Year Ended December 31														2003				2002
(Dollars and Shares in Millions, Except Per Share Data)		2003				2002				2001				v 2002				v 2001
Total net revenue (taxable-equivalent basis)		$	12,530.5			$	12,057.9			$	11,074.6				3.9	%			8.9	%
Noninterest expense			5,596.9				5,740.5				6,149.0				(2.5	)			(6.6	)
Provision for credit losses			1,254.0				1,349.0				2,528.8
Income taxes and taxable-equivalent adjustments			1,969.5				1,740.4				872.8
Income from continuing operations		$	3,710.1			$	3,228.0			$	1,524.0				14.9				111.8
Discontinued operations (after-tax)			22.5				(22.7	)			(45.2	)
Cumulative effect of accounting change (after-tax)			—				(37.2	)			—
Net income		$	3,732.6			$	3,168.1			$	1,478.8				17.8				114.2
Per Common Share
Earnings per share from continuing operations		$	1.93			$	1.68			$	.79				14.9	%			112.7	%
Diluted earnings per share from continuing operations			1.92				1.68				.79				14.3				112.7
Earnings per share			1.94				1.65				.77				17.6				114.3
Diluted earnings per share			1.93				1.65				.76				17.0				117.1
Dividends declared per share			.855				.780				.750				9.6				4.0
Book value per share			10.01				9.62				8.58				4.1				12.1
Market value per share			29.78				21.22				20.93				40.3				1.4
Average shares outstanding			1,923.7				1,916.0				1,927.9				.4				(.6	)
Average diluted shares outstanding			1,936.2				1,924.8				1,940.3				.6				(.8	)
Financial Ratios
Return on average assets			1.99	%			1.84	%			.89	%
Return on average equity			19.2				18.3				9.0
Net interest margin (taxable-equivalent basis)			4.49				4.65				4.46
Efficiency ratio			45.6				48.8				57.2
Average Balances
Loans		$	118,362			$	114,453			$	118,177				3.4	%			(3.2	)%
Investment securities			37,248				28,829				21,916				29.2				31.5
Earning assets			160,808				147,410				143,501				9.1				2.7
Assets			187,630				171,948				165,944				9.1				3.6
Deposits			116,553				105,124				104,956				10.9				.2
Total shareholders’ equity			19,393				17,273				16,426				12.3				5.2
Period End Balances
Loans		$	118,235			$	116,251			$	114,405				1.7	%			1.6	%
Allowance for credit losses			2,369				2,422				2,457				(2.2	)			(1.4	)
Investment securities			43,334				28,488				26,608				52.1				7.1
Assets			189,286				180,027				171,390				5.1				5.0
Deposits			119,052				115,534				105,219				3.0				9.8
Total shareholders’ equity			19,242				18,436				16,745				4.4				10.1
Regulatory capital ratios
Tangible common equity			6.5	%			5.7	%			5.9	%
Tier 1 capital			9.1				8.0				7.8
Total risk-based capital			13.6				12.4				11.9
Leverage			8.0				7.7				7.9

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

“We are pleased to tell you that in 2003, we reported record earnings and also achieved the financial results to which we had committed.”

f e l l o w
s h a r e h o l d e r s :

Strong financial results. U.S. Bancorp delivered strong financial results in 2003, the culmination of five years of transformation and integration, during which we forged a company uniquely positioned to generate consistent earnings and revenue growth.

	•		Earnings per share increased 17.6% over 2002
	•		Record net income increased 17.8% over 2002
	•		Industry-leading Return on Assets of 1.99%
	•		Industry-leading Return on Equity of 19.2%
	•		Industry-leading Tangible Common Equity of 6.5%
	•		Positive debt rating changes by the rating agencies

Growing U.S. Bancorp. With virtually all integration and merger-related activities behind us, we are now focused solely on growing U.S. Bancorp by leveraging the breadth and depth of the powerful franchise we have built. Our five-year transformation allowed us to gain access to high-growth markets, to solidify strong regional positions and to build a national platform. During our integration process, we accelerated our cost control leadership. We are now extending that cost and execution leadership, as well as making significant strategic investments in our highest-potential businesses, and reaffirming our focus on delivering high-quality service.

Achieving our goals to build a stronger corporation. I am pleased to tell you that U.S. Bancorp accomplished the performance, credit quality and other goals we had previously committed to achieving. We met financial objectives — in particular, revenue growth, expense management, net interest margin and earnings per share.

In addition, and perhaps most importantly, we continue to show improvement in overall credit quality, a direct result of all we have done in the past two years to reduce this corporation’s risk profile. We also completed the spin-off of Piper Jaffray, further reducing risk and volatility in our business. Finally, we began a major expansion of our distribution channels in fast-growing markets within our franchise through the previously announced in-store branch partnerships with Safeway/Vons, Smith’s and Publix.

140 years of creating value for shareholders. We have targeted returning 80 percent of our earnings to shareholders through a combination of dividends and share repurchases.

The 17 percent common stock dividend increase approved by our Board of Directors and announced in December 2003 is a continuation of a long history of paying significant dividends, as well as a reflection of the Board’s confidence in this corporation’s future success.

U.S. Bancorp, through its predecessor companies, has increased its dividend in each of the past 32 years and has paid a dividend for 140 consecutive years.

In addition to the common stock dividend discussed above, as part of the December 2003 spin-off of Piper Jaffray, U.S. Bancorp distributed common shares of the new Piper Jaffray Companies in the form of a special dividend to eligible U.S. Bancorp shareholders.

Also in December 2003, our Board of Directors approved authorization to repurchase 150 million shares of outstanding U.S. Bancorp common stock during the next two years.

