U.S. Bancorp - 10-Q quarterly report FY

Table of Contents

UNITED STATES

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

For the quarterly period ended June 30, 2003

OR

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

For the transition period from (not applicable)

Commission file number 1-6880

U.S. BANCORP

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

800 Nicollet Mall

612-973-1111

(not applicable)

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

YES   X  NO        

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

Class Common Stock, $.01 Par Value		Outstanding as of July 31, 2003 1,926,367,301 shares

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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)
Part II -- Other Information
Corporate Information

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Table of Contents

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		10
	d)		Accounting Changes		29
	e)		Critical Accounting Policies		29
	f)		Controls and Procedures (Item 4)		31
2) Quantitative and Qualitative Disclosures About Market Risk / Corporate Risk Profile (Item 3)
	a)		Overview		12
	b)		Credit Risk Management		12
	c)		Residual Risk Management		16
	d)		Operational Risk Management		16
	e)		Interest Rate Risk Management		17
	f)		Market Risk Management		19
	g)		Liquidity Risk Management		20
	h)		Capital Management		22
3) Line of Business Financial Review					23
4) Financial Statements (Item 1)					32
Part II — Other Information
1) Exhibits and Reports on Form 8-K (Item 6)					50
2) Signature					50
3) Exhibit 12 — Computation of Ratio of Earnings to Fixed Charges					51
4) Exhibit 31.1 — Section 302 CEO Certification					52
5) Exhibit 31.2 — Section 302 CFO Certification					53
6) Exhibit 32.1 — Section 906 CEO Certification					54
7) Exhibit 32.2 — Section 906 CFO Certification					55

Forward-Looking Statements

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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)			2003				2002				Change				2003				2002				Change
Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)			$	1,805.9			$	1,689.8				6.9	%		$	3,589.7			$	3,360.2				6.8	%
Noninterest income				1,452.9				1,413.2				2.8				2,835.1				2,702.1				4.9
Securities gains, net				213.1				30.6				*				353.8				74.7				*
	Total net revenue			3,471.9				3,133.6				10.8				6,778.6				6,137.0				10.5
Noninterest expense				1,696.5				1,526.9				11.1				3,270.6				2,969.8				10.1
Provision for credit losses				323.0				335.0				(3.6)				658.0				670.0				(1.8	)
	Income before taxes and cumulative effect of change in accounting principles			1,452.4				1,271.7				14.2				2,850.0				2,497.2				14.1
Taxable-equivalent adjustment				7.6				9.0				(15.6)				15.9				18.1				(12.2	)
Applicable income taxes				491.2				439.6				11.7				969.3				862.8				12.3
Income before cumulative effect of change in accounting principles				953.6				823.1				15.9				1,864.8				1,616.3				15.4
Cumulative effect of change in accounting principles (after-tax)				—				—				—				—				(37.2	)			*
	Net income		$	953.6			$	823.1				15.9			$	1,864.8			$	1,579.1				18.1
Per Common Share
Earnings per share before cumulative effect of change in accounting principles			$	.50			$	.43				16.3	%		$	.97			$	.84				15.5	%
Diluted earnings per share before cumulative effect of change in accounting principles				.49				.43				14.0				.97				.84				15.5
Earnings per share				.50				.43				16.3				.97				.82				18.3
Diluted earnings per share				.49				.43				14.0				.97				.82				18.3
Dividends declared per share				.205				.195				5.1				.41				.39				5.1
Book value per share, period end				9.97				8.70				14.6
Market value per share, period end				24.50				23.35				4.9
Average shares outstanding				1,922.3				1,913.2				.5				1,920.6				1,916.5				.2
Average diluted shares outstanding				1,932.8				1,926.9				.3				1,929.7				1,928.5				.1
Financial Ratios
Return on average assets				2.04	%			1.95	%							2.03	%			1.89	%
Return on average equity				20.0				20.0								20.0				19.5
Net interest margin (taxable-equivalent basis)				4.50				4.59								4.53				4.60
Efficiency ratio (b)				52.1				49.2								50.9				49.0
Average Balances
Loans			$	117,803			$	114,017				3.3	%		$	117,062			$	113,866				2.8	%
Loans held for sale				3,728				2,142				74.0				3,884				2,248				72.8
Investment securities				36,142				28,016				29.0				35,187				27,325				28.8
Earning assets				160,859				147,641				9.0				159,314				146,797				8.5
Assets				187,055				169,147				10.6				185,375				168,466				10.0
Noninterest-bearing deposits				32,515				27,267				19.2				32,669				27,375				19.3
Deposits				116,151				102,450				13.4				115,984				102,232				13.5
Short-term borrowings				9,879				11,650				(15.2)				9,975				13,099				(23.8	)
Long-term debt				32,488				30,152				7.7				31,103				28,311				9.9
Total shareholders’ equity				19,094				16,475				15.9				18,784				16,318				15.1
			June 30, 2003				December 31, 2002
Period End Balances
Loans			$	119,423			$	116,251				2.7	%
Allowance for credit losses				2,368				2,422				(2.2	)
Investment securities				35,578				28,488				24.9
Assets				194,899				180,027				8.3
Deposits				126,327				115,534				9.3
Long-term debt				31,379				28,588				9.8
Total shareholders’ equity				19,180				18,101				6.0
Regulatory capital ratios
	Tangible common equity			5.8	%			5.6	%
	Tier 1 capital			8.3				7.8
	Total risk-based capital			12.8				12.2
	Leverage			7.6				7.5

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

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Management’s Discussion and Analysis" -->

OVERVIEW

Earnings SummaryU.S. Bancorp and its subsidiaries (the “Company”) reported net income of $953.6 million for the second quarter of 2003, or $.49 per diluted share, compared with $823.1 million, or $.43 per diluted share, for the second quarter of 2002. Return on average assets and return on average equity were 2.04 percent and 20.0 percent, respectively, for the second quarter of 2003, compared with returns of 1.95 percent and 20.0 percent, respectively, for the second quarter of 2002. The Company’s results for the second quarter of 2003 improved over the second quarter of 2002, primarily due to growth in net revenue and a slight decline in credit costs, partially offset by a modest increase in expense. A notable item in the second quarter of 2003 was gains on the sale of securities of $213.1 million, an increase of $182.5 million over the second quarter of 2002. The gains on the sale of securities represent an economic hedge to a mortgage servicing rights (“MSR”) impairment of $196.3 million recognized in the second quarter of 2003, caused by declining interest rates and related prepayments. Net income for the second quarter of 2003 also included after-tax merger and restructuring-related items of $7.2 million ($10.8 million on a pre-tax basis), compared with after-tax merger and restructuring-related items of $46.7 million ($71.6 million on a pre-tax basis) for the second quarter of 2002. The $60.8 million decline in pre-tax merger and restructuring-related charges was primarily due to the completion of integration activities associated with the merger of Firstar Corporation (“Firstar”) and the former U.S. Bancorp (“USBM”). Refer to the “Merger and Restructuring-Related Items” section for further discussion on merger and restructuring-related items.

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4	U.S. Bancorp

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

Planned Spin-Off of Piper Jaffray CompaniesOn February 19, 2003, the Company announced that its Board of Directors approved a plan to effect a spin-off of its capital markets business unit, including the investment banking and brokerage activities primarily conducted by its wholly-owned subsidiary, U.S. Bancorp Piper Jaffray Companies (“Piper Jaffray Companies”). As of December 31, 2002, Piper Jaffray Companies had assets of $2.1 billion. During 2002, Piper Jaffray Companies generated revenue of $729.1 million (5.7 percent of total consolidated revenue) and contributed $.1 million of net income, representing less than 1 percent of the Company’s consolidated net income.

STATEMENT OF INCOME ANALYSIS

Net Interest IncomeThe second quarter of 2003 net interest income, on a taxable-equivalent basis, was $1,805.9 million, compared with $1,689.8 million for the second quarter of 2002, which represented a $116.1 million (6.9 percent) increase over 2002. Year-to-date net interest income, on a taxable-equivalent basis, was $3,589.7 million, compared with $3,360.2 million for the first six months of 2002, which represented a $229.5 million (6.8 percent) increase from a year ago. Average earning assets in the second quarter and first six months of 2003 increased $13.2 billion (9.0 percent) and $12.5 billion (8.5 percent), respectively, over the comparable periods of 2002. The increase in net interest income for the second quarter and first six months of 2003 was driven by an increase in average earning assets, growth in net free funds and favorable changes in the Company’s funding mix. This

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Table 2		Analysis of Net Interest Income

			Three Months Ended												Six Months Ended
			June 30,												June 30,
(Dollars in Millions)			2003				2002				Change				2003				2002				Change
Components of net interest income
	Income on earning assets (taxable-equivalent basis) (a)		$	2,347.2			$	2,384.6			$	(37.4	)		$	4,698.2			$	4,756.3			$	(58.1	)
	Expense on interest-bearing liabilities			541.3				694.8				(153.5	)			1,108.5				1,396.1				(287.6	)
Net interest income (taxable-equivalent basis)			$	1,805.9			$	1,689.8			$	116.1			$	3,589.7			$	3,360.2			$	229.5
Net interest income, as reported			$	1,798.3			$	1,680.8			$	117.5			$	3,573.8			$	3,342.1			$	231.7
Average yields and rates paid
	Earning assets yield (taxable-equivalent basis)			5.85	%			6.47	%			(.62	)%			5.93	%			6.52	%			(.59	)%
	Rate paid on interest-bearing liabilities			1.69				2.32				(.63	)			1.76				2.36				(.60	)
Gross interest margin (taxable-equivalent basis)				4.16	%			4.15	%			.01	%			4.17	%			4.16	%			.01	%
Net interest margin (taxable-equivalent basis)				4.50	%			4.59	%			(.09	)%			4.53	%			4.60	%			(.07	)%
Average balances
	Investment securities		$	36,142			$	28,016			$	8,126			$	35,187			$	27,325			$	7,862
	Loans			117,803				114,017				3,786				117,062				113,866				3,196
	Earning assets			160,859				147,641				13,218				159,314				146,797				12,517
	Interest-bearing liabilities			128,664				119,851				8,813				127,213				119,119				8,094
	Net free funds (b)			32,195				27,790				4,405				32,101				27,678				4,423

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

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Provision for Credit LossesThe provision for credit losses was $323.0 million and $335.0 million for the second quarter of 2003 and 2002, respectively, a decrease of $12.0 million (3.6 percent). For the first six months of 2003 and 2002, the provision for credit losses was $658.0 million and $670.0 million, respectively, a decrease of $12.0 million (1.8 percent). Refer to the “Corporate Risk Profile” section for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Noninterest IncomeNoninterest income during the second quarter of 2003 was $1,666.0 million, an increase of $222.2 million (15.4 percent) from the second quarter of 2002. Noninterest income for the first six months of 2003 was $3,188.9 million, compared with $2,776.8 million for the first six months of 2002, which represented an increase of $412.1 million (14.8 percent). Included in noninterest income during the second quarter and first six months of 2003 were net securities gains of $213.1 million and $353.8 million, respectively, compared with net securities gains of $30.6 million and $74.7 million, respectively for the second quarter and first six months of 2002. During a declining rate environment, the Company utilizes securities gains generated by its

