company’s operating earnings for the second quarter of 2004 and $337.7 million for the first six months of 2004, a 23.3 percent and 22.2 percent increase, respectively, over the same periods of 2003. The increases were due to growth in total net revenue and reductions in provision for credit losses, partially offset by increases in total noninterest expense.

Total net revenue was $605.3 million in the second quarter of 2004 and $1,165.1 million in the first six months of 2004, increases of $55.1 million (10.0 percent) and $83.0 million (7.7 percent), respectively, compared with the same periods of 2003. Net interest income decreased $3.3 million (2.3 percent) and $14.5 million (4.8 percent) in the second quarter and the first six months of 2004, respectively, compared with the same periods of 2003, primarily due to reductions in customer fees, higher corporate card rebates and a decline in average deposit balances. Noninterest income increased $58.4 million (14.4 percent) in the second quarter of 2004 and $97.5 million (12.5 percent) in the first six months of 2004, compared with the same periods of 2003. The increase in fee-based revenue in the second quarter of 2004 was driven by strong growth in credit card and debit card revenue (11.5 percent), corporate payment products revenue (13.0 percent), ATM processing services revenue (10.6 percent) and merchant processing revenue (16.4 percent). The growth in credit card and debit card revenue was muted somewhat by the impact of the debit card antitrust settlement by VISA USA and Mastercard which lowered interchange rates on signature debit transactions commencing in the third quarter of 2003. Credit card and debit card revenue increased $16.3 million due to strong growth in sales volumes. Corporate payment products revenue increased $11.8 million due to increases in sales volumes and pricing enhancements. ATM processing services revenue increased $2.9 million due to transaction growth and new sales. Merchant processing revenue increased $23.3 million due to an increase in sales and transaction processing volumes and the purchase of two European merchant acquiring businesses, which accounted for approximately $7.1 million of the change.

Total noninterest expense was $232.6 million in the second quarter of 2004 and $446.9 million in the first six months of 2004, increases of $12.7 million (5.8 percent) and $12.6 million (2.9 percent), respectively, compared with the same periods of 2003. The total noninterest expense increase was primarily attributable to higher compensation and employee benefit costs associated with increased corporate payment products and merchant processing sales volumes, in addition to higher merchant acquiring costs resulting from the purchase of the two European merchant acquiring businesses in the second quarter of 2004.

The provision for credit losses was $94.8 million in the second quarter of 2004 and $187.4 million in the first six months of 2004, decreases of $10.1 million (9.6 percent) and $25.9 million (12.1 percent), respectively, compared with the same periods of 2003, due to lower net charge-offs. Net charge-offs were 3.63 percent of average loans in the second quarter of 2004, compared with 4.26 percent in the second quarter of 2003. The favorable change in credit losses was due to improvements in ongoing collection efforts and risk management, as well as an improvement in economic conditions from a year ago.

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

Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management and asset securitization activities, interest rate risk management, the net effect of transfer pricing related to average balances and the residual aggregate of expenses associated with business activities managed on a corporate basis, including enterprise-wide operations and administrative support functions. Operational expenses incurred by Treasury and Corporate Support on behalf of the other business lines are allocated back primarily based on customer transaction volume and account activities to the appropriate business unit and are identified as net shared services expense. Treasury and Corporate Support recorded operating earnings of


30	U.S. Bancorp

$90.9 million for the second quarter of 2004 and $294.7 million for the first six months of 2004, a decrease of $46.7 million (33.9 percent) and an increase of $8.2 million (2.9 percent), respectively, compared with the same periods of 2003.

Total net revenue was $294.2 million and $614.5 million in the second quarter and first six months of 2004, respectively, compared with total net revenue of $314.7 million and $638.7 million for the same periods of 2003. The decline of $20.5 million (6.5 percent) in total net revenue in the second quarter of 2004 was attributable to reductions in net interest income of $15.6 million and net securities gains (losses) of $17.4 million, partially offset by increases in noninterest income of $12.5 million (39.3 percent). The decrease in net interest income was primarily attributable to the Company’s asset/liability management decisions to invest in lower-yield floating-rate securities, higher-cost fixed funding and repositioning of the balance sheet for changes in the interest rate environment. Investment securities increased $6.3 billion in the second quarter of 2004 compared with the second quarter of 2003, reflecting the reinvestment of proceeds from declines in commercial loan balances and additional deposit growth. The decline of $24.2 million (3.8 percent) in total net revenue in the first six months of 2004 was attributable to decreases in net securities gains (losses) of $53.2 million, partially offset by increases in net interest income of $15.2 million and noninterest income of $13.8 million. The increase in net interest income was primarily attributable to an increase in the investment portfolio of $8.5 billion and changes in funding mix, partially offset by a reduction in loan prepayment fees and the net effect of transfer pricing related to changes in the average balance sheet and interest rates. The increase in noninterest income was primarily attributable to higher equity valuation gains.

Noninterest expense was $198.5 million in the second quarter of 2004 and $375.9 million in the first six months of 2004, compared with $136.1 million and $263.3 million for the same periods of 2003, respectively. The $62.4 million (45.8 percent) increase in the second quarter of 2004 and the $112.6 million (42.8 percent) increase in the first six months of 2004, compared with the same periods of 2003, reflected higher costs associated with stock-based compensation, pension benefits, and insurance. Other expenses also included a charge associated with future-delivery charge-back exposure within the Company’s airline merchant processing portfolio. In addition, the first six months of 2004 included a $35.4 million charge associated with the prepayment of the Company’s long-term debt.

The provision for credit losses for this business unit represents the residual aggregate of the net credit losses allocated to the reportable business units and the Company’s recorded provision determined in accordance with accounting principles generally accepted in the United States. The provision for credit losses was a net recovery of $1.1 million in the second quarter of 2004 and $.7 million in the first six months of 2004, compared with a net recovery of $.7 million and $.8 million for the same periods of 2003, respectively. Refer to the “Corporate Risk Profile” section for further information on the provision for credit losses, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support. The first quarter of 2004 reflected a $90.0 million reduction in income tax expense related to the resolution of federal tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999.

ACCOUNTING CHANGES

Note 2 of the Notes to Consolidated Financial Statements discusses new accounting policies adopted by the Company during 2004 and 2003 and the expected impact of accounting policies recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards affects the Company’s financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of Management’s Discussion and Analysis and the Notes to Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company’s financial statements. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and


U.S. Bancorp	31

results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third-parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under generally accepted accounting principles. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee.

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

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

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

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

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

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


32	U.S. Bancorp

recorded value is temporary in nature. While impairment assessments impact most asset categories, the following areas are considered to be critical accounting matters in relation to the financial statements.

