PJC Piper Jaffray Companies

U.S. Bancorp Reports Record Net Income of $1 Billion for the First Quarter 2004 EARNINGS SUMMARY Table 1 MINNEAPOLIS, April 20 /PRNewswire-FirstCall/ -- U.S. Bancorp today reported net income of $1,008.4 million for the first quarter of 2004, compared with $884.8 million for the first quarter of 2003. Net income of $.52 per diluted share in the first quarter of 2004 was higher than the same period of 2003 by $.06 (13.0 percent). Return on average assets and return on average equity were 2.14 percent and 20.7 percent, respectively, for the first quarter of 2004, compared with returns of 1.95 percent and 19.1 percent, respectively, for the first quarter of 2003. U.S. Bancorp Chairman, President and Chief Executive Officer Jerry A. Grundhofer said, "Our Company's first quarter results, highlighted by achieving record net income of $1 billion, demonstrate that we are well on our way toward reaching our financial goals for 2004. We expect our industry- leading return on average assets and return on average equity of 2.14 percent and 20.7 percent, respectively, to show modest improvement as the year progresses. We had continued improvement in our credit quality, growth in our fee based businesses and improvement in our overall operating efficiency. During the first quarter, we continued to benefit from growth in both consumer deposit accounts and loans, and we began to see signs of growth in commercial loans. As the economy improves, we are optimistic that this segment will become even stronger. "With all integration activity completed and credit quality issues abating, we are now focused on generating revenue growth. We remain committed to growing revenue faster than expense, achieving industry leading performance metrics, reaching the top quartile in credit quality, sustaining industry leading capital generation, and returning 80% of our earnings to shareholders; all while providing exceptional customer service. We have the people, the products and services, the advanced technology, the low-cost provider leadership position and the commitment to customer service we need to continue to build and grow this franchise. I am looking forward to the rest of 2004 and what our Company can, and will, accomplish." The Company's results for the first quarter of 2004 improved over the same period of 2003, primarily due to growth in fee based products and services, as well as controlled operating expense and lower credit costs. Included in the current quarter was a $90.0 million reduction in income tax expense related to the resolution of federal tax examinations covering substantially all of the Company's legal entities for the years 1995 through 1999. The first quarter of 2004 also included the recognition of $109.3 million ($71.7 million on an after-tax basis) of mortgage servicing rights ("MSR") impairment, driven by lower interest rates and related prepayments, and a $35.4 million expense ($23.2 million on an after-tax basis) associated with the prepayment of a portion of the Company's long term debt. The Company took no securities gains in the quarter to offset MSR impairment. Total net revenue on a taxable-equivalent basis for the first quarter of 2004 was $45.5 million (1.4 percent) lower than the first quarter of 2003, primarily reflecting a $140.7 million reduction in gains on the sale of securities. Favorable revenue growth in the majority of fee based products and services categories partially offset the reduction in securities gains. Total noninterest expense in the first quarter of 2004 was essentially flat to the first quarter of 2003, primarily reflecting a $17.6 million reduction in merger and restructuring-related charges, an $11.6 million favorable change in the recognition of MSR impairment and cost savings from completed integration activities. These positive variances were partially offset by expense increases in employee benefits, professional services, marketing and business development and other expense, the latter of which included a $35.4 million charge related to the debt prepayment. Provision