Table 3		Noninterest Income

			Three Months Ended												Six Months Ended
			June 30,												June 30,
											Percent												Percent
(Dollars in Millions)			2003				2002				Change				2003				2002				Change
Credit and debit card revenue			$	142.3			$	131.2				8.5	%		$	269.7			$	240.5				12.1	%
Corporate payment products revenue				90.9				82.5				10.2				176.9				157.7				12.2
ATM processing services				36.0				33.5				7.5				72.9				64.4				13.2
Merchant processing services				141.8				144.4				(1.8	)			269.1				278.0				(3.2	)
Trust and investment management fees				241.9				234.9				3.0				472.2				459.2				2.8
Deposit service charges				184.9				173.3				6.7				353.6				329.0				7.5
Cash management fees				111.8				104.3				7.2				223.8				208.5				7.3
Commercial products revenue				100.0				123.7				(19.2	)			204.2				245.9				(17.0	)
Mortgage banking revenue				90.3				78.0				15.8				185.7				130.0				42.8
Trading account profits and commissions				67.6				49.5				36.6				128.5				99.4				29.3
Investment products fees and commissions				109.2				107.4				1.7				209.5				218.5				(4.1	)
Investment banking revenue				56.8				70.5				(19.4	)			94.4				123.7				(23.7	)
Securities gains, net				213.1				30.6				*				353.8				74.7				*
Other				79.4				80.0				(.8	)			174.6				147.3				18.5
	Total noninterest income		$	1,666.0			$	1,443.8				15.4	%		$	3,188.9			$	2,776.8				14.8	%

*		Not meaningful

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Noninterest ExpenseSecond quarter of 2003 noninterest expense was $1,696.5 million, an increase of $169.6 million (11.1 percent) from the second quarter of 2002. For the first six months of 2003, noninterest expense was $3,270.6 million, an increase of $300.8 million (10.1 percent) from the first six months

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Pension PlansBecause of the long-term nature of pension plan operations and liabilities, the accounting for pensions is complex and can be impacted by several factors, including accounting methods, investment and funding policies and the plan’s actuarial assumptions. The Company’s pension accounting policies comply with Statement of Financial Accounting Standards No. 87, “Employer’s Accounting for Pension Plans” (“SFAS 87”), and reflect the long-term nature of benefit obligations and the investment horizon of plan assets. The Company has an established process for evaluating the plans, their performance and significant plan assumptions, including the assumed discount rate and the long-term rate of return (“LTROR”). At least annually, an independent consultant is engaged to assist U.S. Bancorp’s Compensation Committee in evaluating plan objectives, investment policies considering its long-term investment time horizon and asset allocation strategies, funding policies and significant plan assumptions. Refer to the Company’s 2002 Annual Report on Form 10-K for a detailed discussion relating to the Company’s pension plan policies.

Table 4		Noninterest Expense

			Three Months Ended												Six Months Ended
			June 30,												June 30,
											Percent												Percent
(Dollars in Millions)			2003				2002				Change				2003				2002				Change
Compensation and related benefits			$	720.3			$	698.7				3.1	%		$	1,431.3			$	1,383.4				3.5	%
Net occupancy and equipment				173.1				178.8				(3.2	)			348.7				355.8				(2.0	)
Professional services				37.9				36.2				4.7				66.9				63.7				5.0
Marketing and business development				58.1				50.8				14.4				94.4				92.4				2.2
Technology and communications				117.9				108.4				8.8				236.3				217.6				8.6
Postage, printing and supplies				64.8				62.6				3.5				128.9				129.9				(.8	)
Intangibles				312.3				104.7				*				547.4				184.9				*
Merger and restructuring-related charges				10.8				71.6				(84.9	)			28.4				145.8				(80.5	)
Other				201.3				215.1				(6.4	)			388.3				396.3				(2.0	)
	Total noninterest expense		$	1,696.5			$	1,526.9				11.1	%		$	3,270.6			$	2,969.8				10.1	%
Efficiency ratio (a)				52.1	%			49.2	%							50.9	%			49.0	%

*		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.

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		Combined or Weighted Plan
		Assumptions
						Preliminary				As Reported
		2003				2003				2002
Expected long-term return on plan assets (a)			8.9	%			9.9	%			10.9	%
Discount rate in determining benefit obligations			6.8				6.8				7.2
Rate of increase in future compensation			3.5				3.5				3.5

(a)		The weighted rates for 2002 represent a blended rate utilizing the original 2002 assumption of 11.9 percent for the first six months of 2002 and the 2003 preliminary rate of 9.9 percent for the second six months of 2002. The preliminary rates for 2003 represented the most recent information available at the re-measurement date.

Merger and Restructuring-Related ItemsNoninterest expense in the second quarter and first six months of 2003 included merger and restructuring-related items of $10.8 million and $28.4 million, respectively, compared with $71.6 million and $145.8 million, respectively, for the same periods of 2002. For the second quarter and first six months of 2003, total merger and restructuring-related items primarily represented system conversions associated with the acquisitions of NOVA, Bay View Bank branches and State Street Corporate Trust. For the second quarter of 2002, merger and restructuring-related items included $60.5 million of charges associated with the Firstar/ USBM merger and $11.1 million associated with the integration of NOVA and other smaller acquisitions. For the first six months of 2002, merger and restructuring-related items included $124.9 million of charges associated with the Firstar/ USBM merger and $20.9 million associated with NOVA and other smaller acquisitions.

Income Tax ExpenseThe provision for income taxes was $491.2 million (an effective rate of 34.0 percent) for the second quarter of 2003 and $969.3 million (an effective rate of 34.2 percent) for the first six months of 2003, compared with $439.6 million (an effective rate of 34.8 percent) and $862.8 million (an effective rate of 34.8 percent) for the same periods of 2002. The improvement in the effective tax rate primarily reflected a change in unitary state tax apportionment factors driven by a shift in business mix as a result of the impact of acquisitions, market demographics and the mix of product revenue.

BALANCE SHEET ANALYSIS

Loans The Company’s total loan portfolio was $119.4 billion at June 30, 2003, compared with $116.3 billion at December 31, 2002, an increase of $3.1 billion (2.7 percent). The increase in total loans was driven by growth in residential mortgages and automobile loans. Commercial loans, including lease financing, totaled $42.2 billion at June 30, 2003, compared with $41.9 billion at December 31, 2002, an increase of $294 million (.7 percent). The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction loans, was $27.3 billion at June 30, 2003, compared with $26.9 billion at December 31, 2002, an increase of $392 million (1.5 percent).

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Loans Held for SaleAt June 30, 2003, loans held for sale, consisting of residential mortgages to be sold in the secondary markets, were $3.8 billion, compared with $4.2 billion at December 31, 2002. The $.4 billion (8.8 percent) decrease, despite strong mortgage banking activities, was the result of the timing of loan originations and sales in the first six months of 2003.

Investment SecuritiesAt June 30, 2003, investment securities, both available-for-sale and held-to-maturity, totaled $35.6 billion, compared with $28.5 billion at December 31, 2002. The $7.1 billion (24.9 percent) increase reflected the reinvestment of average deposit growth, partially offset by the sale of $11.9 billion of fixed-rate securities during the first six months of 2003. At June 30, 2003, approximately 16.0 percent of the investment securities portfolio represented adjustable-rate financial instruments, compared with 18.6 percent as of December 31, 2002.

Deposits Total deposits were $126.3 billion at June 30, 2003, compared with $115.5 billion at December 31, 2002, an increase of $10.8 billion (9.3 percent). The increase in total deposits was primarily the result of an increase in noninterest-bearing deposits and money market deposits, partially offset by a decline in time deposits greater than $100,000 and time certificates of deposit less than $100,000. Noninterest-bearing deposits were $44.5 billion at June 30, 2003, compared with $35.1 billion at December 31, 2002, an increase of $9.4 billion (26.7 percent), primarily due to the timing of seasonal corporate trust and government deposits. Due to the short duration of these deposits, the impact on the average balance of noninterest-bearing deposits in the second quarter of 2003 was not material and is not expected to significantly increase average deposits in the third quarter of 2003. These short-term deposits also contributed to the increase in total assets as the funds were invested in short-term money market investments.

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 $7.4 billion at June 30, 2003, compared with $7.8 billion at December 31, 2002. Short-term funding is managed to levels deemed appropriate given alternative funding sources. The decrease of $.4 billion (5.4 percent) in short-term borrowings reflected the impact of funding earning assets through growth in deposits and a shift toward longer-term funding sources. Long-term debt was $31.4 billion at June 30, 2003, compared with $28.6 billion at December 31, 2002. The $2.8 billion (9.8 percent) increase in long-term debt was driven by the issuance of $7.4 billion of medium- and long-term notes and bank notes during the first six months of 2003. The issuance of long-term debt was partially offset by maturities of $4.8 billion during the first six months of 2003. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

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CORPORATE RISK PROFILE

Overview Managing risks is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit, residual, operational, interest rate, market and liquidity. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Residual risk is the potential reduction in the end-of-term value of leased assets or the residual cash flows related to asset securitization and other off-balance sheet structures. Operational risk includes risks related to fraud, legal and compliance risk, processing errors, technology and breaches of internal controls. 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 ManagementThe 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. The Company utilizes a credit risk rating system to measure the credit quality of individual commercial loan transactions and regularly forecasts potential changes in risk ratings and nonperforming status. In the Company’s retail banking operations, standard credit scoring systems are used to assess consumer credit risks and to price consumer products accordingly. The Company also engages in non-lending activities that may give rise to credit risk, including interest rate swap contracts for balance sheet hedging purposes, foreign exchange transactions and interest rate swap contracts for customers, settlement risk and the processing of credit card transactions for merchants. These activities are also subject to credit review, analysis and approval processes.

Analysis of Net Loan Charge-offs Total loan net charge-offs were $322.9 million and $656.7 million during the second quarter and first six months of 2003, respectively, compared with net charge-offs of $330.5 million and $665.5 million, respectively, for the same periods of 2002. The ratio of total loan net charge-offs to average loans in the second quarter and first six months of 2003 was 1.10 percent and 1.13 percent, respectively, compared with 1.16 percent and 1.18 percent, respectively, for the same periods of 2002. Management believes the overall credit quality of the loan portfolio has improved as a result of actions taken by the Company; however, net charge-offs may be volatile during the second half of 2003.

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Analysis of Nonperforming Assets Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms and other real estate and other nonperforming assets owned by the Company. Interest payments on nonperforming assets are typically applied against the principal balance and not recorded as income. At June 30, 2003, total nonperforming assets were $1,359.7 million, compared with $1,373.5 million at December 31, 2002. The ratio of total nonperforming assets to total loans and other real estate decreased to 1.14 percent at June 30, 2003, compared with 1.18 percent at December 31, 2002. While nonperforming assets levels have declined, the relative level of nonperforming assets reflects the general impact of soft economic conditions during the past two years, specific weakness in the communications, transportation and manufacturing sectors, and the more pronounced affect of the economy on highly leveraged enterprise value refinancings. The Company expects nonperforming assets to remain relatively stable given current market conditions.