Mortgage Servicing Rights MSRs are capitalized as separate assets when loans are sold and servicing is retained. The total cost of loans sold is allocated between the loans sold and the servicing assets retained based on their relative fair values. MSRs that are purchased from others are initially recorded at cost. The carrying value of the MSRs is amortized in proportion to and over the period of estimated net servicing revenue and recorded in noninterest expense as amortization of intangible assets. The carrying value of these assets is periodically reviewed for impairment using a lower of carrying value or fair value methodology. For purposes of measuring impairment, the servicing rights are stratified based on the underlying loan type and note rate and the carrying value for each stratum is compared to fair value based on a discounted cash flow analysis, utilizing current prepayment speeds and discount rates. Events that may significantly affect the estimates used are changes in interest rates and the related impact on mortgage loan prepayment speeds and the payment performance of the underlying loans. If the carrying value is greater than fair value, impairment is recognized through a valuation allowance for each impaired stratum and recorded as amortization of intangible assets. The reduction in the fair value of MSRs at June 30, 2004, to immediate 25 and 50 basis point adverse changes in interest rates would be approximately $50 million and $119 million, respectively. An upward movement in interest rates at June 30, 2004, of 25 and 50 basis points would increase the value of the MSRs by approximately $86 million and $133 million, respectively. Refer to Note 6 of the Notes to Consolidated Financial Statements for additional information regarding MSRs.

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

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

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

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

CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design


U.S. Bancorp	33

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

During the most recently completed fiscal quarter, there was no change made in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


34	U.S. Bancorp

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U.S. Bancorp	35

U.S. Bancorp

Consolidated Balance Sheet


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


				(Unaudited)
Assets
Cash and due from banks				$	7,476		$	8,630
Investment securities
	Held-to-maturity (fair value $128 and $161, respectively)				125			152
	Available-for-sale				40,160			43,182
Loans held for sale					1,383			1,433
Loans
	Commercial				40,065			38,526
	Commercial real estate				27,204			27,242
	Residential mortgages				14,380			13,457
	Retail				41,181			39,010

		Total loans			122,830			118,235
			Less allowance for loan losses		(2,244	)		(2,369	)

			Net loans		120,586			115,866
Premises and equipment					1,893			1,957
Customers’ liability on acceptances					169			121
Goodwill					6,226			6,025
Other intangible assets					2,475			2,124
Other assets					9,737			9,796

		Total assets		$	190,230		$	189,286

Liabilities and Shareholders’ Equity
Deposits
	Noninterest-bearing			$	32,786		$	32,470
	Interest-bearing				71,314			74,749
	Time deposits greater than $100,000				15,827			11,833

		Total deposits			119,927			119,052
Short-term borrowings					11,592			10,850
Long-term debt					31,013			31,215
Junior subordinated debentures					2,652			2,601
Acceptances outstanding					169			121
Other liabilities					6,202			6,205

		Total liabilities			171,555			170,044
Shareholders’ equity
	Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares issued: 06/30/04 and 12/31/03 — 1,972,643,007 shares				20			20
	Capital surplus				5,860			5,851
	Retained earnings				15,644			14,508
	Less cost of common stock in treasury: 06/30/04 — 88,527,451 shares; 12/31/03 — 49,722,856 shares				(2,316	)		(1,205	)
	Other comprehensive income				(533	)		68

		Total shareholders’ equity			18,675			19,242

		Total liabilities and shareholders’ equity		$	190,230		$	189,286

See Notes to Consolidated Financial Statements.


36	U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Income



			Three Months Ended					Six Months Ended
			June 30,					June 30,

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

Interest Income
Loans			$	1,740.0		$	1,821.0	$	3,487.0		$	3,657.7
Loans held for sale				27.3			51.8		47.2			111.4
Investment securities
	Taxable			438.7			422.4		902.7			818.5
	Non-taxable			4.7			7.5		10.0			16.4
Other interest income				25.5			25.1		47.4			55.0

		Total interest income		2,236.2			2,327.8		4,494.3			4,659.0
Interest Expense
Deposits				205.3			288.5		432.3			595.1
Short-term borrowings				58.9			38.9		108.8			78.4
Long-term debt				174.8			184.0		360.7			368.3
Junior subordinated debentures				24.8			24.5		48.3			55.9

		Total interest expense		463.8			535.9		950.1			1,097.7

Net interest income				1,772.4			1,791.9		3,544.2			3,561.3
Provision for credit losses				204.5			323.0		439.5			658.0

Net interest income after provision for credit losses				1,567.9			1,468.9		3,104.7			2,903.3
Noninterest Income
Credit and debit card revenue				158.8			142.3		300.6			269.7
Corporate payment products revenue				102.7			90.9		197.5			176.9
ATM processing services				44.9			41.9		87.1			84.3
Merchant processing services				165.1			141.8		306.2			269.1
Trust and investment management fees				251.7			238.9		500.3			467.5
Deposit service charges				202.1			179.0		387.3			342.2
Treasury management fees				121.5			111.8		239.0			223.8
Commercial products revenue				107.4			100.0		217.8			204.2
Mortgage banking revenue				109.9			90.3		204.1			185.7
Investment products fees and commissions				42.2			38.1		81.5			73.2
Securities gains (losses), net				(171.7	)		213.1		(171.7	)		353.8
Other				107.1			84.8		210.3			188.6

		Total noninterest income		1,241.7			1,472.9		2,560.0			2,839.0
Noninterest Expense
Compensation				572.6			547.6		1,108.4			1,093.6
Employee benefits				91.2			79.6		191.4			171.3
Net occupancy and equipment				153.4			159.5		309.1			320.8
Professional services				34.7			32.9		67.1			59.3
Marketing and business development				48.7			51.1		84.0			80.9
Technology and communications				102.4			104.1		204.1			209.0
Postage, printing and supplies				60.5			61.8		122.1			122.2
Other intangibles				(47.6	)		312.3		178.5			547.4
Merger and restructuring-related charges				—			10.8		—			28.4
Other				216.7			186.9		422.8			368.3

		Total noninterest expense		1,232.6			1,546.6		2,687.5			3,001.2

Income from continuing operations before income taxes				1,577.0			1,395.2		2,977.2			2,741.1
Applicable income taxes				540.1			480.2		931.9			942.0

Income from continuing operations				1,036.9			915.0		2,045.3			1,799.1
Income from discontinued operations (after-tax)				—			4.9		—			5.6

Net income			$	1,036.9		$	919.9	$	2,045.3		$	1,804.7

Earnings Per Share
	Income from continuing operations		$	.55		$	.48	$	1.07		$	.94
	Discontinued operations			—			—		—			—

	Net income		$	.55		$	.48	$	1.07		$	.94

Diluted Earnings Per Share
	Income from continuing operations		$	.54		$	.47	$	1.06		$	.93
	Discontinued operations			—			.01		—			.01

	Net income		$	.54		$	.48	$	1.06		$	.94

Dividends declared per share			$	.240		$	.205	$	.480		$	.410

Average common shares outstanding				1,891.6			1,922.3		1,903.5			1,920.6
Average diluted common shares outstanding				1,913.4			1,931.6		1,927.3			1,928.6

See Notes to Consolidated Financial Statements.