These specific steps were undertaken to increase the value of your shares; in addition, we manage this corporation with the long-term value of your investment as our paramount objective. It’s the reason we come to work each day.

Sincerely,

Jerry A. Grundhofer
Chairman, President and Chief Executive Officer
U.S. Bancorp
February 27, 2004

Good corporate governance promotes ethical business practices, demands meticulous accounting policies and procedures and includes a structure with effective checks and balances. Corporate governance is vital to the continued success of U.S. Bancorp and the entire financial services industry. Our ethical standards have rewarded us with an enviable reputation in today’s marketplace — a marketplace where trust is hard to earn. Our shareholders, customers, communities and employees demand — and deserve — to do business with companies they can trust. U.S. Bancorp operates with uncompromising honesty and integrity. Our Board of Directors has had a Corporate Governance Committee for many years. We have implemented Corporate Governance Guidelines in response to today’s heightened concern. Our Corporate Governance Guidelines are available for you to view on our Internet web site at usbank.com. Following are some of the important elements of our Corporate Governance practices.

Independent oversight. Each of our Audit Committee, Compensation Committee and Governance Committee is composed entirely of independent outside directors. In fact, following our annual meeting, our Chairman, President and Chief Executive Officer will be the only member of our Board of Directors who is not independent. In addition, our Board of Directors and the committees of the Board meet in “executive session” without management in attendance at every meeting. The presiding director at every executive session of the Board is an independent director. The Board and each committee also have express authority to engage outside advisors to provide additional independent expertise for their deliberations.

Board of Directors’ focus on U.S. Bancorp. To ensure that our directors are able to focus effectively on our business, we limit the number of other public company boards a director may serve on to three. The Chairman, President and Chief Executive Officer of U.S. Bancorp serves on only two other public company boards. Audit Committee members may serve on no more than three other public company audit committees, and the chairman of the Audit Committee serves on no other audit committees.

Board of Directors’ knowledge and expertise. All of our directors are skilled business leaders. Directors are encouraged to attend continuing director education seminars in order to keep a sharp focus on current good governance practices. In addition, the Board and each committee may use outside advisors to add expertise on specific issues. Our directors have full and

unrestricted access to our management and employees. Additionally, key members of management attend Board meetings from time to time to present information about the results, plans and operations of their business segments. The Board and each committee perform annual self-evaluations in order to assess their performance and to ensure that the Board and committee structure is providing effective oversight of corporate management. You may review the charters of each of our Board committees on our Internet web site at usbank.com.

Management’s ownership commitment. We understand clearly that U.S. Bancorp shareholders are the primary beneficiaries of management’s actions. All U.S. Bancorp executive officers and directors own shares of company stock, and in order to tightly align management’s interests with those of our shareholders, we have established stock ownership guidelines for our executive officers.

Disclosure controls. We have established rigorous procedures to ensure that we provide complete and accurate disclosure in our publicly filed documents. We have also established a telephone hotline for employees to anonymously submit any concern they may have regarding corporate controls or ethical breaches. Management investigates all complaints and directs to our Audit Committee any issues relating to concerns about our financial statements or public disclosures.

U.S. Bancorp Code of Ethics and Business Conduct. Each year, we reiterate the vital importance of our Code of Ethics and Business Conduct. The Code applies to directors, officers and all employees, who must certify annually their compliance with the standards of the Code. The content of the Code is based not solely on what we have the right to do, but, even more importantly, on what is the right thing to do. Our standards are higher than any legal minimum because our business is built on trust. You may review our Code of Ethics and Business Conduct on our Internet web site at usbank.com.

Communications with our Board of Directors. Shareholders can communicate with our Board of Directors by sending a letter addressed to the Board of Directors, the independent outside directors or specified individual directors, to:

The Office of the Corporate Secretary
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402

shareholder value. It is an environment where employees take ownership of their business, where they are held accountable for the company’s success and where they are compensated for measurable performance results.

Service is foundation of success. U.S. Bank employees are recognized and rewarded for their outstanding service. Our Pay for Performance compensation program rewards employees financially and personally for their achievements in meeting service and sales goals and for their contributions to company earnings. Customized line of business incentive programs drive employees to generate revenue while fulfilling customers’ needs. Each quarter, 20 selected employees who exemplify our high service standards are inducted into the prestigious Circle of Service Excellence.

The Service Advantage puts customers at center of everything we do. To deepen our commitment to superior service, in 2003, we launched The Service Advantage, an innovative internal initiative designed to increase customer access and convenience; simplify customer issue solutions; make quality service central to hiring, orientation and training; and improve the common customer experience. Our Service Council is the driving force behind The Service Advantage; it is comprised of senior managers from every line of business who identify areas of improvement, analyze customer satisfaction measurements and implement resolutions that create greater customer satisfaction and loyalty. We are enhancing existing and creating new internal service techniques and processes, as well, so that our frontline employees have the tools and support they need to better meet customer expectations. By the end of first quarter 2004, every U.S. Bank employee will have received personalized training on the core principles of The Service Advantage.

Cacique® is the #1 selling brand of Hispanic-style cheeses and creams in the world. For over three decades, the family owned and operated company has produced authentic cheeses, creams and chorizos, growing from a small, abandoned facility to one of the world’s most sophisticated cheese manufacturing facilities. Cacique is committed to quality, heritage and tradition, sharing this legacy with the community through a long history of philanthropy, including Fighting Diabetes Together, a recent collaboration with City of Hope®. U.S. Bank Commercial Banking partners with Cacique to provide flexible, competitive products to meet the financial needs of this unique company.