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

					Three Months Ended								Six Months Ended
					June 30,								June 30,
					2003				2002				2003				2002
Commercial
	Commercial					1.35	%			1.14	%			1.44	%			1.19	%
	Lease financing					2.11				2.52				1.94				2.39
		Total commercial				1.44				1.32				1.50				1.34
Commercial real estate
	Commercial mortgages					.19				.13				.12				.16
	Construction and development					.14				.02				.10				.07
		Total commercial real estate				.17				.10				.12				.14
Residential mortgages						.24				.19				.24				.16
Retail
	Credit card					4.80				5.23				4.98				5.03
	Retail leasing					.88				.62				.93				.73
	Home equity and second mortgages					.72				.77				.74				.81
	Other retail					1.59				2.24				1.64				2.23
		Total retail				1.63				1.93				1.69				1.94
			Total loans			1.10	%			1.16	%			1.13	%			1.18	%

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Table 6		Nonperforming Assets (a)

					June 30,				December 31,
(Dollars in Millions)					2003				2002
Commercial
	Commercial				$	795.2			$	760.4
	Lease financing					126.6				166.7
		Total commercial				921.8				927.1
Commercial real estate
	Commercial mortgages					182.0				174.6
	Construction and development					35.3				57.5
		Total commercial real estate				217.3				232.1
Residential mortgages						56.0				52.0
Retail
	Retail leasing					.5				1.0
	Other retail					23.7				25.1
		Total retail				24.2				26.1
			Total nonperforming loans			1,219.3				1,237.3
Other real estate						71.5				59.5
Other assets						68.9				76.7
			Total nonperforming assets		$	1,359.7			$	1,373.5
Restructured loans accruing interest (b)					$	6.0			$	1.4
Accruing loans 90 days or more past due (c)					$	360.7			$	426.4
Nonperforming loans to total loans						1.02	%			1.06	%
Nonperforming assets to total loans plus other real estate						1.14	%			1.18	%

Delinquent Loan Ratios

(as a percent of ending loan balances)					June 30,				December 31,
90 days or more past due excluding nonperforming loans					2003				2002
Commercial
Commercial						.09	%			.14	%
Lease financing						.08				.10
Total commercial						.09				.14
Commercial real estate
Commercial mortgages						.01				.03
Construction and development						.06				.07
Total commercial real estate						.02				.04
Residential mortgages						.65				.90
Retail
Credit card						1.90				2.09
Retail leasing						.19				.19
Other retail						.47				.54
Total retail						.63				.72
Total loans						.30	%			.37	%

			June 30,				December 31,
90 days or more past due including nonperforming loans			2003				2002
Commercial				2.27	%			2.35	%
Commercial real estate				.82				.90
Residential mortgages				1.13				1.44
Retail				.70				.79
	Total loans			1.32	%			1.43	%

(a)		Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b)		Nonaccrual restructured loans are included in the respective nonperforming loan categories and excluded from restructured loans accruing interest.
(c)		These loans are not included in nonperforming assets and continue to accrue interest because they are secured by collateral and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status.

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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 7		Summary of Allowance for Credit Losses

						Three Months Ended								Six Months Ended
						June 30,								June 30,
(Dollars in Millions)						2003				2002				2003				2002
Balance at beginning of period						$	2,408.5			$	2,461.5			$	2,422.0			$	2,457.3
Charge-offs
	Commercial
		Commercial					134.2				136.6				283.2				267.6
		Lease financing					39.3				45.4				79.8				87.4
			Total commercial				173.5				182.0				363.0				355.0
	Commercial real estate
		Commercial mortgages					12.5				8.3				18.2				18.3
		Construction and development					3.0				.5				5.1				2.5
			Total commercial real estate				15.5				8.8				23.3				20.8
	Residential mortgages						7.1				4.8				14.1				8.9
	Retail
		Credit card					71.4				79.8				146.2				152.7
		Retail leasing					14.4				11.0				29.7				22.7
		Home equity and second mortgages					26.8				27.4				54.6				55.2
		Other retail					66.9				79.2				137.3				163.4
			Total retail				179.5				197.4				367.8				394.0
				Total charge-offs			375.6				393.0				768.2				778.7
Recoveries
	Commercial
		Commercial					11.3				26.0				22.4				36. 5
		Lease financing					12.4				10.2				29.9				20.1
			Total commercial				23.7				36.2				52.3				56.6
	Commercial real estate
		Commercial mortgages					3.2				2.3				6.0				3.5
		Construction and development					.5				.1				1.6				.2
			Total commercial real estate				3.7				2.4				7.6				3.7
	Residential mortgages						.6				.9				1.7				2.3
	Retail
		Credit card					6.9				6.4				13.0				12.3
		Retail leasing					1.8				2.7				3.2				3.9
		Home equity and second mortgages					2.9				2.1				5.3				3.8
		Other retail					13.1				11.8				28.4				30.6
			Total retail				24.7				23.0				49.9				50.6
				Total recoveries			52.7				62.5				111.5				113.2
Net Charge-offs
	Commercial
		Commercial					122.9				110.6				260.8				231.1
		Lease financing					26.9				35.2				49.9				67.3
			Total commercial				149.8				145.8				310.7				298.4
	Commercial real estate
		Commercial mortgages					9.3				6.0				12.2				14.8
		Construction and development					2.5				.4				3.5				2.3
			Total commercial real estate				11.8				6.4				15.7				17.1
	Residential mortgages						6.5				3.9				12.4				6.6
	Retail
		Credit card					64.5				73.4				133.2				140.4
		Retail leasing					12.6				8.3				26.5				18.8
		Home equity and second mortgages					23.9				25.3				49.3				51.4
		Other retail					53.8				67.4				108.9				132.8
			Total retail				154.8				174.4				317.9				343.4
				Total net charge-offs			322.9				330.5				656.7				665.5
Provision for credit losses							323.0				335.0				658.0				670.0
Acquisitions and other changes							(41.0	)			.4				(55.7	)			4.6
Balance at end of period (a)						$	2,367.6			$	2,466.4			$	2,367.6			$	2,466.4
Allowance as a percentage of
	Period-end loans						1.98	%			2.15	%
	Nonperforming loans						194				241
	Nonperforming assets						174				215
	Annualized net charge-offs						183				186

(a)		The allowance for credit losses includes credit loss liability related to off-balance sheet commitments. At June 30, 2003, the allowance for credit losses included an estimated $101.4 million credit loss liability related to the Company’s $57.8 billion of commercial off-balance sheet loan commitments and letters of credit.

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Residual Risk ManagementThe Company manages its risk to changes in the value of lease residual assets through disciplined residual setting and valuation at the inception of a lease, diversification of its leased assets, regular asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. Commercial lease originations are subject to the same well-defined underwriting standards referred to in the “Credit Risk Management” section which includes an evaluation of the residual risk. Retail lease residual risk is mitigated further by originating longer-term vehicle leases and effective end-of-term marketing of off-lease vehicles. Also, to reduce the financial risk of potential changes in vehicle residual values, the Company maintains residual value insurance. The catastrophic insurance maintained by the Company provides for the potential recovery of losses on individual vehicle sales in an amount equal to the difference between: (a) 105 percent or 110 percent of the average wholesale auction price for the vehicle at the time of sale and (b) the vehicle residual value specified by the Automotive Lease Guide (an authoritative industry source) at the inception of the lease. The potential recovery is calculated for each individual vehicle sold in a particular policy year and is reduced by any gains realized on vehicles sold during the same period. The Company will receive claim proceeds if, in the aggregate, there is a net loss for such period. To reduce the risk associated with collecting insurance claims, the Company monitors the financial viability of the insurance carrier based on insurance industry ratings and available financial information.

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

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

Net Interest Income Simulation Analysis One of the primary tools used to measure interest rate risk and the effect of interest rate changes on rate sensitive income and net interest income is simulation analysis. The monthly analysis incorporates substantially all of the Company’s assets and liabilities and off-balance sheet instruments, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on interest rate sensitive income of a 300 basis point upward or downward gradual change of market interest rates over a one-year period. The simulations also estimate the effect of immediate and sustained parallel shifts in the yield curve of 50 basis points as well as the effect of immediate and sustained flattening or steepening of the yield curve. These simulations include assumptions about how the balance sheet is likely to be affected by changes in loan and deposit growth. Assumptions are made to project interest rates for new loans and deposits based on historical analysis, management’s outlook and repricing strategies. These assumptions are validated on a periodic basis. A sensitivity analysis is provided for key variables of the simulation. The results are reviewed by ALPC monthly and are used to guide hedging strategies. ALPC policy guidelines limit the estimated change in interest rate sensitive income to 5.0 percent of forecasted interest rate sensitive income over the succeeding 12 months.

		June 30, 2003																December 31, 2002
		Down 50				Up 50				Down 300				Up 300				Down 50				Up 50				Down 300				Up 300
		Immediate				Immediate				Gradual				Gradual				Immediate				Immediate				Gradual				Gradual
Net interest income			.66	%			.17	%			*	%			(1.35	)%			.08	%			(.34	)%			*	%			(1.91	)%
Rate sensitive income			.24	%			—	%			*	%			(1.87	)%			.20	%			(.55	)%			*	%			(2.57	)%

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

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Market Value of Equity Modeling The Company also utilizes the market value of equity as a measurement tool in managing interest rate sensitivity. The market value of equity measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. ALPC guidelines limit the change in market value of equity in a 200 basis point parallel rate shock to 15 percent of the base case. Given the low level of current interest rates, the down 200 basis point scenario cannot be computed. The up 200 basis point scenario was a 3.9 percent decrease at June 30, 2003, compared with a 2.5 percent decrease at December 31, 2002. ALPC reviews other down rate scenarios to evaluate the impact of falling interest rates. The down 100 basis point scenario was a .7 percent decrease at June 30, 2003, and a 1.0 percent decrease at December 31, 2002. The overall sensitivity was relatively neutral.

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

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Market Risk ManagementIn addition to interest rate risk, the Company is exposed to other forms of market risk as a consequence of conducting normal trading activities. Business activities that contribute to market risk include, among other things, market making, underwriting, proprietary trading and foreign exchange

Table 8		Derivative Positions

													Weighted-
													Average
													Remaining
					Notional				Fair				Maturity
June 30, 2003 (Dollars in Millions)					Amount				Value				In Years
Asset and Liability Management Positions
	Interest rate contracts
	Receive fixed/pay floating swaps				$	20,853			$	1,484				4.92
	Pay fixed/receive floating swaps					6,890				(116	)			1.75
	Futures and forwards					8,695				(46	)			.16
	Options
	Written					5,073				(1	)			.19
	Equity contracts					5				—				2.42
Customer-related Positions
	Interest rate contracts
	Receive fixed/pay floating swaps				$	5,266			$	288				5.05
	Pay fixed/receive floating swaps					5,266				(255	)			5.05
	Basis swaps					1				—				1.18
	Options
	Purchased					241				3				2.25
	Written					241				(3	)			2.25
	Foreign exchange rate contracts
	Forwards, spots and swaps
	Buy					1,684				66				.57
	Sell					1,689				(65	)			.57
	Options
	Purchased					121				—				.38
	Written					121				—				.38

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Liquidity Risk ManagementALPC establishes policies, as well as analyzes and manages liquidity, to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. The Company’s performance in these areas has enabled it to develop a large and reliable base of core funding within its market areas and in domestic and global capital markets. Liquidity management is viewed from long-term and short-term perspectives, as well as from an asset and liability perspective. Management monitors liquidity through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk.

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Off-Balance Sheet Arrangements Asset securitization and conduits represent a source of funding for the Company through off-balance sheet structures. The Company sponsors two off-balance sheet conduits to which it has transferred high-grade assets: a commercial loan conduit and an investment securities conduit. These conduits are funded by issuing commercial paper. The commercial loan conduit holds primarily high credit quality commercial loans and held assets of $1.8 billion at June 30, 2003, and $4.2 billion at December 31, 2002. The investment securities conduit holds high-grade investment securities and held assets of $8.4 billion at June 30, 2003, and $9.5 billion at December 31, 2002. These investment securities include primarily (i) private label asset-backed securities, which are insurance “wrapped” by AAA/ Aaa-rated mono-line insurance companies and (ii) government agency mortgage-backed securities and collateralized mortgage obligations. The commercial loan conduit had commercial paper liabilities of $1.8 billion at June 30, 2003, and $4.2 billion at December 31, 2002. The investment securities conduit had commercial paper liabilities of $8.4 billion at June 30, 2003, and $9.5 billion at December 31, 2002. The Company benefits by selling commercial loans and investment securities to conduits that provide diversification of funding sources in a capital-efficient manner and generate income.

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Capital ManagementThe Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. Total shareholders’ equity was $19.2 billion at June 30, 2003, compared with $18.1 billion at December 31, 2002. The increase was the result of corporate earnings offset primarily by dividends.

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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, Capital Markets and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance. Business line results are derived from the Company’s business unit profitability reporting systems. Designations, assignments and allocations may change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to our diverse customer base. During 2003, certain organization and methodology changes were made and, accordingly, 2002 results were restated and presented on a comparable basis. The provision for credit losses within the Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management, Payment Services and Capital Markets lines of business is based on net charge-offs while Treasury and Corporate Support reflects the residual component of the Company’s total consolidated provision for credit losses, determined in accordance with accounting principles generally accepted in the United States.