U.S. Bancorp	37

U.S. Bancorp

Consolidated Statement of Shareholders’ Equity


																Other			Total
(Dollars in Millions)		Common Shares			Common		Capital			Retained			Treasury			Comprehensive			Shareholders’
(Unaudited)		Outstanding			Stock		Surplus			Earnings			Stock			Income			Equity


Balance December 31, 2002			1,916,956,560		$	20	$	5,799		$	13,105		$	(1,272	)	$	784		$	18,436
Net income											1,805									1,805
Unrealized gain on securities available for sale																	157			157
Unrealized loss on derivatives																	(222	)		(222	)
Foreign currency translation adjustment																	17			17
Realized gain on derivatives																	188			188
Reclassification adjustment for gains realized in net income																	(379	)		(379	)
Income taxes																	91			91

	Total comprehensive income																			1,657
Cash dividends declared on common stock											(788	)								(788	)
Issuance of common and treasury stock			8,249,225					(46	)					190						144
Stock option and restricted stock grants								72												72
Shares reserved to meet deferred compensation obligations			(678,976	)				10						(10	)					—

Balance June 30, 2003			1,924,526,809		$	20	$	5,835		$	14,122		$	(1,092	)	$	636		$	19,521

Balance December 31, 2003			1,922,920,151		$	20	$	5,851		$	14,508		$	(1,205	)	$	68		$	19,242
Net income											2,045									2,045
Unrealized loss on securities available for sale																	(990	)		(990	)
Unrealized loss on derivatives																	(125	)		(125	)
Realized gain on derivatives																	3			3
Reclassification adjustment for losses realized in net income																	143			143
Income taxes																	368			368

	Total comprehensive income																			1,444
Cash dividends declared on common stock											(909	)								(909	)
Issuance of common and treasury stock			16,564,323					(58	)					418						360
Purchase of treasury stock			(54,607,715	)										(1,509	)					(1,509	)
Stock option and restricted stock grants								51												51
Shares reserved to meet deferred compensation obligations			(761,203	)				16						(20	)					(4	)

Balance June 30, 2004			1,884,115,556		$	20	$	5,860		$	15,644		$	(2,316	)	$	(533	)	$	18,675

See Notes to Consolidated Financial Statements.


38	U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Cash Flows



		Six Months Ended
		June 30,

(Dollars in Millions)
(Unaudited)		2004			2003


Operating Activities
	Net cash provided by (used in) operating activities	$	2,587.5		$	3,540.9
Investing Activities
Proceeds from sales of available-for-sale investment securities			4,644.3			11,855.0
Proceeds from maturities of investment securities			5,660.6			9,661.9
Purchases of investment securities			(7,917.6	)		(28,826.1	)
Net (increase) decrease in loans outstanding			(4,753.6	)		(4,658.8	)
Proceeds from sales of loans			918.5			1,141.2
Purchases of loans			(1,188.8	)		(239.5	)
Proceeds from sales of premises and equipment			38.0			20.6
Purchases of premises and equipment			(63.3	)		(555.2	)
Acquisitions, net of cash acquired			(301.6	)		—
Other, net			(210.5	)		(158.9	)

	Net cash provided by (used in) investing activities		(3,174.0	)		(11,759.8	)
Financing Activities
Net increase (decrease) in deposits			875.2			10,793.4
Net increase (decrease) in short-term borrowings			742.7			(419.6	)
Principal payments on long-term debt			(5,459.0	)		(4,797.9	)
Proceeds from issuance of long-term debt			5,450.6			7,448.8
Redemption of Company-obligated mandatorily redeemable preferred securities			—			(350.0	)
Proceeds from issuance of common stock			314.2			126.7
Repurchase of common stock			(1,591.0	)		—
Cash dividends paid			(919.0	)		(767.2	)

	Net cash provided by (used in) financing activities		(586.3	)		12,034.2

	Change in cash and cash equivalents		(1,172.8	)		3,815.3
Cash and cash equivalents at beginning of period			8,782.2			11,192.1

	Cash and cash equivalents at end of period	$	7,609.4		$	15,007.4

See Notes to Consolidated Financial Statements.


U.S. Bancorp	39

Notes to Consolidated Financial Statements

(Unaudited)


Note 1		Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States. In the opinion of management of U.S. Bancorp (the “Company”), all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Certain amounts in prior periods have been reclassified to conform to the current presentation.

Accounting policies for the lines of business are generally the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. Table 12 “Line of Business Financial Performance” provides details of segment results. This information is incorporated by reference into these Notes to Consolidated Financial Statements.


Note 2		Accounting Changes

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


Note 3		Discontinued Operations

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

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



		Three Months Ended		Six Months Ended
(Dollars in Millions)		June 30, 2003		June 30, 2003


Revenue		$	207.1	$	374.3
Noninterest expense			197.8		364.0

Income from discontinued operations			9.3		10.3
Costs of disposal			1.8		2.1
Income taxes			2.6		2.6

	Discontinued operations, net of tax	$	4.9	$	5.6

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


40	U.S. Bancorp

Jaffray Companies at the time of the distribution. Through June 30, 2004, the Company has paid approximately $.3 million to Piper Jaffray Companies under this agreement.


Note 4		Investment Securities

The detail of the amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale securities was as follows:



			June 30, 2004									December 31, 2003



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


Held-to-maturity (a)
	Mortgage-backed securities		$	12	$	—	$	—		$	12	$	14	$	—	$	—		$	14
	Obligations of state and political subdivisions			113		7		(4	)		116		138		11		(2	)		147

		Total held-to-maturity securities	$	125	$	7	$	(4	)	$	128	$	152	$	11	$	(2	)	$	161

Available-for-sale (b)
	U.S. Treasury and agencies		$	3,108	$	6	$	(77	)	$	3,037	$	1,634	$	10	$	(69	)	$	1,575
	Mortgage-backed securities			36,799		77		(1,093	)		35,783		40,229		203		(407	)		40,025
	Asset-backed securities			142		1		(1	)		142		250		5		(3	)		252
	Obligations of state and political subdivisions			260		8		—			268		335		13		—			348
	Other securities and investments			932		10		(12	)		930		993		9		(20	)		982

		Total available-for-sale securities	$	41,241	$	102	$	(1,183	)	$	40,160	$	43,441	$	240	$	(499	)	$	43,182


(a)		Held-to-maturity securities are carried at historical cost adjusted for amortization of premiums and accretion of discounts.
(b)		Available-for-sale securities are carried at fair value with unrealized net gains or losses reported within other comprehensive income in shareholders’ equity.