U.S. Bancorp meets the diverse financial needs of our customers by providing innovative, creative answers through specialized lines of business. Across 24 states and beyond, our experienced bankers share ideas, best practices, capabilities and cross-sell opportunities, supported by advanced technology and operating systems. The results are competitive benefits for our customers and competitive advantages for U.S. Bancorp.

	•		Commercial Banking
	•		Commercial Real Estate
	•		Corporate Banking
	•		Correspondent Banking
	•		Dealer Commercial Services
	•		Equipment Leasing
	•		Foreign Exchange
	•		Government Banking
	•		International Banking
	•		Specialized Industries
	•		Treasury Management

Wholesale Banking offers strategic lending, depository, treasury management and other financial services to middle market, large corporate, financial institution and public sector customers. Experienced, accessible relationship managers serve as our customers’ link to all the products, credit, support and resources that the extensive scope of U.S. Bancorp provides.

S U C C E S S E S

•		Launched U.S. Bank Returned Check Management, providing customers the capability to consolidate all returned items to one location, convert them to electronic items and monitor collection on a state-of-the-art web-based reporting system.
•		Introduced Global Trade Works, an industry-leading web-based Trade Finance Product Suite; delivers increased customer productivity by providing secure online access to real-time data and extensive reporting capabilities, and allows customers to initiate letters of credit via the Internet.
•		Introduced enhancements to U.S. Bank ONLINE BANKER services, a web-based cash management solution; provides a single point of access to information reporting, plus the initiation of wire transfers, ACH, book transfers, stop payments and data export functions.
•		Expanded U.S. Bank FIRSTLook Now, a new wholesale lockbox image service that offers same-day, online customer access to wholesale lockbox checks and invoices, plus added CD-ROM archive capabilities.
•		Developed a new remittance processing system for government banking customers that integrates payment and remittance information received over the Internet via a newest generation image-based lockbox system; speeds processing, provides more valuable incoming payment information, enhances service quality and is scalable and upgradable as customer needs change.

•

Corporate Payment Systems

–

Travel and entertainment, purchasing, fleet, freight payment systems and business-to-business payment

•

NOVA Information Systems, Inc.

–

Merchant processing with top 3 market share

•

Retail Payment Solutions

–

Relationship-based retail payment solutions; includes credit, debit and stored value cards through U.S. Bank, Elan financial institutions and co-brand partners

•

Transaction Services

	–		ATM Banking
	–		Elan Financial Services, a single source provider of transaction processing for financial institutions nationwide

Our unique Payment Services business specializes in credit and debit cards, commercial card services, business-to-business payment and ATM and merchant processing. Customized products delivered through leading-edge technology channels equip consumers, small businesses, merchants of every size, government entities, large corporations, financial institutions and co-brand partners with the most advanced payment services tools available.

S U C C E S S E S

•		Released AccountCommander, Voyager Fleet Systems’ newest online account maintenance tool, to customers nationwide, marking the first phase of Voyager’s FleetCommander Online, a web-based fuel management program designed to provide complete, convenient online account access.
•		Introduced eQuest,™ an Internet-based application that allows financial institution customers to analyze and report on daily ATM and debit transaction activity; eQuest generates a suite of informational reports with customized selection criteria.
•		Expanded the Fastbank® ATM network through Elan Financial Services to become the 12th largest ATM network in the nation.
•		Launched Electronic Check Service and Electronic Gift Card programs through NOVA Information Systems; these value-added products enhance the payment services offerings for bank partners, and improve cash flow and point-of-sale operations for merchant customers.
•		Entered the health care payment segment through the MedAssist Advantage Plan (MAP), offering a new solution for patient financing.

•

Corporate Trust Services

	–		Escrow
	–		Public Finance/Structured Finance/Corporate Finance
	–		Document Custody

•

Institutional Trust & Custody

	–		Retirement Plans
	–		Institutional Custody
	–		Master Trust

•

Private Client Group

	–		Private Banking
	–		Personal Trust
	–		Investment Management
	–		Financial and Estate Planning

•

U.S. Bancorp Asset Management, Inc.

	–		First American Funds™
	–		Private Asset Management
	–		Institutional Advisory
	–		Securities Lending

•

U.S. Bancorp Fund Services, LLC

	–		Mutual Fund Administration and Compliance
	–		Transfer Agent
	–		Mutual Fund Accounting
	–		Fund Distribution
	–		Partnership Administration
	–		Offshore Trust Administration

Private Client, Trust & Asset Management meets diverse wealth management needs through best-in-class personal trust, corporate trust, institutional trust and custody, private banking, financial advisory, investment management and mutual fund and alternative investment product services. Expert advisers and relationship managers offering sophisticated knowledge and personalized service give U.S. Bank a competitive advantage.

S U C C E S S E S

•		Launched a number of new products to meet individual and institutional investors’ needs, including the First American Stable Asset Advisor Fund - designed for investors who seek preservation of principal and competitive returns; new institutional-class money market shares; and a unique alliance with Coast Asset Management to provide qualified investors with absolute-return hedge-fund-of-fund products.
•		Expanded U.S. Bancorp Fund Services, LLC service offerings to include private investment products, such as investment partnerships and separately managed accounts.
•		Unveiled the U.S. Bank Trust Investor Reporting web site usbank.com/abs, providing investors in public and private corporate trust transactions the ability to assign entitlements for access to private deals; offers a customized portfolio, improved factor and payment searching and a simplified navigational flow for excellent customer usability.
•		Expanded TrustNow Essentials, a new comprehensive online reporting system allowing Corporate Trust Services, Institutional Trust & Custody and Private Client Group customers to view, print and download trust statements and reports via the Internet 24 hours a day, seven days a week.
•		Successfully completed purchase of State Street Corporate Trust and resulting systems conversions, seamlessly integrating approximately 20,000 new client issuances, 365,000 bondholders and $689 billion in assets to the U.S. Bank Corporate Trust Services platform.