Wholesale Bankingoffers lending, depository, treasury management and other financial services to middle market, large corporate and public sector clients. Wholesale Banking contributed $311.2 million of the Company’s operating earnings for the second quarter of 2003 and $616.8 million for the first six months of 2003, an 8.0 percent and 7.0 percent increase, respectively, over the same periods of 2002. The increase in operating earnings in the second quarter of 2003 and the first six months of 2003, compared with the same periods of 2002, was driven by higher net revenue and reductions in noninterest expense partially offset by higher provision for credit losses.

Table 9		Capital Ratios

			June 30,				December 31,
(Dollars in Millions)			2003				2002
Tangible common equity				$10,841			$	9,489
	As a percent of tangible assets			5.8	%			5.6	%
Tier 1 capital				$13,609			$	12,606
	As a percent of risk-weighted assets			8.3	%			7.8	%
	As a percent of adjusted quarterly average assets (leverage ratio)			7.6	%			7.5	%
Total risk-based capital				$21,051			$	19,753
	As a percent of risk-weighted assets			12.8	%			12.2	%

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Table 10		Line of Business Financial Performance

				Wholesale												Consumer
				Banking												Banking
												Percent												Percent
For the Three Months Ended June 30 (Dollars in Millions)				2003				2002				Change				2003				2002				Change
Condensed Income Statement
Net interest income (taxable-equivalent basis)				$	511.7			$	484.4				5.6	%		$	861.2			$	803.9				7.1	%
Noninterest income					194.5				185.5				4.9				556.5				349.2				59.4
	Total net revenue				706.2				669.9				5.4				1,417.7				1,153.1				22.9
Noninterest expense					94.0				107.1				(12.2	)			437.8				422.1				3.7
Other intangible amortization					4.9				5.2				(5.8	)			250.5				52.5				*
	Total noninterest expense				98.9				112.3				(11.9	)			688.3				474.6				45.0
		Operating income			607.3				557.6				8.9				729.4				678.5				7.5
Provision for credit losses					118.1				104.5				13.0				99.8				104.1				(4.1	)
Income before income taxes					489.2				453.1				8.0				629.6				574.4				9.6
Income taxes and taxable-equivalent adjustment					178.0				164.9				7.9				229.1				209.0				9.6
Operating earnings (loss), before merger and restructuring-related items and cumulative effect of change in accounting principles				$	311.2			$	288.2				8.0			$	400.5			$	365.4				9.6
Merger and restructuring-related items (after-tax)
Cumulative effect of change in accounting principles (after-tax)
Net income
Average Balance Sheet Data
Commercial				$	30,256			$	31,853				(5.0	)%		$	6,541			$	7,570				(13.6	)%
Commercial real estate					16,420				15,632				5.0				9,838				8,779				12.1
Residential mortgages					121				175				(30.9	)			10,593				7,783				36.1
Retail					57				159				(64.2	)			28,809				26,673				8.0
	Total loans				46,854				47,819				(2.0	)			55,781				50,805				9.8
Goodwill					1,332				1,314				1.4				2,138				1,720				24.3
Other intangible assets					109				130				(16.2	)			900				1,000				(10.0	)
Assets					54,044				54,120				(.1	)			65,251				58,921				10.7
Noninterest-bearing deposits					15,478				11,938				29.7				13,652				12,699				7.5
Savings products					8,946				4,888				83.0				40,531				35,332				14.7
Time deposits					3,521				2,296				53.4				19,023				22,931				(17.0	)
	Total deposits				27,945				19,122				46.1				73,206				70,962				3.2
Shareholders’ equity				$	5,479			$	5,284				3.7			$	5,705			$	4,681				21.9

				Wholesale												Consumer
				Banking												Banking
												Percent												Percent
For the Six Months Ended June 30 (Dollars in Millions)				2003				2002				Change				2003				2002				Change
Condensed Income Statement
Net interest income (taxable-equivalent basis)				$	1,017.6			$	968.8				5.0	%		$	1,711.9			$	1,587.8				7.8	%
Noninterest income					392.8				366.5				7.2				1,013.2				647.5				56.5
	Total net revenue				1,410.4				1,335.3				5.6				2,725.1				2,235.3				21.9
Noninterest expense					191.0				199.2				(4.1	)			859.0				841.4				2.1
Other intangible amortization					9.8				10.4				(5.8	)			424.0				81.0				*
	Total noninterest expense				200.8				209.6				(4.2	)			1,283.0				922.4				39.1
		Operating income			1,209.6				1,125.7				7.5				1,442.1				1,312.9				9.8
Provision for credit losses					239.9				219.5				9.3				204.3				209.3				(2.4	)
Income before income taxes					969.7				906.2				7.0				1,237.8				1,103.6				12.2
Income taxes and taxable-equivalent adjustment					352.9				329.8				7.0				450.4				401.6				12.2
Operating earnings (loss), before merger and restructuring-related items and cumulative effect of change in accounting principles				$	616.8			$	576.4				7.0			$	787.4			$	702.0				12.2
Merger and restructuring-related items (after-tax)
Cumulative effect of change in accounting principles (after-tax)
Net income
Average Balance Sheet Data
Commercial				$	30,194			$	32,307				(6.5	)%		$	6,583			$	7,700				(14.5	)%
Commercial real estate					16,371				15,607				4.9				9,735				8,797				10.7
Residential mortgages					142				157				(9.6	)			10,141				7,698				31.7
Retail					60				167				(64.1	)			28,679				26,218				9.4
	Total loans				46,767				48,238				(3.0	)			55,138				50,413				9.4
Goodwill					1,333				1,347				(1.0	)			2,138				1,708				25.2
Other intangible assets					112				132				(15.2	)			939				893				5.2
Assets					53,917				54,781				(1.6	)			64,924				58,667				10.7
Noninterest-bearing deposits					15,833				12,088				31.0				13,501				12,562				7.5
Savings products					8,268				4,858				70.2				39,818				35,359				12.6
Time deposits					3,476				2,285				52.1				19,695				23,361				(15.7	)
	Total deposits				27,577				19,231				43.4				73,014				71,282				2.4
Shareholders’ equity				$	5,400			$	5,299				1.9			$	5,598			$	4,593				21.9

*		Not meaningful

24	U.S. Bancorp

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Private Client, Trust														Payment												Capital												Treasury and												Consolidated
and Asset Management														Services												Markets												Corporate Support												Company
										Percent												Percent												Percent												Percent												Percent
		2003				2002				Change				2003				2002				Change				2003				2002				Change				2003				2002				Change				2003				2002				Change
		$	93.5			$	78.4				19.3	%		$	154.1			$	164.8				(6.5	)%		$	6.9			$	(.4	)			*	%		$	178.5			$	158.7				12.5	%		$	1,805.9			$	1,689.8				6.9	%
			236.0				226.4				4.2				427.5				406.1				5.3				200.0				199.2				.4				51.5				77.4				(33.5	)			1,666.0				1,443.8				15.4
			329.5				304.8				8.1				581.6				570.9				1.9				206.9				198.8				4.1				230.0				236.1				(2.6	)			3,471.9				3,133.6				10.8
			113.4				110.3				2.8				153.2				160.5				(4.5	)			191.2				188.2				1.6				383.8				362.4				5.9				1,373.4				1,350.6				1.7
			16.5				7.9				*				38.9				38.8				.3				—				—				—				1.5				.3				*				312.3				104.7				*
			129.9				118.2				9.9				192.1				199.3				(3.6	)			191.2				188.2				1.6				385.3				362.7				6.2				1,685.7				1,455.3				15.8
			199.6				186.6				7.0				389.5				371.6				4.8				15.7				10.6				48.1				(155.3	)			(126.6	)			(22.7	)			1,786.2				1,678.3				6.4
			.9				.5				80.0				104.8				122.6				(14.5	)			—				—				—				(.6	)			3.3				*				323.0				335.0				(3.6	)
			198.7				186.1				6.8				284.7				249.0				14.3				15.7				10.6				48.1				(154.7	)			(129.9	)			(19.1	)			1,463.2				1,343.3				8.9
			72.3				67.7				6.8				103.6				90.6				14.3				5.7				3.9				46.2				(86.3	)			(62.6	)			(37.9	)			502.4				473.5				6.1
		$	126.4			$	118.4				6.8			$	181.1			$	158.4				14.3			$	10.0			$	6.7				49.3			$	(68.4	)		$	(67.3	)			(1.6	)			960.8				869.8				10.5
																																																			(7.2	)			(46.7	)
																																																			—				—
																																																		$	953.6			$	823.1
		$	1,842			$	1,839				.2	%		$	2,901			$	2,798				3.7	%		$	—			$	223				*	%		$	162			$	144				12.5	%		$	41,702			$	44,427				(6.1	)%
			598				591				1.2				—				—				—				—				—				—				233				227				2.6				27,089				25,229				7.4
			285				230				23.9				—				—				—				—				—				—				13				6				*				11,012				8,194				34.4
			2,101				1,999				5.1				6,982				7,291				(4.2	)			—				—				—				51				45				13.3				38,000				36,167				5.1
			4,826				4,659				3.6				9,883				10,089				(2.0	)			—				223				*				459				422				8.8				117,803				114,017				3.3
			741				289				*				1,814				1,813				.1				306				306				—				—				—				—				6,331				5,442				16.3
			406				232				75.0				669				773				(13.5	)			—				—				—				13				14				(7.1	)			2,097				2,149				(2.4	)
			6,590				5,706				15.5				13,297				13,149				1.1				2,587				3,119				(17.1	)			45,286				34,132				32.7				187,055				169,147				10.6
			3,052				2,304				32.5				334				189				76.7				7				202				(96.5	)			(8	)			(65	)			(87.7	)			32,515				27,267				19.2
			5,349				4,232				26.4				10				7				42.9				—				—				—				2				200				(99.0	)			54,838				44,659				22.8
			474				460				3.0				—				—				—				—				—				—				5,780				4,837				19.5				28,798				30,524				(5.7	)
			8,875				6,996				26.9				344				196				75.5				7				202				(96.5	)			5,774				4,972				16.1				116,151				102,450				13.4
		$	2,140			$	1,347				58.9			$	3,081			$	3,121				(1.3	)		$	637			$	636				.2			$	2,052			$	1,406				45.9			$	19,094			$	16,475				15.9