The fair value of available-for-sale securities shown above includes securities totaling $3.2 billion with unrealized losses of $239.3 million which have been in an unrealized loss position for greater than 12 months. All principal and interest payments are expected to be collected given the high credit quality of the U.S. government agency debt securities and bank holding company issuers and the Company’s ability and intent to hold the securities until such time as the value recovers or maturity. All other available-for-sale securities with unrealized losses have an aggregate fair value of $30.7 billion and have been in an unrealized loss position for less than 12 months and represent both fixed-rate securities and floating-rate securities containing caps with temporary impairment resulting from increases in interest rates since the purchase of the securities.

Securities carried at $33.3 billion at June 30, 2004, and $31.0 billion at December 31, 2003, were pledged to secure public, private and trust deposits and for other purposes required by law. Securities sold under agreements to repurchase were collateralized by securities and securities purchased under agreements to resell with an amortized cost of $4.5 billion and $3.6 billion at June 30, 2004 and December 31, 2003, respectively.

The following table provides information as to the amount of gross gains and losses realized through the sales of available-for-sale investment securities.



		Three Months Ended						Six Months Ended
		June 30,						June 30,



(Dollars in Millions)		2004			2003			2004			2003


Realized gains		$	.3		$	220.5		$	1.3		$	362.3
Realized losses			(172.0	)		(7.4	)		(173.0	)		(8.5	)

	Net realized gains (losses)	$	(171.7	)	$	213.1		$	(171.7	)	$	353.8

Income tax (benefit) on realized gains (losses)		$	(65.2	)	$	81.0		$	(65.2	)	$	134.4


U.S. Bancorp	41

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


Note 5		Loans

The composition of the loan portfolio was as follows:



				June 30, 2004					December 31, 2003



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


Commercial
	Commercial			$	35,170		28.6	%	$	33,536		28.4	%
	Lease financing				4,895		4.0			4,990		4.2

		Total commercial			40,065		32.6			38,526		32.6
Commercial real estate
	Commercial mortgages				20,382		16.6			20,624		17.4
	Construction and development				6,822		5.6			6,618		5.6

		Total commercial real estate			27,204		22.2			27,242		23.0
Residential mortgages
	Residential mortgages				8,420		6.9			7,332		6.2
	Home equity loans, first liens				5,960		4.8			6,125		5.2

		Total residential mortgages			14,380		11.7			13,457		11.4
Retail
	Credit card				6,079		4.9			5,933		5.0
	Retail leasing				6,640		5.4			6,029		5.1
	Home equity and second mortgages				14,017		11.4			13,210		11.2
	Other retail
		Revolving credit			2,544		2.1			2,540		2.1
		Installment			2,656		2.2			2,380		2.0
		Automobile			7,515		6.1			7,165		6.1
		Student			1,730		1.4			1,753		1.5

			Total other retail		14,445		11.8			13,838		11.7

		Total retail			41,181		33.5			39,010		33.0

			Total loans	$	122,830		100.0	%	$	118,235		100.0	%

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

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


Note 6		Mortgage Servicing Rights

The Company’s portfolio of residential mortgages serviced for others was $58.7 billion and $53.9 billion at June 30, 2004, and December 31, 2003, respectively.

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



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


Initial carrying value, net of amortization		$	954		$	830
Impairment valuation allowance			(91	)		(160	)

	Net carrying value	$	863		$	670


42	U.S. Bancorp

Changes in capitalized mortgage servicing rights are summarized as follows:


		Six Months Ended			Year Ended
(Dollars in Millions)		June 30, 2004			December 31, 2003


Balance at beginning of period			$670		$	642
	Rights purchased		76			55
	Rights capitalized		148			338
	Amortization		(93	)		(156	)
	Rights sold		—			—
	Repairment (impairment) (a)		62			(209	)

Balance at end of period			$863		$	670


(a)		Mortgage servicing rights reparation of $171.1 million and impairment of $196.3 million were recognized during the second quarter of 2004 and 2003, respectively.

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



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


Fair value	$	863		$	670
Expected weighted-average life (in years)		7.0			5.2
Discount rate		9.9	%		9.9	%

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



	Down Scenario						Up Scenario


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


Fair value	$	(119	)	$	(50	)		$86	$	133

The Company utilizes the investment securities 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 the 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 Mortgage Revenue Bond Programs (“MRBP”), government-related mortgages and conventional mortgages. The MRBP division specializes in servicing loans made under state and local housing authority programs. These programs provide mortgages to low and moderate income borrowers and are generally under government insured programs with down payment or closing cost assistance. The conventional and government servicing portfolios are predominantly comprised of fixed-rate agency loans (FNMA, FHLMC, GNMA, FHLB and various housing agencies) with limited adjustable-rate or jumbo mortgage loans.

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


(Dollars in Millions)	MRBP			Government			Conventional			Total


Servicing portfolio	$	7,696		$	8,872		$	42,107		$	58,675
Fair market value	$	116		$	159		$	588		$	863
Value (bps)		151			179			140			147
Weighted-average servicing fees (bps)		43			46			34			37
Multiple (value/servicing fees)		3.51			3.89			4.12			3.97
Weighted-average note rate		6.37	%		6.13	%		5.70	%		5.85	%
Age (in years)		3.5			2.0			1.4			1.8
Expected life (in years)		4.8			7.1			7.4			7.0
Discount rate		10.1	%		11.0	%		9.6	%		9.9	%


U.S. Bancorp	43


Note 7		Intangible Assets

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


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


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

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


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

Intangible assets consisted of the following:



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


Goodwill			—		—	$	6,226	$	6,025
Merchant processing contracts			8 years		AC		751		552
Core deposit benefits			10 years/6 years		SL/AC		376		417
Mortgage servicing rights			7 years		AC		863		670
Trust relationships			15 years/9 years		SL/AC		322		311
Other identified intangibles			8 years/9 years		SL/AC		163		174

	Total					$	8,701	$	8,149


(a)		Estimated life represents the amortization period for assets subject to the straight line method and the weighted-average amortization period for intangibles subject to accelerated methods. If more than one amortization method is used for a category, the estimated life for each method is calculated and reported separately.
(b)		Amortization methods: SL = straight line method AC = accelerated methods generally based on cash flows

Aggregate amortization and impairment expense consisted of the following:



		Three Months Ended					Six Months Ended
		June 30,					June 30,



(Dollars in Millions)		2004			2003		2004		2003


Merchant processing contracts		$	32.4		$	32.5	$	60.2	$	64.7
Core deposit benefits			20.3			22.1		41.2		44.2
Mortgage servicing rights (a)			(123.6	)		233.5		30.9		390.2
Trust relationships			11.9			13.4		23.7		26.6
Other identified intangibles			11.4			10.8		22.5		21.7

	Total	$	(47.6	)	$	312.3	$	178.5	$	547.4


(a)		Includes mortgage servicing rights reparation of $171.1 million and impairment of $196.3 million for the three months ended June 30, 2004 and 2003, respectively, and reparation of $61.8 million and impairment of $317.2 million for the six months ended June 30, 2004 and 2003, respectively.