for credit losses for the first quarter of 2004 was $235.0 million, a decrease of $100.0 million (29.9 percent) from the first quarter of 2003. Net charge-offs in the first quarter of 2004 were $233.9 million, compared with the fourth quarter of 2003 net charge-offs of $285.1 million and the first quarter of 2003 net charge-offs of $333.8 million. The decline in losses from a year ago was primarily the result of an improving credit risk profile and collection efforts. Total nonperforming assets declined to $1,046.6 million at March 31, 2004, from $1,148.1 million at December 31, 2003 (8.8 percent), and $1,362.6 million at March 31, 2003 (23.2 percent). The ratio of the allowance for credit losses to nonperforming loans was 258 percent at March 31, 2004, compared with 232 percent at December 31, 2003, and 194 percent at March 31, 2003. On December 31, 2003, the Company completed the spin-off of Piper Jaffray Companies (NYSE:PJC). In connection with the spin-off, accounting rules require that the financial statements be restated for all prior periods. As such, historical financial results related to Piper Jaffray Companies have been segregated and accounted for in the Company's financial statements as discontinued operations. Net income in the first quarter of 2003 and fourth quarter of 2003 included after-tax income from the discontinued operations of Piper Jaffray Companies of $.7 million and $6.7 million, respectively, which had an immaterial impact on diluted earnings per share. INCOME STATEMENT HIGHLIGHTS Table 2 (Taxable-equivalent basis, $ in millions, Percent Percent except per-share data) Change Change 1Q 4Q 1Q 1Q04 vs 1Q04 vs 2004 2003 2003 4Q03 1Q03 Net interest income $1,779.0 $1,816.7 $1,776.7 (2.1) 0.1 Noninterest income 1,318.3 1,296.6 1,366.1 1.7 (3.5) Total net revenue 3,097.3 3,113.3 3,142.8 (0.5) (1.4) Noninterest expense 1,454.9 1,342.4 1,454.6 8.4 -- Provision for credit losses 235.0 286.0 335.0 (17.8) (29.9) Income from continuing operations before income taxes 1,407.4 1,484.9 1,353.2 (5.2) 4.0 Taxable-equivalent adjustment 7.2 7.2 7.3 -- (1.4) Applicable income taxes 391.8 507.4 461.8 (22.8) (15.2) Income from continuing operations 1,008.4 970.3 884.1 3.9 14.1 Income from discontinued operations (after-tax) -- 6.7 0.7 nm nm Net income $1,008.4 $977.0 $884.8 3.2 14.0 Diluted earnings per share: Income from continuing operations $0.52 $0.50 $0.46 4.0 13.0 Discontinued operations -- -- -- -- -- Net income $0.52 $0.50 $0.46 4.0 13.0 Net Interest Income First quarter net interest income on a taxable-equivalent basis was $1,779.0 million, compared with $1,776.7 million recorded in the first quarter of 2003. Average earning assets for the period increased over the first quarter of 2003 by $10.2 billion (6.6 percent), primarily driven by increases in investment securities, residential mortgages, and retail loans, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The net interest margin in the first quarter of 2004 was 4.29 percent, compared with 4.42 percent in the fourth quarter of 2003 and 4.59 percent in the first quarter of 2003. The decline in the net interest margin in the first quarter of 2004 from the first quarter of 2003 primarily reflected growth in lower-yielding investment securities as a percent of total earning assets, a change in loan mix, and a decline in the margin benefit from net free funds due to lower interest rates. In addition, the net interest margin declined year-over-year as a result of consolidating high credit quality, low margin loans from Stellar Funding Group, Inc., a commercial loan conduit, onto the Company's balance sheet during the third quarter of 2003. The decline in the net interest margin in the first quarter of 2004 from the fourth quarter of 2003 reflected a similar change in earning asset mix. NET INTEREST INCOME Table 3 (Taxable-equivalent basis; $ in millions) Change Change 1Q 4Q 1Q 1Q04 vs 1Q04 vs 2004 2003 2003 4Q03 1Q03 Components of net interest income Income on earning assets $2,265.3 $2,294.9 $2,338.5 $(29.6) $(73.2) Expense on interest-bearing liabilities 