Our industry-leading Consumer Banking delivers a full range of products and services to the broad consumer market and small businesses through full-service banking offices, ATMs, telephone customer service and telesales, online banking and direct mail. A disciplined sales culture, optimal distribution channel convenience and a mandate for quality service are the hallmarks of Consumer Banking.

S U C C E S S E S

•		Enhanced our unique Checking That Pays® program, giving customers who use their U.S. Bank Visa® Check Card the choice of four different reward options. In August 2003, rewarded more than one million Checking That Pays customers with an annual cash rebate. Expanded Checking That Pays to business check card customers, too.
•		Introduced free U.S. Bank Internet Bill Pay, eliminating the monthly fee and making online bill payment even easier for consumer checking account customers.
•		Enhanced usbank.com with a host of new features, including free online account statements through U.S. Bank Internet Banking, instant application decisions for U.S. Bank Cash Rewards Cards and U.S. Bank Student Checking Account, direct enrollment in the online security program Verified by Visa®, and Spanish-language additions to usbank.com/espanol.
•		Introduced U.S. Bank Home Mortgage Payment Buster, a new mortgage loan program that reduces monthly payments and eliminates the need to purchase mortgage insurance.
•		Partnered with the United States Hispanic Chamber of Commerce to create ¡Capital!, a first-of-its-kind, strategic loan program designed to meet small business lending needs in high-growth Hispanic markets nationwide.
•		Reached the $1 billion milestone in outstanding recreation finance loans just two years after inception of our Recreation Finance Division; announced the creation of the U.S. Bank manufactured housing finance business, modeled after our successful recreation finance strategies and partnerships.
•		Expanded Student Banking Campus Card relationships with Bellarmine University, Creighton University, Gonzaga University, John Carroll University, Minnesota State University Moorhead and San Diego State University; multi-purpose campus ID card provides students with official campus identification and ATM access, plus convenient access to laundry facilities, vending machines, health services, computer labs and more.

	•		24-Hour Banking and Financial Sales
	•		Business Equipment Finance Group
	•		Community Banking
	•		Consumer Lending
	•		Group Sales and Student Banking
	•		Home Mortgage
	•		In-store and Corporate On-site Banking
	•		Investments and Insurance
	•		Metropolitan Branch Banking
	•		SBA Division
	•		Small Business Banking

Expanding in-store banking office distribution. In 2003, we began a major expansion of our in-store network — the third largest in the country — by partnering with supermarket retailers Safeway Inc., Publix and Smith’s Food & Drug Stores. Beginning with six new Nashville Publix branches in 2003, by the end of 2004, U.S. Bank will have opened 15 new Smith’s in-store branches in Utah, and by the end of 2005 we will have opened a total of 163 new full-service in-store locations in Safeway and Vons stores throughout California, Arizona and Nevada.

Strategic investments solidify our position in high-growth markets and businesses. In 2003, U.S. Bank completed system conversions resulting from the 2002 purchase and deposit assumption of 57 Bay View Bank branches in California. This transaction strengthened the U.S. Bank geographic footprint in California, adding to existing U.S. Bank branches to create an integrated network offering complete coverage of the fast-growing Greater Bay area- San Francisco, San Jose, Alameda County, Contra Costa County, Santa Rosa, Vallejo-Fairfield-Sonoma and Santa Cruz.

In 2003, U.S. Bank also completed system conversions resulting from the purchase of State Street Corporate Trust in 2002. This transaction strongly complemented our existing corporate trust business, making U.S. Bank the leading corporate trust provider in New England in addition to our current lead status in the Northwest, West and Central regions of the country.

With over thirty-five years of experience, Millennium Development Corp. has invested in and developed a wide variety of real estate projects ranging from agricultural land to office buildings to shopping centers. As an equity participant in each project, Millennium Development Corp. is committed to preserving capital and producing an attractive return on investment. For more than 10 years, U.S. Bank Small Business Banking has provided the cash flow management, credit and financing resources that support Millennium Development’s business vision.

The sports, educational and cultural programs of the Mathews-Dickey Boys’ & Girls’ Club in St. Louis instill “The Three R’s: Respect, Restraint & Responsibility” within more than 40,000 deserving young men and women each year. In 1982, President Ronald Reagan recognized the Club’s neighbor-helping neighbor concept by declaring it a model for the country. Numerous other government, media, sports and civic luminaries have applauded the 44-year-old organization’s impact in keeping more than one million youth on the fields, in the classroom and off the streets. We’ve enjoyed a successful relationship with Mathews-Dickey, a long-time client of the U.S. Bank Private Client Group. We are proud to manage the Endowment Fund for Mathews- Dickey to support its youth-enrichment programs for years to come.

U.S. Bancorp serves multiple customer segments in our 24-state footprint through a broad, attractive business mix with scale, resulting in competitive advantages, operating economies, reduced risk, diversified revenue streams and a wide range of ways to satisfy every customer.

U.S. Bancorp has a very attractive growth franchise. Our core regional businesses operate in our 24-state footprint and benefit from the geographic density of our banking locations and franchise support in terms of cross-sell, crossservicing and back-office support. Our top-performing regional businesses, combined with our specialized national-scale businesses, create a diversified and advantaged revenue mix of both spread and fee income from discrete sources. With challenge, opportunity, risk and reward spread across all geographic markets and a wide range of customer and business segments, we are positioned to capitalize on a recovering economy, while tolerating individual market or industry weaknesses.