Private Client, Trust														Payment												Capital												Treasury and												Consolidated
and Asset Management														Services												Markets												Corporate Support												Company
										Percent												Percent												Percent												Percent												Percent
		2003				2002				Change				2003				2002				Change				2003				2002				Change				2003				2002				Change				2003				2002				Change
		$	183.1			$	156.3				17.1	%		$	322.1			$	334.3				(3.6	)%		$	13.2			$	7.4				78.4	%		$	341.8			$	305.6				11.8	%		$	3,589.7			$	3,360.2				6.8	%
			459.9				446.9				2.9				820.2				770.8				6.4				365.8				372.4				(1.8	)			137.0				172.7				(20.7	)			3,188.9				2,776.8				14.8
			643.0				603.2				6.6				1,142.3				1,105.1				3.4				379.0				379.8				(.2	)			478.8				478.3				.1				6,778.6				6,137.0				10.5
			228.8				221.5				3.3				300.9				322.5				(6.7	)			354.1				351.0				.9				761.0				703.5				8.2				2,694.8				2,639.1				2.1
			33.0				15.5				*				77.6				77.4				.3				—				—				—				3.0				.6				*				547.4				184.9				*
			261.8				237.0				10.5				378.5				399.9				(5.4	)			354.1				351.0				.9				764.0				704.1				8.5				3,242.2				2,824.0				14.8
			381.2				366.2				4.1				763.8				705.2				8.3				24.9				28.8				(13.5	)			(285.2	)			(225.8	)			(26.3	)			3,536.4				3,313.0				6.7
			1.3				2.0				(35.0	)			213.2				236.6				(9.9	)			—				—				—				(.7	)			2.6				*				658.0				670.0				(1.8	)
			379.9				364.2				4.3				550.6				468.6				17.5				24.9				28.8				(13.5	)			(284.5	)			(228.4	)			(24.6	)			2,878.4				2,643.0				8.9
			138.2				132.5				4.3				200.4				170.4				17.6				9.0				10.6				(15.1	)			(156.0	)			(113.3	)			(37.7	)			994.9				931.6				6.8
		$	241.7			$	231.7				4.3			$	350.2			$	298.2				17.4			$	15.9			$	18.2				(12.6	)		$	(128.5	)		$	(115.1	)			(11.6	)			1,883.5				1,711.4				10.1
																																																			(18.7	)			(95.1	)
																																																			—				(37.2	)
																																																		$	1,864.8			$	1,579.1
		$	1,813			$	1,827				(.8	)%		$	2,822			$	2,753				2.5	%		$	58			$	225				(74.2	)%		$	177			$	90				96.7	%		$	41,647			$	44,902				(7.2	)%
			589				592				(.5	)			—				—				—				—				—				—				242				211				14.7				26,937				25,207				6.9
			273				219				24.7				—				—				—				—				—				—				14				4				*				10,570				8,078				30.8
			2,115				1,951				8.4				7,004				7,301				(4.1	)			—				—				—				50				42				19.0				37,908				35,679				6.2
			4,790				4,589				4.4				9,826				10,054				(2.3	)			58				225				(74.2	)			483				347				39.2				117,062				113,866				2.8
			739				288				*				1,813				1,817				(.2	)			306				306				—				—				1				*				6,329				5,467				15.8
			417				233				79.0				685				786				(12.8	)			—				—				—				31				10				*				2,184				2,054				6.3
			6,552				5,732				14.3				13,292				13,191				.8				2,546				3,137				(18.8	)			44,144				32,958				33.9				185,375				168,466				10.0
			2,885				2,304				25.2				405				237				70.9				38				208				(81.7	)			7				(24	)			*				32,669				27,375				19.3
			5,070				4,218				20.2				9				7				28.6				—				—				—				8				249				(96.8	)			53,173				44,691				19.0
			467				445				4.9				—				—				—				—				—				—				6,504				4,075				59.6				30,142				30,166				(.1	)
			8,422				6,967				20.9				414				244				69.7				38				208				(81.7	)			6,519				4,300				51.6				115,984				102,232				13.5
		$	2,112			$	1,347				56.8			$	3,080			$	3,124				(1.4	)		$	630			$	636				(.9	)		$	1,964			$	1,319				48.9			$	18,784			$	16,318				15.1

U.S. Bancorp	25

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Consumer Bankingdelivers products and services to the broad consumer market and small businesses through banking offices, telemarketing, on-line services, direct mail and automated teller machines (“ATMs”). It encompasses community banking, metropolitan banking, small business banking, consumer lending, mortgage banking, workplace banking, student banking, 24-hour banking and investment product and insurance sales. Consumer Banking contributed $400.5 million of the Company’s operating earnings for the second quarter of 2003 and $787.4 million for the first six months of 2003, a 9.6 percent and 12.2 percent increase, respectively, over the same periods of 2002.

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Private Client, Trust and Asset Managementprovides mutual fund processing services, trust, private banking and financial advisory services through four businesses, including: the Private Client Group, Corporate Trust, Institutional Trust and Custody and Fund Services, LLC. The business segment also offers investment management services to several client segments, including mutual funds, institutional customers and private asset management. Private Client, Trust and Asset Management contributed $126.4 million of the Company’s operating earnings for the second quarter of 2003 and $241.7 million for the first six months of 2003, increases of 6.8 percent and 4.3 percent, respectively, over the same periods of 2002.

Payment Servicesincludes consumer and business credit cards, corporate and purchasing card services, consumer lines of credit, ATM processing, merchant processing and debit cards. Payment Services contributed $181.1 million of the Company’s operating earnings for the second quarter of 2003 and $350.2 million for the first six months of 2003, a 14.3 percent and 17.4 percent increase, respectively, over the same periods of 2002.

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Capital Marketsengages in equity and fixed income trading activities, offers investment banking and underwriting services for corporate and public sector customers and provides financial advisory services and securities, mutual funds, annuities and insurance products to consumers and regionally based businesses through a network of brokerage offices. Capital Markets contributed $10.0 million of the Company’s operating earnings for the second quarter of 2003 and $15.9 million for the first six months of 2003, a 49.3 percent increase and a 12.6 percent decrease, respectively, compared with the same periods of 2002.

Treasury and Corporate Supportincludes the Company’s investment portfolios, funding, capital management and asset securitization activities, interest rate risk management, the net effect of transfer pricing related to average balances and business activities managed on a corporate basis, including enterprise-wide operations and administrative support functions. Treasury and Corporate Support recorded an operating loss of $68.4 million for the second quarter of 2003 and $128.5 million for the first six months of 2003, decreases of 1.6 percent and 11.6 percent, respectively, compared with the same periods of 2002.

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ACCOUNTING CHANGES

Note 2 of the Notes to Consolidated Financial Statements discusses new accounting policies adopted by the Company during 2003 and 2002 and the expected impact of accounting policies recently issued or proposed 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 reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third-parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under generally accepted accounting principles. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee.

Allowance for Credit LossesThe 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.

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

Mortgage Servicing Rights Mortgage servicing rights (“MSRs”) are capitalized as separate assets when loans are sold and servicing is retained. The total cost of loans sold is allocated between the loans sold and the servicing assets retained based on their relative fair values. MSRs that are purchased from others are initially recorded at cost. The carrying value of the MSRs is amortized in proportion to and over the period of estimated net servicing revenue and recorded in noninterest expense as amortization of intangible assets. The carrying value of these assets is periodically reviewed for impairment using a lower of carrying value or fair value methodology. For purposes of measuring impairment, the servicing rights are stratified based on the underlying loan type and note rate and the carrying value for each stratum is compared to fair value based on a discounted cash flow analysis, utilizing current prepayment speeds and discount rates. Events that may significantly affect the estimates used are changes in interest rates and the related impact on mortgage loan prepayment speeds and the payment performance of the underlying loans. If the fair value is less than the carrying value, impairment is recognized through a valuation allowance for each impaired stratum and recorded as amortization of intangible assets. The reduction in the fair value of MSRs at June 30, 2003, to immediate 25 and 50 basis point adverse changes in interest rates would be approximately $37 million and $68 million, respectively. An upward movement in interest rates at June 30, 2003, of 25 and 50 basis points would increase the fair value of the MSRs by approximately $66 million and $139 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 (“SFAS 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.

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CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 15(d)-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in making them aware on a timely basis of the material information relating to the Company required to be included in the Company’s periodic filings with the Securities and Exchange Commission.

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Consolidated Balance Sheet" -->

					June 30,				December 31,
(Dollars in Millions)					2003				2002
					(Unaudited)
Assets
Cash and due from banks					$	11,795			$	10,758
Money market investments						3,213				434
Trading securities						1,039				898
Investment securities
	Held-to-maturity (fair value $199 and $240, respectively)					188				233
	Available-for-sale					35,390				28,255
Loans held for sale						3,791				4,159
Loans
	Commercial					42,238				41,944
	Commercial real estate					27,259				26,867
	Residential mortgages					11,712				9,746
	Retail					38,214				37,694
		Total loans				119,423				116,251
			Less allowance for credit losses			(2,368	)			(2,422	)
			Net loans			117,055				113,829
Premises and equipment						2,064				1,697
Customers’ liability on acceptances						148				140
Goodwill						6,329				6,325
Other intangible assets						1,984				2,321
Other assets						11,903				10,978
		Total assets			$	194,899			$	180,027
Liabilities and Shareholders’ Equity
Deposits
	Noninterest-bearing				$	44,465			$	35,106
	Interest-bearing					72,315				68,214
	Time deposits greater than $100,000					9,547				12,214
		Total deposits				126,327				115,534
Short-term borrowings						7,387				7,806
Long-term debt						31,379				28,588
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company						2,652				2,994
Acceptances outstanding						148				140
Other liabilities						7,826				6,864
		Total liabilities				175,719				161,926
Shareholders’ equity
	Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares issued: 6/30/03 — 1,972,643,007 shares; 12/31/02 — 1,972,643,060 shares					20				20
	Capital surplus					4,821				4,850
	Retained earnings					14,795				13,719
	Less cost of common stock in treasury: 6/30/03 — 48,116,198 shares; 12/31/02 — 55,686,500 shares					(1,092	)			(1,272	)
	Other comprehensive income					636				784
		Total shareholders’ equity				19,180				18,101
		Total liabilities and shareholders’ equity			$	194,899			$	180,027

See Notes to Consolidated Financial Statements.

32	U.S. Bancorp

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Consolidated Statement of Income" -->

				Three Months Ended								Six Months Ended
				June 30,								June 30,
(Dollars and Shares in Millions, Except Per Share Data)
(Unaudited)				2003				2002				2003				2002
Interest Income
Loans				$	1,821.0			$	1,936.9			$	3,657.8			$	3,868.8
Loans held for sale					51.8				36.6				111.4				75.8
Investment securities
	Taxable				422.4				346.1				818.5				693.9
	Non-taxable				7.5				11.7				16.4				24.9
Money market investments					2.6				2.2				6.6				5.5
Trading securities					7.3				9.4				15.3				17.6
Other interest income					27.0				32.7				56.3				51.7
		Total interest income			2,339.6				2,375.6				4,682.3				4,738.2
Interest Expense
Deposits					288.5				375.8				595.1				771.3
Short-term borrowings					42.8				68.3				86.2				147.2
Long-term debt					185.5				216.8				371.3				408.9
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company					24.5				33.9				55.9				68.7
		Total interest expense			541.3				694.8				1,108.5				1,396.1
Net interest income					1,798.3				1,680.8				3,573.8				3,342.1
Provision for credit losses					323.0				335.0				658.0				670.0
Net interest income after provision for credit losses					1,475.3				1,345.8				2,915.8				2,672.1
Noninterest Income
Credit and debit card revenue					142.3				131.2				269.7				240.5
Corporate payment products revenue					90.9				82.5				176.9				157.7
ATM processing services					36.0				33.5				72.9				64.4
Merchant processing services					141.8				144.4				269.1				278.0
Trust and investment management fees					241.9				234.9				472.2				459.2
Deposit service charges					184.9				173.3				353.6				329.0
Cash management fees					111.8				104.3				223.8				208.5
Commercial products revenue					100.0				123.7				204.2				245.9
Mortgage banking revenue					90.3				78.0				185.7				130.0
Trading account profits and commissions					67.6				49.5				128.5				99.4
Investment products fees and commissions					109.2				107.4				209.5				218.5
Investment banking revenue					56.8				70.5				94.4				123.7
Securities gains, net					213.1				30.6				353.8				74.7
Other					79.4				80.0				174.6				147.3
		Total noninterest income			1,666.0				1,443.8				3,188.9				2,776.8
Noninterest Expense
Salaries					625.3				607.6				1,227.1				1,195.9
Employee benefits					95.0				91.1				204.2				187.5
Net occupancy					101.1				101.8				203.3				201.9
Furniture and equipment					72.0				77.0				145.4				153.9
Capitalized software					38.2				37.7				75.5				76.1
Communication					50.5				44.1				101.7				89.8
Postage					45.9				44.4				91.3				91.0
Other intangible assets					312.3				104.7				547.4				184.9
Merger and restructuring-related charges					10.8				71.6				28.4				145.8
Other					345.4				346.9				646.3				643.0
		Total noninterest expense			1,696.5				1,526.9				3,270.6				2,969.8
Income before income taxes and cumulative effect of change in accounting principles					1,444.8				1,262.7				2,834.1				2,479.1
Applicable income taxes					491.2				439.6				969.3				862.8
Income before cumulative effect of change in accounting principles					953.6				823.1				1,864.8				1,616.3
Cumulative effect of change in accounting principles					—				—				—				(37.2	)
Net income				$	953.6			$	823.1			$	1,864.8			$	1,579.1
Earnings Per Share
	Income before cumulative effect of change in accounting principles			$	.50			$	.43			$	.97			$	.84
	Cumulative effect of change in accounting principles				—				—				—				(.02	)
	Net income			$	.50			$	.43			$	.97			$	.82
Diluted Earnings Per Share
	Income before cumulative effect of change in accounting principles			$	.49			$	.43			$	.97			$	.84
	Cumulative effect of change in accounting principles				—				—				—				(.02	)
	Net income			$	.49			$	.43			$	.97			$	.82
Dividends declared per share				$	.205			$	.195			$	.41			$	.39
Average common shares					1,922.3				1,913.2				1,920.6				1,916.5
Average diluted common shares					1,932.8				1,926.9				1,929.7				1,928.5