486.3 478.2 561.8 8.1 (75.5) Net interest income $1,779.0 $1,816.7 $1,776.7 $(37.7) $2.3 Average yields and rates paid Earning assets yield 5.47% 5.58% 6.05% (0.11)% (0.58)% Rate paid on interest-bearing liabilities 1.45 1.44 1.82 0.01 (0.37) Gross interest margin 4.02% 4.14% 4.23% (0.12)% (0.21)% Net interest margin 4.29% 4.42% 4.59% (0.13)% (0.30)% Average balances Investment securities $44,744 $40,774 $34,220 $3,970 $10,524 Loans 118,810 119,300 116,311 (490) 2,499 Earning assets 166,359 163,705 156,126 2,654 10,233 Interest-bearing liabilities 134,966 131,990 124,669 2,976 10,297 Net free funds* 31,393 31,715 31,457 (322) (64) * Represents noninterest-bearing deposits, allowance for loan losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other non-interest bearing liabilities and equity AVERAGE LOANS Table 4 ($ in millions) Percent Percent Change Change 1Q 4Q 1Q 1Q04 vs 1Q04 vs 2004 2003 2003 4Q03 1Q03 Commercial $33,629 $35,080 $36,339 (4.1) (7.5) Lease financing 4,902 4,959 5,251 (1.1) (6.6) Total commercial 38,531 40,039 41,590 (3.8) (7.4) Commercial mortgages 20,554 20,230 20,241 1.6 1.5 Construction and development 6,556 7,060 6,542 (7.1) 0.2 Total commercial real estate 27,110 27,290 26,783 (0.7) 1.2 Residential mortgages 13,610 13,374 10,124 1.8 34.4 Credit card 5,878 5,713 5,389 2.9 9.1 Retail leasing 6,192 5,895 5,750 5.0 7.7 Home equity and second mortgages 13,376 13,084 13,470 2.2 (0.7) Other retail 14,113 13,905 13,205 1.5 6.9 Total retail 39,559 38,597 37,814 2.5 4.6 Total loans $118,810 $119,300 $116,311 (0.4) 2.1 Average loans for the first quarter of 2004 were $2.5 billion (2.1 percent) higher than the first quarter of 2003, primarily due to growth in average residential mortgages of $3.5 billion (34.4 percent) and retail loans of $1.7 billion (4.6 percent) year-over-year. Total commercial loans declined by $3.1 billion (7.4 percent), while total commercial real estate loans increased by $327 million (1.2 percent). Although the consolidation of loans from the Stellar commercial loan conduit had a positive impact on average loan balances year-over-year, soft economic conditions throughout much of 2003 led to the overall decrease in total commercial loans. Average loans for the first quarter of 2004 were lower than the fourth quarter of 2003 by $490 million (.4 percent), reflecting reductions in commercial and commercial real estate loans, partially offset by growth in both residential mortgages and retail loans. While average commercial loans declined for the quarter, the Company's ending commercial loan balances increased by $480 million from December 31, 2003. Average investment securities in the first quarter of 2004 were $10.5 billion (30.8 percent) higher than the first quarter of 2003, reflecting the reinvestment of proceeds from declining commercial loan balances and deposit growth from a year ago. Investment securities at March 31, 2004, were $15.0 billion higher than at March 31, 2003, and $2.1 billion higher than the balance at December 31, 2003. During the first quarter of 2004, the Company continued to acquire floating-rate securities and shorter-term fixed-rate securities as part of its asset/liability management activities. AVERAGE DEPOSITS Table 5 ($ in millions) Percent Percent Change Change 1Q 4Q 1Q 1Q04 vs 1Q04 vs 2004 2003 2003 4Q03 1Q03 Noninterest-bearing deposits $29,025 $29,647 $32,824 (2.1) (11.6) Interest-bearing deposits Interest checking 20,948 20,595 17,536 1.7 19.5 Money market accounts 34,397 35,351 28,683 (2.7) 19.9 Savings accounts 5,898 5,708 5,272 3.3 11.9 Savings products 61,243 61,654 51,491 (0.7) 18.9 Time certificates of deposit less than $100,000 13,618 14,182 17,218 (4.0) (20.9) Time deposits greater than $100,000 12,133 10,786 14,282 12.5 (15.0) Total interest- bearing deposits 86,994 86,622 82,991 0.4 4.8 Total deposits $116,019 $116,269 $115,815 (0.2) 0.2 Average noninterest-bearing deposits for the first quarter of 2004 were lower than the first quarter of 2003 by $3.8 billion (11.6 percent). The change was primarily due to lower deposits associated