Improving business unit trends. We see strong business momentum in Consumer Banking; we opened nearly a quarter of a million more checking accounts than were closed in 2003. A checking account is our retail customers’ primary link to U.S. Bank and is the basis for our 11.7 percent compound annual growth rate in branch-generated average low-cost core deposits. More importantly, checking is the starting point for expanded consumer relationships, reflected in a 12 percent compound annual growth rate in branch-generated average retail loans. Small business loans and branch-based investment product fee income also showed double-digit growth rates.

Our investment in distribution in high-growth markets continues, most particularly our current in-store branch expansion and our extension of mortgage banking origination capabilities in western markets.

In our Wholesale Banking business, the timing of commercial loan growth is still uncertain; however, we expect credit improvement trends to continue, a key driver of future growth. Along with loan generation, our relationship managers are putting renewed focus on providing appropriate supplementary services and deposit products to our commercial customers.

Improving equity markets are driving growth in our Private Client, Trust & Asset Management business units, as are outstanding service and our exceptional personal attention to each customer. Deposits, total loans and noninterest income are on upward trends. We strive to increase the level and breadth of services we provide to corporate executives, business owners, legal and healthcare professionals, professional athletes and non-profit organizations with their specialized and complex financial needs. Private Client Group earns an increasing share of wallet through expert investment management, financial planning, personal trust and private banking services. Institutional investment needs are met with high-performing securities lending, equity, fixed income and cash products.

Revenue by
Business Segment

15.1% Metropolitan Banking
11.9% Community Banking
10.3% Retail Payment Solutions
  6.7% Corporate Banking
  6.2% NOVA Information Systems
  5.5% Middle Market Banking
  4.9% Mortgage Banking
  4.3% Consumer Lending
  3.9% Private Client Group
  3.4% Commercial Real Estate
  2.5% Corporate Trust
  2.0% Government Banking
  1.9% Asset Management
  1.9% Corporate Payment Systems
  1.1% Institutional Trust
    .7% Fund Services

Diversified
Regional Businesses

Consumer Banking

Institutional Trust

Middle Market Banking

Private Client Group

With top-ranked payment services, expertise in highly specialized businesses, advanced technological capabilities and financial products and services not limited by location, U.S. Bancorp has built a national standing in a number of high-growth businesses.

Lockheed Martin Corporation, the world’s premier advanced technology systems integrator, has partnered with U.S. Bank Corporate Payment Systems for ten years, adopting a full range of Corporate Payment Systems services, including corporate travel card and purchasing card programs. As a result of U.S. Bank Corporate Payment Systems’ flexibility and client-focus, Lockheed Martin recently extended its purchasing card commitment with a new five-year contract

Connie Mearkle (left), Assistant Treasurer,
and Molly Chung (right), Director,
Global Treasury Operations
Lockheed Martin Corporation
Bethesda, MD

Payment Services is a high-value, growth business without boundaries. U.S. Bank has developed innovative payment services to meet the rapidly expanding needs of consumers, businesses, financial institutions, government entities and millions of merchants throughout the world. This line of business has unlimited potential, and we utilize our expertise, technology and reputation for service to seize a growing share of business within this burgeoning arena.

We are the Number 3 merchant processor (NOVA), the Number 1 Visa commercial card issuer, the Number 2 small business card issuer, the Number 7 Visa and MasterCard® consumer card issuer, the Number 2 bank-owned ATM network, the Number 2 universal fleet card (Voyager) and the Number 2 freight payment provider (PowerTrack®).

Through NOVA Information Systems, recognized for superlative customer service and technical proficiency, our Merchant Processing business ranks third in the nation and serves more than 600,000 merchant locations in the United States and in Europe. We continue to expand this business through penetration of the U.S. Bank customer base of merchants and through ongoing activities, backed by the full resources of U.S. Bancorp, to gain additional merchant customers.

Our Retail Payment Solutions business is unique among large issuers in that we build this business in large part on relationship-based efforts among our retail and small business customers, among our growing network of correspondent financial institutions and with a star-studded roster of co-brand partners. There is enormous potential in the further penetration of our existing customer base and in our ability to stay at the leading edge of new product introductions.

Corporate Payment Systems is at the forefront of payment providers, using leading technology and expertise to automate the entire payment continuum for commercial buyers and sellers. Card solutions like One Card, Corporate Card, Purchasing Card and Fleet Card provide flexible solutions for classic payables, while PowerTrack adds increased control and sophisticated pre-payment audits for complex business-to-business procurement processes.

With a compelling investment in the industry’s best technology, our Transaction Services is the hub of electronic payments transactions for all U.S. Bancorp ATMs, as well as ATMs, credit and debit cards, merchant processing, and the electronic funds transfer network gateway for other financial institutions, through Elan Financial Services. With expertise, technology, economy of scale and existing potential still within our markets, this is a full-service, start-to-finish business with growth expectation.

Diverse U.S. Bancorp national businesses serve customers coast to coast. U.S. Bank is a leading financial resource for local and state government, political sub-divisions and the federal government through our Government Banking business. We are one of the largest tax payment processors for the U.S. Government, and we provide a wide range of financial services for the Department of Defense, as well as web and lockbox collection services for the U.S. Department of Homeland Security. Mortgage Banking originates loans in all 50 states. We are targeting becoming a Top 10 mortgage provider through expanded sales efforts nationally and also the extension of our Mortgage Banking as a primary line of business into our western markets.