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Shareholders’ Equity" -->

																							Other				Total
(Dollars in Millions)			Common Shares				Common				Capital				Retained				Treasury				Comprehensive				Shareholders’
(Unaudited)			Outstanding				Stock				Surplus				Earnings				Stock				Income				Equity
Balance December 31, 2001				1,951,709,512			$	19.7			$	4,906.2			$	11,918.0			$	(478.1	)		$	95.4			$	16,461.2
Net income																1,579.1												1,579.1
Unrealized gain on securities available for sale																								490.0				490.0
Unrealized loss on derivatives																								(82.9	)			(82.9	)
Foreign currency translation adjustment																								8.2				8.2
Realized gain on derivatives																								63.2				63.2
Reclassification adjustment for gains realized in net income																								(84.6	)			(84.6	)
Income taxes																								(149.6	)			(149.6	)
	Total comprehensive income																											1,823.4
Cash dividends declared on common stock																(741.1	)											(741.1	)
Issuance of common and treasury stock				7,333,432								(42.2	)							171.5								129.3
Purchase of treasury stock				(44,814,685	)															(1,032.3	)							(1,032.3	)
Shares reserved to meet deferred compensation obligations				(48,110	)							2.2								(2.2	)							—
Amortization of restricted stock												9.0																9.0
Balance June 30, 2002				1,914,180,149			$	19.7			$	4,875.2			$	12,756.0			$	(1,341.1	)		$	339.7			$	16,649.5
Balance December 31, 2002				1,916,956,560			$	19.7			$	4,850.4			$	13,718.6			$	(1,272.1	)		$	784.0			$	18,100.6
Net income																1,864.8												1,864.8
Unrealized gain on securities available for sale																								157.2				157.2
Unrealized loss on derivatives																								(222.6	)			(222.6	)
Foreign currency translation adjustment																								16.7				16.7
Realized gain on derivatives																								188.2				188.2
Reclassification adjustment for gains realized in net income																								(378.7	)			(378.7	)
Income taxes																								90.9				90.9
	Total comprehensive income																											1,716.5
Cash dividends declared on common stock																(788.0	)											(788.0	)
Issuance of common and treasury stock				8,249,225								(45.8	)							190.4								144.6
Shares reserved to meet deferred compensation obligations				(678,976	)							10.2								(10.2	)							—
Amortization of restricted stock												6.4																6.4
Balance June 30, 2003				1,924,526,809			$	19.7			$	4,821.2			$	14,795.4			$	(1,091.9	)		$	635.7			$	19,180.1

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Cash Flows" -->

				Six Months Ended
				June 30,
(Dollars in Millions)
(Unaudited)				2003				2002
Operating Activities
	Net cash provided by (used in) operating activities			$	3,540.9			$	4,045.3
Investing Activities
Proceeds from sales of investment securities					11,855.0				6,407.3
Maturities of investment securities					9,661.9				3,094.7
Purchases of investment securities					(28,826.1	)			(13,076.3	)
Net (increase) decrease in loans outstanding (a)					(4,658.8	)			(1,473.3	)
Proceeds from sales of loans					1,141.2				871.9
Purchases of loans					(239.5	)			(26.9	)
Proceeds from sales of premises and equipment					20.6				167.3
Purchases of premises and equipment					(555.2	)			(282.4	)
Acquisitions, net of cash acquired					—				(62.7	)
Other, net					(158.9	)			(121.8	)
	Net cash provided by (used in) investing activities				(11,759.8	)			(4,502.2	)
Financing Activities
Net increase (decrease) in deposits					10,793.4				(154.2	)
Net increase (decrease) in short-term borrowings					(419.6	)			(5,956.9	)
Principal payments on long-term debt					(4,797.9	)			(2,391.0	)
Proceeds from issuance of long-term debt					7,448.8				9,515.0
Redemption of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company					(350.0	)			—
Proceeds from issuance of common stock					126.7				109.1
Repurchase of common stock					—				(1,032.3	)
Cash dividends paid					(767.2	)			(733.8	)
	Net cash provided by (used in) financing activities				12,034.2				(644.1	)
	Change in cash and cash equivalents				3,815.3				(1,101.0	)
Cash and cash equivalents at beginning of period					11,192.1				9,745.3
		Cash and cash equivalents at end of period		$	15,007.4			$	8,644.3

See Notes to Consolidated Financial Statements.

(a)		Includes $427.5 million of loans transferred to Stellar Funding Group, Inc. (the “loan conduit”) and $234.9 million of loans repurchased from the loan conduit during the six months ended June 30, 2003. System constraints make it impractical to collect information on the gross cash flows between the Company and the loan conduit for 2002.

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Notes to Consolidated Financial Statements" -->

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, and the Company believes such presentation is adequate to make the information presented not misleading. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Certain amounts in prior periods have been reclassified to conform to the current presentation.

Note 2		Accounting Changes

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and EquityIn May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Company does not believe that the adoption of SFAS 150 will have a material impact on the Company’s financial statements.

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

Consolidation of Variable Interest EntitiesIn January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” (“VIEs”), an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to improve financial reporting of special purpose and other entities. In accordance with FIN 46, business enterprises that represent the primary beneficiary of another entity by retaining a controlling financial interest in that entity’s assets, liabilities and results of operating activities must consolidate the entity in its financial statements. Prior to the issuance of FIN 46, consolidation generally occurred when an enterprise controlled another entity through voting interests. Certain VIEs that are qualifying special purpose entities (“QSPEs”) subject to the reporting requirements of Statement of Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” will not be required to be consolidated under the provisions of FIN 46. The consolidation provisions of FIN 46 apply to VIEs created or entered into after January 31, 2003, and for pre-existing VIEs, in the first reporting period beginning after June 15, 2003. If applicable, transition rules allow the restatement of financial statements or prospective application with a cumulative effect adjustment. In addition, FIN 46 expands the

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

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

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Business Combinations and Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations,” and Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 141 mandates that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and established specific criteria for the recognition of intangible assets separately from goodwill. SFAS 142 addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The Company adopted SFAS 142 on January 1, 2002. The most significant changes made by SFAS 142 are that goodwill and indefinite lived intangible assets are no longer amortized and are to be tested for impairment at least annually. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the amortization provisions of SFAS 142 were effective upon adoption of SFAS 142.

Note 3		Business Combinations and Divestitures

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

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

(Dollars and Shares in Millions)		Date			Assets (a	)			Deposits			Goodwill and Other Intangibles			Cash Paid/ (Received	)		Accounting Method
Corporate trust business of State Street Bank and Trust Company		December 2002		$	13			$	—			$667		$	643			Purchase
Bay View Bank branches		November 2002			362				3,305			483			(2,494	)		Purchase
The Leader Mortgage Company, LLC		April 2002			517				—			191			85			Purchase

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

Note 4		Merger and Restructuring-Related Items

The Company recorded pre-tax merger and restructuring-related items of $28.4 million in the first six months of 2003. In 2003, merger and restructuring-related items were primarily incurred in connection with the July 2001 acquisition of NOVA and with the acquisitions of State Street Corporate Trust and Bay View Bank. Refer to Note 3 of the Notes to Consolidated Financial Statements for additional information regarding business combinations.

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

			Six Months Ended
			June 30, 2003
							State				Bay
(Dollars in Millions)			NOVA				Street				View				Total
Severance and employee-related			$	.8			$	—			$	—			$	.8
Systems conversions and integration				15.0				5.3				4.3				24.6
Asset write-downs and lease terminations				—				—				3.0				3.0
	Total		$	15.8			$	5.3			$	7.3			$	28.4

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

											State				Bay
(Dollars in Millions)			USBM (a)				NOVA				Street				View				Other (b)				Total
Balance at December 31, 2002			$	18.6			$	15.1			$	7.8			$	5.8			$	4.8			$	52.1
	Provision charged to operating expense			—				15.8				5.3				7.3				—				28.4
	Additions related to purchase acquisitions			—				—				(1.4	)			—				—				(1.4	)
	Cash outlays			(14.6	)			(17.0	)			(7.5	)			(8.6	)			(.5	)			(48.2	)
	Noncash write-downs and other			6.9				—				—				(2.1	)			(4.3	)			.5
Balance at June 30, 2003			$	10.9			$	13.9			$	4.2			$	2.4			$	—			$	31.4

(a)		Represents the organization created by the February 2001 acquisition by Firstar Corporation of the former U.S. Bancorp of Minneapolis, Minnesota.
(b)		Primarily includes acquisitions by NOVA prior to the Company’s July 2001 acquisition of NOVA.

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

			June 30,				December 31,
(Dollars in Millions)			2003				2002
Severance and employee-related			$	19.1			$	33.3
Lease termination and facility costs				11.9				17.2
Other				.4				1.6
	Total		$	31.4			$	52.1

Merger and restructuring-related accruals by significant acquisition were as follows:

			June 30,				December 31,
(Dollars in Millions)			2003				2002
USBM			$	10.9			$	18.6
NOVA				13.9				15.1
State Street Corporate Trust				4.2				7.8
Bay View Bank				2.4				5.8
Other acquisitions				—				4.8
	Total		$	31.4			$	52.1

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Note 5		Loans

The composition of the loan portfolio was as follows:

					June 30, 2003								December 31, 2002
									Percent								Percent
(Dollars in Millions)					Amount				of Total				Amount				of Total
Commercial
	Commercial				$	37,145				31.1	%		$	36,584				31.5	%
	Lease financing					5,093				4.3				5,360				4.6
		Total commercial				42,238				35.4				41,944				36.1
Commercial real estate
	Commercial mortgages					20,043				16.8				20,325				17.5
	Construction and development					7,216				6.0				6,542				5.6
		Total commercial real estate				27,259				22.8				26,867				23.1
Residential mortgages						11,712				9.8				9,746				8.4
Retail
	Credit card					5,478				4.6				5,665				4.9
	Retail leasing					5,783				4.8				5,680				4.9
	Home equity and second mortgages					13,255				11.1				13,572				11.6
	Other retail
		Revolving credit				2,561				2.1				2,650				2.3
		Installment				2,243				1.9				2,258				1.9
		Automobile				7,276				6.1				6,343				5.5
		Student				1,618				1.4				1,526				1.3
			Total other retail			13,698				11.5				12,777				11.0
		Total retail				38,214				32.0				37,694				32.4
			Total loans		$	119,423				100.0	%		$	116,251				100.0	%

Note 6		Mortgage Servicing Rights

The Company’s portfolio of residential mortgages serviced for others was $48.2 billion and $43.1 billion at June 30, 2003, and December 31, 2002, respectively.