with mortgage banking activities and a decline in Federal government deposits related to their decision in the third quarter of 2003 to pay for treasury management services rather than maintain compensating balances. Average interest-bearing deposits increased by $4.0 billion (4.8 percent) over the first quarter of 2003, driven by increases in savings products balances, partially offset by decreases in time certificates of deposit less than $100,000 and time deposits greater than $100,000. Average noninterest-bearing deposits for the first quarter of 2004 were $622 million (2.1 percent) lower than the fourth quarter of 2003 due to lower deposits associated with mortgage banking activities and corporate banking. Average interest-bearing deposits were slightly higher than the fourth quarter of 2003 (.4 percent), primarily due to increases in time deposits greater than $100,000, interest checking and savings accounts, partially offset by decreases in money market accounts and time certificates of deposit less than $100,000. Noninterest-bearing deposits at March 31, 2004, were lower than at March 31, 2003, by $3.4 billion (9.8 percent) and were $1.4 billion (4.3 percent) lower than at December 31, 2003. NONINTEREST INCOME Table 6 ($ in millions) Percent Percent Change Change 1Q 4Q 1Q 1Q04 vs 1Q04 vs 2004 2003 2003 4Q03 1Q03 Credit and debit card revenue $141.8 $153.4 $127.4 (7.6) 11.3 Corporate payment products revenue 94.8 88.7 86.0 6.9 10.2 ATM processing services 42.2 40.3 42.4 4.7 (0.5) Merchant processing services 141.1 146.0 127.3 (3.4) 10.8 Trust and investment management fees 248.6 246.6 228.6 0.8 8.7 Deposit service charges 185.2 186.6 163.2 (0.8) 13.5 Treasury management fees 117.5 116.3 112.0 1.0 4.9 Commercial products revenue 110.4 98.5 104.2 12.1 6.0 Mortgage banking revenue 94.2 91.9 95.4 2.5 (1.3) Investment products fees and commissions 39.3 36.2 35.1 8.6 12.0 Securities gains (losses), net -- (0.1) 140.7 nm nm Other 103.2 92.2 103.8 11.9 (0.6) Total noninterest income $1,318.3 $1,296.6 $1,366.1 1.7 (3.5) Noninterest Income First quarter noninterest income was $1,318.3 million, a decrease of $47.8 million (3.5 percent) from the same quarter of 2003, and a $21.7 million (1.7 percent) increase over the fourth quarter of 2003. The decline in noninterest income in the first quarter of 2004 from the first quarter of 2003 was driven by a $140.7 million reduction in gains on the sale of securities, partially offset by increases in most other categories of noninterest income. Credit and debit card revenue and corporate payment products revenue were higher in the first quarter of 2004 than the first quarter of 2003 by $14.4 million (11.3 percent) and $8.8 million (10.2 percent), respectively. Although credit and debit card revenue grew year-over-year, the growth was somewhat muted due to the impact of the settlement of the antitrust litigation brought against VISA USA and Mastercard by Wal-Mart Stores, Inc., Sears Roebuck & Co. and other retailers, which lowered the interchange rate on signature debit transactions beginning in August 2003. The year-over-year impact of the VISA settlement on credit and debit card revenue was approximately $8.2 million. This change in the interchange rate, in addition to higher customer loyalty rewards expenses, however, were more than offset by increases in transaction volumes and other rate adjustments. The corporate payment products revenue growth reflected growth in sales and card usage. Merchant processing services revenue was higher in the first quarter of 2004 than the same quarter of 2003 by $13.8 million (10.8 percent), reflecting an increase in transaction volume, partially offset by lower processing spreads due to a change in the mix of merchants. The favorable variance in trust and investment management fees of $20.0 million (8.7 percent) in the first quarter of 2004 over the same period of 2003 was principally driven by higher equity market valuations year-over-year. Deposit service charges were higher year- over-year by $22.0 million (13.5 percent) due to account growth and