With expertise to support the nation’s largest corporations, specialized industries and our middle market customers, Corporate Banking provides services to meet the most complex transactional, credit, financial management, international financing and exchange, and risk mitigation needs. We are also a national leader in treasury management services. Our relationship-based model succeeds on the experience of our managers, the economies of scope and scale derived from our size and geography and our commitment to cost management. As the leading provider of municipal trust services and a top provider of corporate, escrow and structured finance services, Corporate Trust Services brings an unrelenting commitment to exceeding expectations by providing the right solutions at the right time for customers nationwide.

U.S. Bancorp Asset Management leverages the multiple distribution channels and broad geographic range of U.S. Bank to deliver the First American family of mutual funds, which encompasses a full range of equity and fixed income investment strategies. We are a performance-driven culture of expanding non-proprietary distribution, and we continue to promote U.S. Bancorp Asset Management to prospective customers nationwide.

National
Businesses

 

                c o m m u n i t y
p a r t n e r s h i p s

 

 

Management’s Discussion and Analysis

     The Company’s strong performance is also reflected in our capital levels and the improving outlook by our credit rating agencies relative to a year ago. Equity capital of the Company has increased to 6.5 percent of tangible common equity at December 31, 2003 from 5.7 percent at December 31, 2002. Credit ratings assigned by various credit rating agencies reflect the favorable rating agency views of the direction of the Company’s credit quality, risk management, liquidity and capital management practices and our ability to generate earnings. Each of these factors is considered important by management and discussed further throughout this document.

     In concert with achieving our stated financial objectives, the Company took key steps to strategically change the risk profile of the organization and enhance shareholder value. The Company’s financial statements reflect decisions by the Company to spin off Piper Jaffray Companies (“Piper Jaffray”) and to adopt the fair value method of accounting for stock-based compensation. Additionally, in December 2003 we announced an expanded share repurchase program and further increased our cash dividend resulting in a 23.1 percent increase from the dividend rate in the fourth quarter of 2002. The tax-free distribution of Piper Jaffray strategically changed the risk profile of the Company by reducing the earnings volatility and business risks associated with investment banking and resulted in the distribution to our shareholders of an independent company with approximately $880 million of market value shortly after the distribution.

     In connection with the Piper Jaffray spin-off and the change in our method of accounting for stock-based compensation, the financial statements of the Company have been restated for all prior periods. As such, historical financial results related to Piper Jaffray have been segregated and accounted for in the Company’s financial statements as discontinued operations.

     In 2003, the Company had income from continuing operations, net of tax, of $3.7 billion, or $1.92 per diluted share, compared with $3.2 billion, or $1.68 per diluted share, in 2002. The 14.9 percent increase in income from continuing operations was primarily due to growth in net revenue, lower expenses and decreased credit costs. Net income from continuing operations included after-tax merger and restructuring-related items of $30.4 million ($46.2 million on a pre-tax basis), compared with after-tax merger and restructuring-related items of $209.3 million ($321.2 million on a pre-tax basis) in 2002. The $275.0 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 and the former U.S. Bancorp of Minneapolis (“USBM”) at the end of 2002. Partially offsetting this favorable item in 2003 was a year-over-year decrease of $55.1 million in net securities gains realized in 2002, and a year-over-year increase in the level of mortgage servicing rights (“MSRs”) impairment of $22.6 million, driven by

 

18 U.S. Bancorp

     Total net revenue, on a taxable-equivalent basis, was $12.5 billion in 2003, compared with $12.1 billion in 2002, a year-over-year increase of $472.6 million (3.9 percent). This growth was primarily due to organic growth of 3.7 percent and the benefit of acquisitions, offset somewhat by lower gains from asset sales. Revenue growth was comprised of a 5.4 percent increase in net interest income and a 2.0 percent net increase in noninterest income. The

 

 

U.S. Bancorp  19

5.4 percent increase in net interest income resulted from an increase of $13.4 billion (9.1 percent) in average earning assets, primarily driven by increases in investment securities, residential mortgages, retail loans and loans held for sale, partially offset by an overall decline in commercial loans. The impact of the increase in average earning assets was offset in part by a lower net interest margin given the current interest rate environment. The net interest margin in 2003 was 4.49 percent, compared with 4.65 percent in 2002. The decline reflected the change in asset mix among loan products, reinvestment of loan proceeds into lower-yielding investment securities and a reduction in the marginal benefit of net free funds due to lower average interest rates. The 2.0 percent net increase in noninterest income was driven by increases in payment services revenue, trust and investment management fees, deposit service charges, treasury management fees, mortgage banking activity, strong investment product sales and the impact of acquisitions. Somewhat offsetting the growth in these fee-based revenues was a year-over-year decline in net securities gains of $55.1 million. Additionally, other revenues for 2002 included $67.4 million of gains related to the sales of two co-branded credit card portfolios. Approximately $194.6 million of the increase in net revenue in 2003, compared with 2002, was due to acquisitions, including The Leader Mortgage Company, LLC (“Leader”), the 57 branches of Bay View Bank (“Bay View”) in northern California and the corporate trust business of State Street Bank and Trust Company (“State Street Corporate Trust”).