Below is the estimated amortization expense for the years ending:


(Dollars in Millions)


Remaining 2004	$	247.0
2005		430.3
2006		361.6
2007		309.6
2008		252.4


44	U.S. Bancorp


Note 8		Junior Subordinated Debentures Issued to Unconsolidated Subsidiary Trusts

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

Trust

Preferred

Earliest

Issuance

Securities

Debentures

Rate

Redemption

Issuance Trust (Dollars in Millions)

Date

Amount

Amount (a)

Type (b)

Rate

Maturity Date

Date

Retail

USB Capital V

December 2001

300

309

Fixed

7.25

December 2031

December 7, 2006

USB Capital IV

November 2001

500

515

Fixed

7.35

November 2031

November 1, 2006

USB Capital III

May 2001

700

722

Fixed

7.75

May 2031

May 4, 2006

Institutional

Star Capital I

June 1997

150

155

Variable

2.29

June 2027

June 15, 2007

Mercantile Capital Trust I

February 1997

150

155

Variable

2.03

February 2027

February 1, 2007

USB Capital I

December 1996

300

309

Fixed

8.27

December 2026

December 15, 2006

Firstar Capital Trust I

December 1996

150

155

Fixed

8.32

December 2026

December 15, 2006

FBS Capital I

November 1996

300

309

Fixed

8.09

November 2026

November 15, 2006


(a)		Junior subordinated debentures issued to unconsolidated subsidiary trusts that are designated in fair value hedges at June 30 2004, are recorded on the balance sheet at fair value. Carrying value includes a fair value adjustment of $27 million related to hedges on certain junior subordinated debentures, as well as prepaid issuance fees of $(4) million.
(b)		The variable-rate Trust Preferred Securities and Debentures reprice quarterly based on three-month LIBOR.


Note 9		Shareholders’ Equity

At June 30, 2004, and December 31, 2003, the Company had authority to issue 4 billion shares of common stock and 10 million shares of preferred stock. The Company had 1,884.1 million and 1,922.9 million shares of common stock outstanding at June 30, 2004, and December 31, 2003, respectively.

On December 18, 2001, the Board of Directors approved an authorization to repurchase 100 million shares of outstanding common stock throughout 2003. In 2003, the Company repurchased 7.0 million shares of common stock under the plan, which expired in December of 2003. On December 16, 2003, the Board of Directors approved an authorization to repurchase 150 million shares of common stock during the following 24 months. This repurchase program replaced the Company’s December 18, 2001, program. In the first quarter of 2004, the Company purchased 33.8 million shares under the December 2003 plan. During the second quarter of 2004, the Company purchased an additional 20.8 million shares under the December 2003 plan.


U.S. Bancorp	45


Note 10		Earnings Per Share

The components of earnings per share were:



			Three Months Ended				Six Months Ended
			June 30,				June 30,



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


Income from continuing operations			$	1,036.9	$	915.0	$	2,045.3	$	1,799.1
	Income from discontinued operations (after-tax)			—		4.9		—		5.6

		Net income	$	1,036.9	$	919.9	$	2,045.3	$	1,804.7

Average common shares outstanding				1,891.6		1,922.3		1,903.5		1,920.6
Net effect of the assumed purchase of stock based on the treasury stock method for options and stock plans				21.8		9.3		23.8		8.0

Average diluted common shares outstanding				1,913.4		1,931.6		1,927.3		1,928.6

Earnings per share
	Income from continuing operations		$	.55	$	.48	$	1.07	$	.94
	Discontinued operations			—		—		—		—

		Net income	$	.55	$	.48	$	1.07	$	.94

Diluted earnings per share
	Income from continuing operations		$	.54	$	.47	$	1.06	$	.93
	Discontinued operations			—		.01		—		.01

		Net income	$	.54	$	.48	$	1.06	$	.94

For the three months ended June 30, 2004 and 2003, options to purchase 40 million and 94 million shares, respectively, and 40 million and 98 million shares for the six months ended 2004 and 2003, respectively, were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.


Note 11		Employee Benefits

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



		Three Months Ended						Six Months Ended
		June 30, 2004						June 30, 2004


					Post-						Post-
					Retirement						Retirement
		Pension			Medical			Pension			Medical
(Dollars in Millions)		Plans			Plans			Plans			Plans


Components of net periodic benefit cost (income)
	Service cost	$	14.7		$	1.0		$	29.3		$	1.9
	Interest cost		26.8			4.8			53.7			9.6
	Expected return on plan assets		(50.8	)		(.3	)		(101.6	)		(.7	)
	Net amortization and deferral		(1.6	)		(.1	)		(3.2	)		(.1	)
	Recognized actuarial loss		7.5			.9			15.1			1.8

Net periodic benefit cost (income)		$	(3.4	)	$	6.3		$	(6.7	)	$	12.5

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


46	U.S. Bancorp


Note 12		Income Taxes

The components of income tax expense were:



		Three Months Ended				Six Months Ended
		June 30,				June 30,



(Dollars in Millions)		2004		2003		2004		2003


Federal
Current		$	418.0	$	382.1	$	696.1	$	740.4
Deferred			67.5		53.9		133.3		108.4

	Federal income tax		485.5		436.0		829.4		848.8
State
Current			42.4		31.6		78.1		66.6
Deferred			12.2		12.6		24.4		26.6

	State income tax		54.6		44.2		102.5		93.2

	Total income tax provision	$	540.1	$	480.2	$	931.9	$	942.0

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



		Three Months Ended						Six Months Ended
		June 30,						June 30,


(Dollars in Millions)		2004			2003			2004			2003


Tax at statutory rate (35%)		$	551.9		$	488.3		$	1,042.0		$	959.4
State income tax, at statutory rates, net of federal tax benefit			35.5			29.2			66.6			62.1
Tax effect of
	Resolution of federal income tax examinations		—			—			(90.0	)		—
	Tax credits		(31.9	)		(27.2	)		(63.1	)		(53.8	)
	Tax-exempt interest, net		(5.5	)		(5.1	)		(10.9	)		(11.0	)
	Other items		(9.9	)		(5.0	)		(12.7	)		(14.7	)

Applicable income taxes		$	540.1		$	480.2		$	931.9		$	942.0

Included in the first quarter of 2004 was a reduction in income tax expense related to the resolution of federal income tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999. The resolution of these cycles was the result of a series of negotiations held between the Company and representatives of the Internal Revenue Service at both the examination and appellate levels. The resolution of these matters and the taxing authorities’ acceptance of submitted claims and tax return adjustments resulted in the reduction of estimated income tax liabilities.