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

			June 30,				December 31,
(Dollars in Millions)			2003				2002
Initial carrying value, net of amortization			$	811			$	849
Impairment valuation allowance				(374	)			(207	)
	Net carrying value		$	437			$	642

Changes in capitalized mortgage servicing rights are summarized as follows:

			Six Months Ended				Year Ended
(Dollars in Millions)			June 30, 2003				December 31, 2002
Balance at beginning of period			$	642			$	360
	Rights purchased			16				229
	Rights capitalized			169				357
	Amortization			(73	)			(94	)
	Rights sold			—				(24	)
	Impairment (a)			(317	)			(186	)
Balance at end of period			$	437			$	642

(a)		Mortgage servicing rights impairment of $196.3 million and $14.3 million were recognized during the second quarter of 2003 and 2002, respectively.

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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)		2003				2002
Fair value		$	437			$	655
Expected weighted-average life (in years)			2.7				4.8
Discount rate			9.7	%			9.8	%

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

		Down Scenario								Up Scenario
(Dollars in Millions)		50 bps				25 bps				25 bps				50 bps
Fair value		$	(68	)		$	(37	)		$	66			$	139

						U.S. Bank Home Mortgage
		Leader
(Dollars in Millions)		Mortgage				Conventional				Government				Total
Servicing portfolio		$	8,621			$	31,034			$	8,572			$	48,227
Fair market value		$	114			$	246			$	77			$	437
Value (bps)			132				79				90				91
Weighted-average servicing fees (bps)			45				36				50				40
Multiple (value/servicing fees)			2.93				2.19				1.80				2.28
Weighted-average note rate			6.69	%			6.21	%			6.98	%			6.41	%
Age (in years)			3.3				1.6				1.9				1.9
Expected life (in years)			4.4				2.4				2.2				2.7
Discount rate			9.9	%			9.4	%			10.6	%			9.7	%

Note 7		Intangible Assets

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

											Private Client,
			Wholesale				Consumer				Trust and Asset				Payment				Capital				Consolidated
(Dollars in Millions)			Banking				Banking				Management				Services				Markets				Company
Balance at December 31, 2002			$	1,332			$	2,139			$	736			$	1,813			$	305			$	6,325
	Goodwill acquired			—				1				5				2				1				9
	Disposal			(5	)			—				—				—				—				(5	)
	Reclass			2				(2	)			—				—				—				—
Balance at June 30, 2003			$	1,329			$	2,138			$	741			$	1,815			$	306			$	6,329

42	U.S. Bancorp

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Amortizable intangible assets consisted of the following:

											June 30,				December 31,
			Estimated				Amortization				2003				2002
(Dollars in Millions)			Life (a)				Method (b)				Balance				Balance
Merchant processing contracts				8 years				AC			$	560			$	596
Core deposit benefits				10 years/6 years				SL/AC				461				505
Mortgage servicing rights				3 years				AC				437				642
Trust relationships				15 years/8 years				SL/AC				337				371
Other identified intangibles				8 years/9 years				SL/AC				189				207
	Total										$	1,984			$	2,321

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

	SL = straight line method AC = accelerated methods generally based on cash flows

Aggregate amortization expense consisted of the following:

			Three Months								Six Months
			Ended June 30,								Ended June 30,
(Dollars in Millions)			2003				2002				2003				2002
Merchant processing contracts			$	32.5			$	32.6			$	64.7			$	64.4
Core deposit benefits				22.1				19.8				44.2				39.8
Mortgage servicing rights (a)				233.5				38.1				390.2				52.2
Trust relationships				13.4				4.9				26.6				9.7
Other identified intangibles				10.8				9.3				21.7				18.8
	Total		$	312.3			$	104.7			$	547.4			$	184.9

(a)		Includes mortgage servicing rights impairment of $196.3 million and $14.3 million for the three months ended June 30, 2003 and 2002, respectively, and $317.2 million and $14.3 million for the six months ended June 30, 2003 and 2002, respectively.

Below is the estimated amortization expense for the years ending:

(Dollars in Millions)
Remaining 2003		$	232.9
2004			380.5
2005			310.4
2006			251.3
2007			210.6

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

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

Trust

Preferred

Issuance

Securities

Debentures

Rate

Redemption

Issuance Trust (Dollars in Millions)

Date

Amount

Amount

Type (a)

Rate

Maturity Date

Date (b)

Retail

USB Capital V

December  2001

$

300

$

309

Fixed

7.25

%

December 2031

December 7, 2006

USB Capital IV

November  2001

500

515

Fixed

7.35

November 2031

November 1, 2006

USB Capital III

May 2001

700

722

Fixed

7.75

May 2031

May 4, 2006

Institutional

Star Capital I

June 1997

150

155

Variable

1.88

(c)

June 2027

June 15, 2007

Mercantile Capital Trust I

February  1997

150

155

Variable

2.16

(d)

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)		The variable-rate Trust Preferred Securities reprice quarterly.
(b)		Earliest date of redemption.
(c)		Three-month LIBOR +76.5 basis points
(d)		Three-month LIBOR +85.0 basis points

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Note 9		Shareholders’ Equity

At June 30, 2003, and December 31, 2002, the Company had authority to issue 4 billion shares of common stock and 10 million shares of preferred stock. The Company had 1,924.5 million and 1,917.0 million shares of common stock outstanding at June 30, 2003, and December 31, 2002, respectively.

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)			2003				2002				2003				2002
Income before cumulative effect of change in accounting principles			$	953.6			$	823.1			$	1,864.8			$	1,616.3
Cumulative effect of change in accounting principles				—				—				—				(37.2	)
	Net income		$	953.6			$	823.1			$	1,864.8			$	1,579.1
Weighted-average common shares outstanding				1,922.3				1,913.2				1,920.6				1,916.5
Net effect of the assumed purchase of stock based on the treasury stock method for options and stock plans				10.5				13.7				9.1				12.0
	Weighted-average diluted common shares outstanding			1,932.8				1,926.9				1,929.7				1,928.5
Earnings per share
	Income before cumulative effect of change in accounting principles		$	.50			$	.43			$	.97			$	.84
	Cumulative effect of change in accounting principles			—				—				—				(.02	)
	Net income		$	.50			$	.43			$	.97			$	.82
Diluted earnings per share
	Income before cumulative effect of change in accounting principles		$	.49			$	.43			$	.97			$	.84
	Cumulative effect of change in accounting principles			—				—				—				(.02	)
	Net income		$	.49			$	.43			$	.97			$	.82

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Note 11		Stock-Based Compensation

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

				Three Months Ended								Six Months Ended
				June 30,								June 30,
(Dollars in Millions, Except Per Share Data)				2003				2002				2003				2002
Reported net income				$	953.6			$	823.1			$	1,864.8			$	1,579.1
	Stock-based compensation expense included in reported net income, net of tax				2.8				2.7				5.4				6.1
	Total stock-based compensation expense under the fair value method for all awards, net of tax				(27.3	)			(32.3	)			(57.9	)			(68.1	)
		Proforma net income		$	929.1			$	793.6			$	1,812.3			$	1,517.1
Earnings per share
	Reported net income			$	.50			$	.43			$	.97			$	.82
	Stock-based compensation, net of tax				(.02	)			(.02	)			(.03	)			(.03	)
		Proforma net income		$	.48			$	.41			$	.94			$	.79
Diluted earnings per share
	Reported net income			$	.49			$	.43			$	.97			$	.82
	Stock-based compensation, net of tax				(.01	)			(.02	)			(.03	)			(.03	)
		Proforma net income		$	.48			$	.41			$	.94			$	.79

Note 12		Guarantees and Contingent Liabilities

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

LETTERS OF CREDIT

Standby letters of credit are conditional commitments the Company issues to guarantee the performance of a customer to a third-party. The guarantees frequently support public and private borrowing arrangements, including commercial paper issuances, bond financings and other similar transactions. The Company issues commercial letters of credit on behalf of customers to ensure payment or collection in connection with trade transactions. In the event of a customer’s nonperformance, the Company’s credit loss exposure is the same as in any extension of credit, up to the letter’s contractual amount. Management assesses the borrower’s credit to determine the necessary collateral, which may include marketable securities, real estate, accounts receivable and inventory. Since the conditions requiring the Company to fund letters of credit may not occur, the Company expects its liquidity requirements to be less than the total outstanding commitments. The maximum potential future payments guaranteed by the Company under standby letter of credit arrangements at June 30, 2003, was approximately $9.6 billion with a weighted-average term of approximately 24 months. The estimated fair value of the liability for standby letters of credit was approximately $85.2 million at June 30, 2003.

GUARANTEES

Guarantees are contingent commitments issued by the Company to customers or other third-parties. The Company’s guarantees primarily include parent guarantees related to subsidiaries’ third-party borrowing arrangements; third-party performance guarantees inherent in the Company’s business operations such as indemnified securities lending programs and merchant charge-backs guarantees; indemnification or buy-back provisions related to certain asset sales; synthetic lease guarantees; and contingent consideration arrangements related to acquisitions. For certain guarantees, the Company has recorded a liability related to the potential obligation, or has access to collateral to support the guarantee or through the exercise of other recourse provisions can offset some or all of the maximum potential future payments made under these guarantees. The estimated fair value of guarantees, other than standby letters of credit, was approximately $131 million at June 30, 2003.

Third-Party Borrowing ArrangementsThe Company provides guarantees to third-parties as a part of certain subsidiaries’ borrowing arrangements, primarily representing guaranteed operating or capital lease payments or other debt obligations with maturity dates extending through 2014. The maximum potential future payments guaranteed by the Company under these arrangements was approximately $1.5 billion at June 30, 2003. The Company’s

U.S. Bancorp	45

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Commitments from Securities LendingThe Company participates in securities lending activities by acting as the customer’s agent involving the loan or sale of securities. The Company indemnifies customers for the difference between the market value of the securities lent and the market value of the collateral received. Cash collateralizes these transactions. The maximum potential future payments guaranteed by the Company under these arrangements was approximately $12.5 billion at June 30, 2003, and represented the market value of the securities lent to third-parties. At June 30, 2003, the Company held assets with a market value of $12.9 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 was approximately $918.1 million at June 30, 2003, and represented the total proceeds received from the buyer in these transactions where the buy-back or make-whole provisions have not yet expired. Recourse available to the Company includes guarantees from the Small Business Administration (for SBA loans sold), recourse to the correspondent that originated the loan or to the private mortgage issuer, the right to collect payments from the debtors, and/or the right to liquidate the underlying collateral, if any, and retain the proceeds. Based on its established loan-to-value guidelines, the Company believes the recourse available is sufficient to recover future payments, if any, under the loan buy-back guarantees.

Merchant ProcessingThe Company, through its subsidiary NOVA Information Systems, Inc., provides merchant processing services. Under the rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In this situation, the transaction is “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.

46	U.S. Bancorp

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Contingent Consideration ArrangementsThe Company has contingent payment obligations related to certain business combination transactions. Payments are guaranteed as long as certain post-acquisition performance-based criteria are met. At June 30, 2003, the maximum potential future payments guaranteed by the Company under these arrangements was approximately $76.2 million and primarily represented contingent payments related to the acquisition of State Street Corporate Trust business on December 31, 2002, and are payable within 6 to 12 months.

Other Guarantees The Company provides liquidity and credit enhancement facilities to two Company-sponsored conduits, as more fully described in the “Off-Balance Sheet Arrangements” section within Management’s Discussion and Analysis. Although management believes a draw against these facilities is remote, the maximum potential future payments guaranteed by the Company under these arrangements was approximately $10.2 billion at June 30, 2003. The recorded fair value of the Company’s liability for the credit enhancement recourse obligation and liquidity facilities was $37.4 million at June 30, 2003, and was included in other liabilities.

OTHER CONTINGENT LIABILITIES

In connection with the industry-wide investigations of research analyst independence issues, the Company’s brokerage and investment banking business line established a $50.0 million liability for probable claims that in part included a settlement with certain governmental and regulatory agencies of $25.0 million for investment banking regulatory matters and $7.5 million for funding independent analyst research for its customers.