     Total noninterest expense was $5.6 billion in 2003, compared with $5.7 billion in 2002. The decrease in total noninterest expense of $143.6 million (2.5 percent) primarily reflected a year-over-year reduction in merger and restructuring-related charges of $275.0 million and cost savings related to integration efforts. Partially offsetting this decrease in expense during 2003 was a year-over-year increase of $22.6 million in MSR impairments coupled with the net impact of acquisitions, which accounted for approximately $124.9 million of the expense growth in 2003. Refer to “Acquisition and Divestiture Activity” and “Merger and Restructuring-related Items” for further information on the timing of acquisitions and discussion of merger and restructuring-related items. The efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) was 45.6 percent in 2003, compared with 48.8 percent in 2002. The favorable change in the efficiency ratio reflects the continuing improvement in the Company’s operating leverage resulting from integrated operating systems across all of our markets and business lines. In 2003, all business and system integration activities were completed including systems for our merchant processing business, Nova Information Systems, Inc., and the recent acquisitions of the corporate trust business of State Street Bank and Trust Company and the 57 branches of Bay View Bank. The Company anticipates no merger and restructuring-related charges in 2004 relating to completed acquisitions.

     The provision for credit losses was $1,254.0 million for 2003, compared with $1,349.0 million for 2002, a decrease of $95.0 million (7.0 percent). Net charge-offs during 2003 were $1,251.7 million, compared with net charge-offs of $1,373.0 million during 2002. The decline in net charge-offs reflects an improving economy and the Company’s ongoing efforts to reduce the overall credit risk profile of the organization over the past three years. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

     The following acquisition 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 Corporate Trust in a cash transaction valued at $725 million. State Street Corporate Trust was a leading provider, particularly in the Northeast, of corporate trust and agency services to a variety of municipalities, corporations, government agencies and other financial institutions serving approximately 20,000 client issuances representing over $689 billion of assets under administration. With this acquisition, the Company is among the nation’s leading providers of a full range of corporate trust products and services. The transaction represented total assets acquired of $682 million and total liabilities of $39 million at the closing date. Included in total assets were contract and other intangibles with a fair value of $218 million and the excess of purchase price over the fair value of identifiable net assets (“goodwill”) of

 

20 U.S. Bancorp

$449 million. The goodwill reflected the strategic value of the combined organization’s leadership position in the corporate trust business and processing economies of scale resulting from the transaction. As part of the purchase price, $75 million was placed in escrow for up to eighteen months with payment contingent on the successful transition of business relationships.

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

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

     The following acquisitions were completed during the year 2001. On September 7, 2001, the Company acquired Pacific Century Bank (“Pacific Century”), which had 20 branches located in southern California and total assets of $570 million. On July 24, 2001, the Company acquired NOVA Corporation (“NOVA”), a merchant processor, which had total assets of $2.9 billion.

     Refer to Notes 3, 4 and 5 of the Notes to Consolidated Financial Statements for additional information regarding discontinued operations, business combinations and merger and restructuring-related items.

 

 

U.S. Bancorp  21

growth in lower-yielding investment securities as a percent of total earning assets, changes in loan mix and a decline in the margin benefit from net free funds due to lower average interest rates. In addition, the net interest margin declined year-over-year as a result of consolidating high credit quality, low margin loans from Stellar Funding Group, Inc., a commercial loan conduit, onto the Company’s balance sheet in mid-2003.

     Total average loans of $118.4 billion in 2003 were $3.9 billion (3.4 percent) higher, compared with 2002, reflecting growth in average residential mortgages, retail loans and commercial real estate loans of $3.3 billion (39.0 percent), $1.7 billion (4.6 percent) and $1.4 billion (5.5 percent), respectively. Growth in these categories was offset somewhat by an overall decline in average commercial loans of $2.5 billion (5.7 percent). The decline in commercial loans was primarily driven by softness in commercial loan demand, modestly offset by the consolidation of loans from Stellar Funding Group, Inc. in mid-2003. Despite recent economic growth, the Company anticipates that commercial loan demand will continue to be soft in early 2004 while business customers utilize liquidity in deposit accounts to fund business activities.

     Average investment securities were $8.4 billion (29.2 percent) higher in 2003, compared with 2002, reflecting the reinvestment of proceeds from loan sales, declining commercial loan balances and deposits assumed in connection with the Bay View transaction. During 2003, the Company sold $15.3 billion of fixed-rate securities classified as available-for-sale as part of the Company’s interest rate risk management practices. During early 2003, sales of fixed-rate securities offset much of the economic impact of changes in MSR valuations. During the course of 2003, the Company began repositioning the investment portfolio by reinvesting proceeds from the sale of fixed-rate securities into floating-rate instruments.

     Average interest-bearing deposits of $84.8 billion in 2003 were higher by $8.4 billion (11.0 percent), compared with 2002. Approximately $3.0 billion of the year-over-year increase in average interest-bearing deposits was due to acquisitions, while the remaining growth was driven by increases in savings balances. The increase in savings balances reflected product initiatives, increasing government banking deposits and customer decisions to maintain liquidity. The Company anticipates that the growth in

 

 

22 U.S. Bancorp

interest-bearing deposits will moderate in 2004 as the economy continues to expand.

     Average net free funds increased $3.1 billion from a year ago, including an increase in average noninterest-bearing deposits of $3.0 billion (10.4 percent) in 2003, compared with 2002. The increase in noninterest-bearing deposits was primarily due to mortgage banking activities during early 2003 and higher liquidity among corporate customers maintained in demand deposit balances year-over-year.