The Company’s net deferred tax liability was $1,442.5 million at June 30, 2004, and $1,556.4 million at December 31, 2003.


Note 13		Guarantees and Contingent Liabilities

COMMITMENTS TO EXTEND CREDIT

Commitments to extend credit are legally binding and generally have fixed expiration dates or other termination clauses. The contractual amount represents the Company’s exposure to credit loss, in the event of default by the borrower. The Company manages this credit risk by using the same credit policies it applies to loans. Collateral is obtained to secure commitments based on management’s credit assessment of the borrower. The collateral may include marketable securities, receivables, inventory, equipment and real estate. Since the Company expects many of the commitments to expire without being drawn, total commitment amounts do not necessarily represent the Company’s future liquidity requirements. In addition, the commitments include consumer credit lines that are cancelable upon notification to the consumer.


U.S. Bancorp	47

LETTERS OF CREDIT

Standby letters of credit are commitments the Company issues to guarantee the performance of a customer to a third-party. The guarantees frequently support public and private borrowing arrangements, including commercial paper issuances, bond financings and other similar transactions. The Company issues commercial letters of credit on behalf of customers to ensure payment or collection in connection with trade transactions. In the event of a customer’s nonperformance, the Company’s credit loss exposure is the same as in any extension of credit, up to the letter’s contractual amount. Management assesses the borrower’s credit to determine the necessary collateral, which may include marketable securities, receivables, inventory, equipment and real estate. Since the conditions requiring the Company to fund letters of credit may not occur, the Company expects its liquidity requirements to be less than the total outstanding commitments. The maximum potential future payments guaranteed by the Company under standby letter of credit arrangements at June 30, 2004, were approximately $10.0 billion with a weighted-average term of approximately 23 months. The estimated fair value of standby letters of credit was approximately $76.6 million at June 30, 2004.

GUARANTEES

Guarantees are contingent commitments issued by the Company to customers or other third-parties. The Company’s guarantees primarily include parent guarantees related to subsidiaries’ third-party borrowing arrangements; third-party performance guarantees inherent in the Company’s business operations such as indemnified securities lending programs and merchant charge-back guarantees; indemnification or buy-back provisions related to certain asset sales; and contingent consideration arrangements related to acquisitions. For certain guarantees, the Company has recorded a liability related to the potential obligation, or has access to collateral to support the guarantee or through the exercise of other recourse provisions can offset some or all of the maximum potential future payments made under these guarantees. The estimated fair value of guarantees, other than standby letters of credit, was approximately $145 million at June 30, 2004.

Third-Party Borrowing Arrangements The Company provides guarantees to third-parties as a part of certain subsidiaries’ borrowing arrangements, primarily representing guaranteed operating or capital lease payments or other debt obligations with maturity dates extending through 2014. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $1.6 billion at June 30, 2004. The Company’s recorded liabilities as of June 30, 2004, included $35.5 million representing outstanding amounts owed to these third-parties and required to be recorded on the Company’s balance sheet in accordance with accounting principles generally accepted in the United States.

Commitments from Securities Lending The Company participates in securities lending activities by acting as the customer’s agent involving the loan or sale of securities. The Company indemnifies customers for the difference between the market value of the securities lent and the market value of the collateral received. Cash collateralizes these transactions. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $19.2 billion at June 30, 2004, and represented the market value of the securities lent to third-parties. At June 30, 2004, the Company held assets with a market value of $19.6 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 $644.6 million at June 30, 2004, and represented the total proceeds received from the buyer in these transactions where the buy-back or make-whole provisions have not yet expired. Recourse available to the Company includes guarantees from the Small Business Administration (for SBA loans sold), recourse against the correspondent that originated the loan or to the private mortgage issuer, the right to collect payments from the debtors, and/or the right to liquidate the underlying collateral, if any, and retain the proceeds. Based on its established loan-to-value guidelines, the Company believes the recourse available is sufficient to recover future payments, if any, under the loan buy-back guarantees.


48	U.S. Bancorp

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

A cardholder, through its issuing bank, generally has until the latter of up to four months after the date the transaction is processed or the receipt of the product or service to present a charge-back to the Company as the merchant processor. The absolute maximum potential liability is estimated to be the total volume of credit card transactions that meet the associations’ requirements to be valid charge-back transactions at any given time. Management estimates that the maximum potential exposure for charge-backs would approximate the total amount of merchant transactions processed through the credit card associations for the last four months. For the last four months this amount totaled approximately $46.6 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 June 30, 2004, the Company held $43.2 million of merchant escrow deposits as collateral.

The Company currently processes card transactions for several of the largest airlines in the United States. In the event of liquidation of these airlines, the Company could become financially liable for refunding tickets purchased through the credit card associations under the charge-back provisions. Charge-back risk related to an airline is evaluated in a manner similar to credit risk assessments and merchant processing contracts consider the potential risk of default. At June 30, 2004, the value of future delivery airline tickets purchased was approximately $2.0 billion, and the Company held collateral of $253.4 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 June 30, 2004, the Company had a recorded liability for potential losses of $29.0 million. In addition, the Company had a $58.2 million liability for guaranty obligations associated with its airline processing activities.

Other Guarantees The Company provides liquidity and credit enhancement facilities to a Company-sponsored conduit, as more fully described in the “Off-Balance Sheet Arrangements” section within Management’s Discussion and Analysis. Although management believes a draw against these facilities is remote, the maximum potential future payments guaranteed by the Company under these arrangements were approximately $6.5 billion at June 30, 2004. The recorded fair value of the Company’s liability for the credit enhancement recourse obligation and liquidity facilities was $38.2 million at June 30, 2004, and was included in other liabilities.