Note 13		Supplemental Disclosures to the Consolidated Financial Statements

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

				Six Months Ended June 30,
(Dollars in Millions)				2003				2002
Acquisitions and divestitures
	Assets acquired			$	—			$	534.6
	Liabilities assumed				—				(446.2	)
		Net		$	—			$	88.4

Money Market Investmentsare 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)			2003				2002
Interest-bearing deposits			$	199			$	102
Federal funds sold				2,847				61
Securities purchased under agreements to resell				167				271
	Total money market investments		$	3,213			$	434

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Consolidated Daily Average Balance Sheet and Related" -->

				For the Three Months Ended June 30,
				2003												2002
												Yields												Yields				% Change
(Dollars in Millions)				Average								and				Average								and				Average
(Unaudited)				Balances				Interest				Rates				Balances				Interest				Rates				Balances
Assets
Money market investments				$	599			$	2.6				1.71	%		$	779			$	2.2				1.09	%			(23.1	)%
Trading securities					960				8.1				3.40				1,022				10.1				3.96				(6.1	)
Taxable securities					35,517				422.4				4.76				27,051				346.1				5.12				31.3
Non-taxable securities					625				10.8				6.89				965				16.5				6.87				(35.2	)
Loans held for sale					3,728				51.8				5.56				2,142				36.6				6.84				74.0
Loans (b)
	Commercial				41,702				584.5				5.62				44,427				670.0				6.05				(6.1	)
	Commercial real estate				27,089				400.5				5.93				25,229				403.4				6.41				7.4
	Residential mortgages				11,012				172.3				6.27				8,194				147.1				7.18				34.4
	Retail				38,000				667.2				7.04				36,167				719.9				7.98				5.1
		Total loans			117,803				1,824.5				6.21				114,017				1,940.4				6.82				3.3
Other earning assets					1,627				27.0				6.67				1,665				32.7				7.88				(2.3	)
		Total earning assets			160,859				2,347.2				5.85				147,641				2,384.6				6.47				9.0
Allowance for credit losses					(2,472	)											(2,546	)											(2.9	)
Unrealized gain (loss) on available-for-sale securities					694												224												*
Other assets					27,974												23,828												17.4
		Total assets		$	187,055											$	169,147												10.6
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits				$	32,515											$	27,267												19.2
Interest-bearing deposits
	Interest checking				18,090				21.6				.48				15,318				25.4				.67				18.1
	Money market accounts				31,134				84.0				1.08				24,384				76.3				1.26				27.7
	Savings accounts				5,614				6.0				.43				4,957				6.6				.54				13.3
	Time certificates of deposit less than $100,000				15,790				115.0				2.92				19,653				192.8				3.93				(19.7	)
	Time deposits greater than $100,000				13,008				61.9				1.91				10,871				74.7				2.76				19.7
		Total interest-bearing deposits			83,636				288.5				1.38				75,183				375.8				2.00				11.2
Short-term borrowings					9,879				42.8				1.74				11,650				68.3				2.35				(15.2	)
Long-term debt					32,488				185.5				2.29				30,152				216.8				2.88				7.7
Company-obligated mandatorily redeemable preferred securities					2,661				24.5				3.69				2,866				33.9				4.75				(7.2	)
		Total interest-bearing liabilities			128,664				541.3				1.69				119,851				694.8				2.32				7.4
Other liabilities					6,782												5,554												22.1
Shareholders’ equity					19,094												16,475												15.9
		Total liabilities and shareholders’ equity		$	187,055											$	169,147												10.6 %
Net interest income								$	1,805.9											$	1,689.8
Gross interest margin													4.16	%											4.15	%
Gross interest margin without taxable-equivalent increments													4.14												4.13
Percent of Earning Assets
Interest income													5.85	%											6.47	%
Interest expense													1.35												1.88
Net interest margin													4.50												4.59
Net interest margin without taxable-equivalent increments													4.48	%											4.57	%

*		Not meaningful
(a)		Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent.
(b)		Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.

48	U.S. Bancorp

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Yields and Rates (a)" -->

				For the Six Months Ended June 30,
				2003												2002
												Yields												Yields				% Change
(Dollars in Millions)				Average								and				Average								and				Average
(Unaudited)				Balances				Interest				Rates				Balances				Interest				Rates				Balances
Assets
Money market investments				$	588			$	6.6				2.25	%		$	746			$	5.5				1.47	%			(21.2	)%
Trading securities					948				17.2				3.63				963				18.6				3.87				(1.6	)
Taxable securities					34,518				818.5				4.74				26,304				693.9				5.28				31.2
Non-taxable securities					669				23.4				6.99				1,021				35.2				6.91				(34.5	)
Loans held for sale					3,884				111.4				5.74				2,248				75.8				6.75				72.8
Loans (b)
	Commercial				41,647				1,173.0				5.67				44,902				1,340.2				6.01				(7.2	)
	Commercial real estate				26,937				801.0				6.00				25,207				810.6				6.48				6.9
	Residential mortgages				10,570				334.5				6.35				8,078				290.9				7.22				30.8
	Retail				37,908				1,356.3				7.22				35,679				1,433.9				8.10				6.2
		Total loans			117,062				3,664.8				6.31				113,866				3,875.6				6.86				2.8
Other earning assets					1,645				56.3				6.90				1,649				51.7				6.33				(.2	)
		Total earning assets			159,314				4,698.2				5.93				146,797				4,756.3				6.52				8.5
Allowance for credit losses					(2,489	)											(2,540	)											(2.0	)
Unrealized gain (loss) on available-for-sale securities					653												195												*
Other assets					27,897												24,014												16.2
		Total assets		$	185,375											$	168,466												10.0
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits				$	32,669											$	27,375												19.3
Interest-bearing deposits
	Interest checking				17,814				44.1				.50				15,236				51.7				.68				16.9
	Money market accounts				29,915				159.5				1.07				24,589				151.9				1.25				21.7
	Savings accounts				5,444				11.3				.42				4,866				13.1				.54				11.9
	Time certificates of deposit less than $100,000				16,500				248.2				3.03				20,056				407.2				4.09				(17.7	)
	Time deposits greater than $100,000				13,642				132.0				1.95				10,110				147.4				2.94				34.9
		Total interest-bearing deposits			83,315				595.1				1.44				74,857				771.3				2.08				11.3
Short-term borrowings					9,975				86.2				1.74				13,099				147.2				2.27				(23.8	)
Long-term debt					31,103				371.3				2.40				28,311				408.9				2.91				9.9
Company-obligated mandatorily redeemable preferred securities					2,820				55.9				4.00				2,852				68.7				4.86				(1.1	)
		Total interest-bearing liabilities			127,213				1,108.5				1.76				119,119				1,396.1				2.36				6.8
Other liabilities					6,709												5,654												18.7
Shareholders’ equity					18,784												16,318												15.1
		Total liabilities and shareholders’ equity		$	185,375											$	168,466												10.0 %
Net interest income								$	3,589.7											$	3,360.2
Gross interest margin													4.17	%											4.16	%
Gross interest margin without taxable-equivalent increments													4.15												4.14
Percent of Earning Assets
Interest income													5.93	%											6.52	%
Interest expense													1.40												1.92
Net interest margin													4.53												4.60
Net interest margin without taxable-equivalent increments													4.51	%											4.58	%

*		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.

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Part II -- Other Information" -->

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

	12	Computation of Ratio of Earnings to Fixed Charges
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, dated August 14, 2003.
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, dated August 14, 2003.

(b) Reports on Form 8-K

	•	Form 8-K dated April 15, 2003, relating to the Company’s first quarter, 2003 financial results.
	•	Form 8-K dated April 28, 2003, relating to U.S. Bancorp Piper Jaffray’s final settlement with Federal and State regulators resolving the research analyst inquiry.
	•	Form 8-K dated June 25, 2003, relating to the filing of a registration statement on Form 10 in connection with the planned spin-off of the Company’s capital markets business unit.
	•	Form 8-K dated July 15, 2003, relating to the Company’s second quarter, 2003 financial results.

SIGNATURE

	U.S. BANCORP

	By:	/s/ TERRANCE R. DOLAN

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

50	U.S. Bancorp

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EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges

			Three Months Ended				Six Months Ended
(Dollars in Millions)			June 30, 2003				June 30, 2003
Earnings
1.  Income before cumulative effect of change in accounting principles			$	953.6			$	1,864.8
2.  Applicable income taxes				491.2				969.3
3.  Income before income taxes and cumulative effect of change in accounting principles (1 + 2)			$	1,444.8			$	2,834.1
4.  Fixed charges:
	a.  Interest expense excluding interest on deposits		$	252.8			$	513.4
	b.  Portion of rents representative of interest and amortization of debt expense			19.4				38.7
	c.  Fixed charges excluding interest on deposits (4a + 4b)			272.2				552.1
	d.  Interest on deposits			288.5				595.1
	e.  Fixed charges including interest on deposits (4c + 4d)		$	560.7			$	1,147.2
5.  Amortization of interest capitalized			$	—			$	—
6.  Earnings excluding interest on deposits (3 + 4c + 5)				1,717.0				3,386.2
7.  Earnings including interest on deposits (3 + 4e + 5)				2,005.5				3,981.3
8.  Fixed charges excluding interest on deposits (4c)				272.2				552.1
9.  Fixed charges including interest on deposits (4e)				560.7				1,147.2
Ratio of Earnings to Fixed Charges
10.  Excluding interest on deposits (line 6/line 8)				6.31				6.13
11.  Including interest on deposits (line 7/line 9)				3.58				3.47

U.S. Bancorp	51

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EXHIBIT 31.1

CERTIFICATION PURSUANT TO

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 quarterly 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 quarterly report;
(3)	Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
(4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and have:

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

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

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

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

	/s/ JERRY A. GRUNDHOFER
	Jerry A. Grundhofer
	Chief Executive Officer

Dated: August 14, 2003

52	U.S. Bancorp

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EXHIBIT 31.2

CERTIFICATION PURSUANT TO

I, David M. Moffett, Chief Financial 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 quarterly 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 quarterly report;
(3)	Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
(4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and have:

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

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

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

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

	/s/ DAVID M. MOFFETT
	David M. Moffett
	Chief Financial Officer

Dated: August 14, 2003

U.S. Bancorp	53

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EXHIBIT 32.1

CERTIFICATION PURSUANT TO

         Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), the undersigned, Chief Executive Officer of U.S. Bancorp, a Delaware corporation (the “Company”), does hereby certify that:

(1)	The Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 14, 2003		/s/ JERRY A. GRUNDHOFER ------------------------------------ Jerry A. Grundhofer Chief Executive Officer

         The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350) and is not being filed as part of the Form 10-Q or as a separate disclosure document.

         A signed original of this written statement required by section 906 has been provided to U.S. Bancorp and will be retained by U.S. Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

54	U.S. Bancorp

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EXHIBIT 32.2

CERTIFICATION PURSUANT TO

         Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), the undersigned, Chief Financial Officer of U.S. Bancorp, a Delaware corporation (the “Company”), does hereby certify that:

(1)	The Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 14, 2003		/s/ DAVID M. MOFFETT ------------------------------------ David M. Moffett Chief Financial Officer

         The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350) and is not being filed as part of the Form 10-Q or as a separate disclosure document.

         A signed original of this written statement required by section 906 has been provided to U.S. Bancorp and will be retained by U.S. Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

U.S. Bancorp	55

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Executive Offices

U.S. Bancorp

Common Stock Transfer Agent and Registrar

Mellon Investor Services

For Registered or Certified Mail:

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

Independent Auditors

Common Stock Listing and Trading

Dividends and Reinvestment Plan

Investment Community Contacts

Judith T. Murphy

Financial Information

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

Media Requests

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.

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