     The increase in net interest income in 2002, compared with 2001, was related to an improvement in the net interest margin as well as growth in earning assets. The 19 basis point improvement in the 2002 net interest margin, compared with 2001, reflected the funding benefits of the declining interest rate environment, a more favorable funding mix and improving spreads due to product repricing dynamics, growth in net free funds and a shift in mix toward retail loans, partially offset by lower yields on the investment portfolio. The $3.9 billion (2.7 percent) increase in average earning assets for 2002, compared with 2001, was primarily driven by increases in the investment portfolio and retail loan growth, partially offset by a decline in commercial and commercial real estate loans. The $3.7 billion decrease in total average loans for 2002, compared with 2001, reflected strong growth in average retail loans of $3.1 billion which was more than offset by an overall decline in average commercial and commercial real estate loans of $6.6 billion. Average investment securities were $6.9 billion (31.5 percent) higher in 2002, compared with 2001, reflecting reinvestment of proceeds from loan sales, declines in commercial and commercial real estate loan balances and growth in deposits. Average interest-bearing deposits of $76.4 billion in 2002 were lower by $3.4 billion, compared with 2001. Growth in average savings products (5.4 percent) for 2002 was more than offset by reductions in the average balances of higher cost time certificates of deposit (17.3 percent) and time certificates of deposit greater than $100,000 (13.2 percent). The decline in time certificates and time deposits greater than $100,000 reflected funding decisions toward more favorably priced wholesale funding sources given the rate environment and customers’ desire to maintain liquidity. The increase in average net free funds was driven by an increase in average noninterest-bearing deposits of $3.6 billion (14.4 percent) in 2002, compared with 2001.

     The decline in the provision for credit losses of $95.0 million in 2003 primarily reflected an improving credit risk profile resulting in lower nonperforming loans and commercial and retail loan losses. The decline in nonperforming loans and commercial loan net charge-offs was broad-based across most industries within the commercial loan portfolio. Retail loan delinquency ratios have also continued to improve across most retail loan portfolios reflecting improving economic conditions and the Company’s ongoing collection efforts and risk management activities. These are also the principal factors resulting in lower levels of retail net charge-offs during the year.

     The decline in the provision for credit losses of $1,179.8 million in 2002 was primarily related to specific credit actions taken in 2001. Included in the provision for credit losses in 2001 was a $1,025 million incremental provision recognized in the third quarter of 2001 and a $160 million charge during the first quarter of 2001 in connection with an accelerated loan workout strategy. The third quarter of 2001 provision for credit losses was significantly above the level anticipated earlier in that quarter and was taken after extensive review of the Company’s commercial loan portfolio in light of the events of September 11, 2001, declining economic conditions, and company-specific trends. The action reflected the Company’s expectations, at that time, of a prolonged economic slowdown and recovery. In addition to these actions, the provision for credit losses in 2001 included a merger and restructuring-related provision of $382.2 million. The merger and restructuring-related provision consisted of a $201.3 million provision for losses related to the disposition of an unsecured small business product; a $90.0 million charge to align risk management practices, align charge-off policies and expedite the transition out of a specific segment of the health care industry not meeting the lower risk appetite of the combined company; a $76.6 million provision for losses related to the sales of high loan-to-value home equity loans and the indirect automobile loan portfolio of USBM; and a $14.3 million charge related to the restructuring of a co-branding credit card relationship. Refer to Note 5 of the Notes to Consolidated Financial Statements for further information on merger and restructuring-related items.

     Refer to “Corporate Risk Profile” 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.

 

U.S. Bancorp  23

     Credit and debit card revenue, corporate payment products revenue and ATM processing services revenue were higher in 2003, compared with 2002, by $43.7 million (8.5 percent), $35.6 million (10.9 percent) and $5.3 million (3.3 percent), respectively. Although credit and debit card revenue increased year-over-year, revenue growth was somewhat muted due to the impact of the settlement of the antitrust litigation brought against VISA USA and Mastercard by Wal-Mart Stores, Inc., Sears Roebuck & Co. and other retailers. This settlement lowered interchange rates that can be received by members of the associations on signature debit transactions beginning in August 2003. In 2003, the impact of the VISA settlement was to lower debit card revenue by $19.4 million relative to 2002. In 2004, the incremental impact will be to lower debit card revenue by approximately $15.0 million. This change in the interchange rate in the third quarter of 2003, in addition to higher customer loyalty rewards expenses, however, were more than offset by increases in transaction volumes and other pricing enhancements. Corporate payment products revenue and ATM processing services revenue were higher in 2003, primarily reflecting growth in sales and card usage during the year. Merchant processing services revenue was lower in 2003 by $5.9 million (1.0 percent), compared with 2002, primarily due to lower processing spreads resulting from pricing changes that occurred in late 2002 and changes in the mix of merchants. Merchant acquiring sales volumes increased by 7.1 percent relative to the fourth quarter of 2002. The Company’s mix of merchants toward smaller retailers and specialty shops often results in a lag in the growth of sales volumes relative to improvements experienced at larger retailers in late 2003. Assuming economic conditions continue to improve, management anticipates stronger merchant processing revenue growth in 2004. The favorable variance in trust and investment management fees in 2003 of $61.8 million (6.9 percent), compared with 2002, was driven by the acquisition of State Street Corporate Trust, which contributed $83.7 million in fees during 2003. Treasury management fees grew by $49.4 million (11.8 percent) in 2003, compared with 2002, with the majority of the increase occurring within the Wholesale Banking line of business. The increase in treasury management fees during 2003 was driven by growth in product sales, pricing enhancements and the relatively low earnings credit rates to customers. The growth was also driven by a change in the Federal government’s payment methodology for treasury management services from compensating balances, reflected in net interest income, to fees during the third quarter of 2003. During 2003, commercial products revenue declined $78.7 million (16.4 percent), principally reflecting lower commercial loan conduit servicing fees resulting, in part, from consolidating the Stellar commercial loan conduit. Mortgage banking revenue had a year-over-year increase of $36.9 million (11.2 percent) during 2003, principally due to higher