The Company guarantees payments to certain certificate holders of Company-sponsored investment trusts with varying termination dates extending through December 2004. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $42.4 million at June 30, 2004. At June 30, 2004, the Company had a recorded liability of $42.4 million, held $20.2 million in cash collateral and had other contractual sources of recourse available to it, including guarantees from third-parties and the underlying assets held by the investment trusts.

OTHER CONTINGENT LIABILITIES

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


U.S. Bancorp	49

terminated by the Company if there is a change in control event for Piper Jaffray Companies. Through June 30, 2004, the Company has paid approximately $.3 million to Piper Jaffray Companies under this agreement.

The Company is subject to various other litigation, investigations and legal and administrative cases and proceedings that arise in the ordinary course of its businesses. Due to their complex nature, it may be years before some matters are resolved. While it is impossible to ascertain the ultimate resolution or range of financial liability with respect to these contingent matters, the Company believes that the aggregate amount of such liabilities will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.


Note 14		Supplemental Disclosures to the Consolidated Financial Statements

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



			Six Months Ended
			June 30,



(Dollars in Millions)			2004			2003


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

		Net	$	302.5		$	—

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


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


Interest-bearing deposits		$	6	$	4
Federal funds sold			127		109
Securities purchased under agreements to resell			—		39

	Total money market investments	$	133	$	152


50	U.S. Bancorp

(This page intentionally left blank)


U.S. Bancorp	51

U.S. Bancorp

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



			For the Three Months Ended June 30,

			2004								2003


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


ASSETS
Taxable securities			$	42,102		$	438.7		4.17	%	$	35,517		$	422.4		4.76	%		18.5	%
Non-taxable securities				387			6.9		7.10			625			10.8		6.89			(38.1	)
Loans held for sale				1,987			27.3		5.49			3,728			51.8		5.56			(46.7	)
Loans (b)
	Commercial			39,330			542.3		5.54			41,702			584.5		5.62			(5.7	)
	Commercial real estate			27,116			372.7		5.53			27,089			400.5		5.93			.1
	Residential mortgages			14,052			199.5		5.69			11,012			172.3		6.27			27.6
	Retail			40,663			630.2		6.23			38,000			667.2		7.04			7.0

		Total loans		121,161			1,744.7		5.79			117,803			1,824.5		6.21			2.9
Other earning assets				1,353			25.6		7.61			1,752			25.0		5.74			(22.8	)

		Total earning assets		166,990			2,243.2		5.39			159,425			2,334.5		5.87			4.7
Allowance for loan losses				(2,289	)							(2,472	)							(7.4	)
Unrealized gain (loss) on available-for-sale securities				(729	)							694								*
Other assets (c)				26,458								29,408								(10.0	)

		Total assets	$	190,430							$	187,055								1.8

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits			$	30,607							$	32,515								(5.9	)
Interest-bearing deposits
	Interest checking			20,739			14.5		.28			18,090			21.6		.48			14.6
	Money market accounts			34,242			56.8		.67			31,134			84.0		1.08			10.0
	Savings accounts			5,936			3.6		.24			5,614			6.0		.43			5.7
	Time certificates of deposit less than $100,000			13,021			83.5		2.58			15,790			115.0		2.92			(17.5	)
	Time deposits greater than $100,000			12,571			46.9		1.50			13,008			61.9		1.91			(3.4	)

		Total interest-bearing deposits		86,509			205.3		.95			83,636			288.5		1.38			3.4
Short-term borrowings				15,310			58.9		1.55			8,982			38.9		1.74			70.5
Long-term debt				30,354			174.8		2.31			32,273			184.0		2.28			(5.9	)
Junior subordinated debentures				2,646			24.8		3.76			2,661			24.5		3.69			(.6	)

		Total interest-bearing liabilities		134,819			463.8		1.38			127,552			535.9		1.68			5.7
Other liabilities (d)				5,961								7,553								(21.1	)
Shareholders’ equity				19,043								19,435								(2.0	)

		Total liabilities and shareholders’ equity	$	190,430							$	187,055								1.8	%

Net interest income						$	1,779.4							$	1,798.6

Gross interest margin									4.01	%							4.19	%

Gross interest margin without taxable-equivalent increments									3.99								4.17

Percent of Earning Assets
Interest income									5.39	%							5.87	%
Interest expense									1.11								1.35

Net interest margin									4.28	%							4.52	%

Net interest margin without taxable-equivalent increments									4.26	%							4.50	%


*		Not meaningful
(a)		Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent.
(b)		Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
(c)		Includes approximately $1,434 million of earning assets from discontinued operations in second quarter 2003.
(d)		Includes approximately $1,112 million of interest-bearing liabilities from discontinued operations in second quarter 2003.


52	U.S. Bancorp

U.S. Bancorp

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



			For the Six Months Ended June 30,

			2004								2003


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


ASSETS
Taxable securities			$	43,205		$	902.7		4.18	%	$	34,518		$	818.5		4.74	%		25.2	%
Non-taxable securities				412			14.6		7.09			669			23.4		6.99			(38.4	)
Loans held for sale				1,716			47.2		5.50			3,884			111.4		5.74			(55.8	)
Loans (b)
	Commercial			38,930			1,087.6		5.61			41,646			1,172.9		5.67			(6.5	)
	Commercial real estate			27,113			746.7		5.54			26,937			801.0		6.00			.7
	Residential mortgages			13,831			397.0		5.76			10,570			334.5		6.35			30.9
	Retail			40,111			1,265.1		6.34			37,908			1,356.3		7.22			5.8

		Total loans		119,985			3,496.4		5.86			117,061			3,664.7		6.31			2.5
Other earning assets				1,356			47.6		7.05			1,652			55.0		6.71			(17.9	)

		Total earning assets		166,674			4,508.5		5.43			157,784			4,673.0		5.96			5.6
Allowance for loan losses				(2,360	)							(2,489	)							(5.2	)
Unrealized gain (loss) on available-for-sale securities				(372	)							653								*
Other assets (c)				26,104								29,427								(11.3	)

		Total assets	$	190,046							$	185,375								2.5

Liabilities and Shareholders’ Equity
Noninterest-bearing deposits			$	29,815							$	32,669								(8.7	)
Interest-bearing deposits
	Interest checking			20,844			33.3		.32			17,814			44.1		.50			17.0
	Money market accounts			34,320			124.2		.73			29,915			159.5		1.07			14.7
	Savings accounts			5,917			8.1		.27			5,444			11.3		.42			8.7
	Time certificates of deposit less than $100,000			13,319			174.1		2.63			16,500			248.2		3.03			(19.3	)
	Time deposits greater than $100,000			12,352			92.6		1.51			13,642			132.0		1.95			(9.5	)

		Total interest-bearing deposits		86,752			432.3		1.00			83,315			595.1		1.44			4.1
Short-term borrowings				14,365			108.8		1.52			9,096			78.4		1.74			57.9
Long-term debt				31,140			360.7		2.33			30,888			368.3		2.40			.8
Junior subordinated debentures				2,636			48.3		3.67			2,820			55.9		3.97			(6.5	)

		Total interest-bearing liabilities		134,893			950.1		1.42			126,119			1,097.7		1.75			7.0
Other liabilities (d)				6,024								7,465								(19.3	)
Shareholders’ equity				19,314								19,122								1.0

		Total liabilities and shareholders’ equity	$	190,046							$	185,375								2.5	%

Net interest income						$	3,558.4							$	3,575.3

Gross interest margin									4.01	%							4.21	%

Gross interest margin without taxable-equivalent increments									3.99								4.19

Percent of Earning Assets
Interest income									5.43	%							5.96	%
Interest expense									1.15								1.40

Net interest margin									4.28	%							4.56	%

Net interest margin without taxable-equivalent increments									4.26	%							4.54	%


*		Not meaningful
(a)		Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent.
(b)		Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
(c)		Includes approximately $1,530 million of earning assets from discontinued operations in 2003.
(d)		Includes approximately $1,094 million of interest-bearing liabilities from discontinued operations in 2003.


U.S. Bancorp	53

Part II — Other Information

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities — Refer to the “Capital Management” section within Management’s Discussion and Analysis in Part I for information regarding shares repurchased by the Company during the second quarter of 2004.

Item 4. Submission of Matters to a Vote of Security Holders — The information contained in Part II, Item 4 of the Company’s Form 10-Q for the quarterly period ended March 31, 2004 is incorporated herein by reference.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


10.1		Amendment of Employment Agreement with Jerry A. Grundhofer.
12		Computation of Ratio of Earnings to Fixed Charges.
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

During the quarter ended June 30, 2004, and through the date of this report, the Company filed the following Current Reports on Form 8-K:

• Form 8-K dated April 20, 2004, relating to first quarter 2004 earnings.

• Form 8-K dated July 20, 2004, relating to second quarter 2004 earnings.


54	U.S. Bancorp

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

U.S. BANCORP

By: /s/ TERRANCE R. DOLAN

Terrance R. Dolan

Executive Vice President and Controller

(Chief Accounting Officer and Duly Authorized Officer)

DATE: August 9, 2004


U.S. Bancorp	55

EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges


			Three Months Ended		Six Months Ended
(Dollars in Millions)			June 30, 2004		June 30, 2004


Earnings
1.	Net income		$	1,036.9	$	2,045.3
2.	Applicable income taxes			540.1		931.9

3.	Income before income taxes (1 + 2)		$	1,577.0	$	2,977.2

4.	Fixed charges:
	a.	Interest expense excluding interest on deposits	$	258.5	$	517.8
	b.	Portion of rents representative of interest and amortization of debt expense		17.2		34.3

	c.	Fixed charges excluding interest on deposits (4a + 4b)		275.7		552.1
	d.	Interest on deposits		205.3		432.3

	e.	Fixed charges including interest on deposits (4c + 4d)	$	481.0	$	984.4

5.	Amortization of interest capitalized		$	—	$	—
6.	Earnings excluding interest on deposits (3 + 4c + 5)			1,852.7		3,529.3
7.	Earnings including interest on deposits (3 + 4e + 5)			2,058.0		3,961.6
8.	Fixed charges excluding interest on deposits (4c)			275.7		552.1
9.	Fixed charges including interest on deposits (4e)			481.0		984.4

Ratio of Earnings to Fixed Charges
10.	Excluding interest on deposits (line 6/ line 8)			6.72		6.39
11.	Including interest on deposits (line 7/ line 9)			4.28		4.02


56	U.S. Bancorp

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Jerry A. Grundhofer, Chief Executive Officer of U.S. Bancorp, a Delaware corporation, certify that:

(1) I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

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

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

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

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

/s/ JERRY A. GRUNDHOFER

Jerry A. Grundhofer

Chief Executive Officer

Dated: August 9, 2004


U.S. Bancorp	57

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, David M. Moffett, Chief Financial Officer of U.S. Bancorp, a Delaware corporation, certify that:

/s/ DAVID M. MOFFETT

David M. Moffett

Chief Financial Officer

Dated: August 9, 2004


58	U.S. Bancorp

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

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

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


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

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

Dated: August 9, 2004


U.S. Bancorp	59



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Corporate Information

Executive Offices

U.S. Bancorp

800 Nicollet Mall

Minneapolis, MN 55402

Common Stock Transfer Agent and Registrar

Mellon Investor Services acts as our transfer agent and registrar, dividend paying agent and investor services program administrator, and maintains all shareholder records for the corporation. Inquiries related to shareholder records, stock transfers, changes of ownership, lost stock certificates, changes of address and dividend payment should be directed to the transfer agent at:

Mellon Investor Services

P.O. Box 3315

South Hackensack, NJ 07606-1915

Phone: 888-778-1311 or 201-329-8660

Internet: melloninvestor.com

For Registered or Certified Mail:

Mellon Investor Services

85 Challenger Road

Ridgefield Park, NJ 07660

Telephone representatives are available weekdays from 8:00 a.m. to 6:00 p.m. Central Time, and automated support is available 24 hours a day, 7 days a week. Specific information about your account is available on Mellon’s Internet site by clicking on the “Investor ServiceDirect^SM” link.

Independent Auditors

Ernst & Young LLP serves as the independent auditors of U.S. Bancorp.

Common Stock Listing and Trading

U.S. Bancorp common stock is listed and traded on the New York Stock Exchange under the ticker symbol USB.

Dividends and Reinvestment Plan

U.S. Bancorp currently pays quarterly dividends on our common stock on or about the 15th day of January, April, July and October, subject to prior approval by our Board of Directors. U.S. Bancorp shareholders can choose to participate in an investor services program that provides automatic reinvestment of dividends and/or optional cash purchase of additional shares of U.S. Bancorp common stock. For more information, please contact our transfer agent, Mellon Investor Services. See above.

Investment Community Contacts

Howell D. McCullough

Senior Vice President, Investor Relations

howell.mccullough@usbank.com

Phone: 612-303-0786

Judith T. Murphy

Vice President, Investor Relations

judith.murphy@usbank.com

Phone: 612-303-0783

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)


	•	Form 8-K dated April 20, 2004, relating to first quarter 2004 earnings.
	•	Form 8-K dated July 20, 2004, relating to second quarter 2004 earnings.



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


(1)	I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp;

(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


	(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


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


	(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


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

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