revenue enhancement initiatives. Treasury management fees grew by $5.5 million (4.9 percent) in the first quarter of 2004 over the same period of 2003. The increase in treasury management fees year-over-year was partially driven by a change during the third quarter of 2003 in the Federal government's payment methodology for treasury management services from compensating balances, reflected in net interest income, to fees. Commercial products revenue increased by $6.2 million (6.0 percent) over the first quarter of 2003 due to higher letter of credit, foreign exchange, syndication, and leasing fees, partially offset by a reduction in conduit servicing revenue. The $4.2 million (12.0 percent) increase in investment products fees and commissions reflected higher sales activity in the Consumer Banking business line. Offsetting these favorable variances were slight declines in mortgage banking revenue and other income year-over-year. Noninterest income increased in the first quarter of 2004 by $21.7 million (1.7 percent) over the fourth quarter of 2003, the net result of favorable variances in corporate payment products revenue, ATM processing services, trust and investment management fees, treasury management fees, commercial products revenue, mortgage banking revenue, investment products fees and commissions and other income, partially offset by seasonally lower credit and debit card revenue and merchant processing services. Corporate payment products revenue, ATM processing services, commercial products revenue, and investment products fees and commissions rose due to higher processing volumes and product sales. Mortgage banking revenue increased due to higher servicing fee income, partially offset by lower fees from originations and loan sales. Other income was higher by $11.0 million (11.9 percent), the net result of lower end of term lease residual losses partially offset by a decrease in revenue from equity investments relative to the fourth quarter of 2003. NONINTEREST EXPENSE Table 7 ($ in millions) Percent Percent Change Change 1Q 4Q 1Q 1Q04 vs 1Q04 vs 2004 2003 2003 4Q03 1Q03 Compensation $535.8 $539.4 $546.0 (0.7) (1.9) Employee benefits 100.2 81.3 91.7 23.2 9.3 Net occupancy and equipment 155.7 161.6 161.3 (3.7) (3.5) Professional services 32.4 44.2 26.4 (26.7) 22.7 Marketing and business development 35.3 50.8 29.8 (30.5) 18.5 Technology and communications 101.7 106.3 104.9 (4.3) (3.1) Postage, printing and supplies 61.6 61.8 60.4 (0.3) 2.0 Other intangibles 226.1 124.2 235.1 82.0 (3.8) Merger and restructuring-related charges -- 7.6 17.6 nm nm Other 206.1 165.2 181.4 24.8 13.6 Total noninterest expense $1,454.9 $1,342.4 $1,454.6 8.4 -- Noninterest Expense First quarter noninterest expense totaled $1,454.9 million, essentially flat to noninterest expense for the first quarter of 2003. Favorable variances in merger and restructuring-related charges of $17.6 million and other intangibles of $9.0 million (3.8 percent), along with general cost savings from completed integration activities were offset by increases in employee benefits, professional services, marketing and business development, postage, printing and supplies and other expense. Other expense in the first quarter of 2004 included a $35.4 million charge related to the prepayment of a portion of the Company's debt. Noninterest expense in the first quarter of 2004 was higher than the fourth quarter of 2003 by $112.5 million (8.4 percent). The unfavorable variance from the fourth quarter of 2003 was primarily due to the recognition of $109.3 million of MSR impairment and a $35.4 million charge in other expense related to the prepayment of a portion of the Company's debt in the first quarter of 2004. The fourth quarter of 2003 did not include expense related to changes in MSR valuations. In addition, seasonally high payroll taxes contributed to the unfavorable variance in employee benefits quarter- over-quarter. Partially offsetting these variances were reductions in all other expense categories, reflecting on-going expense management activities. ALLOWANCE FOR CREDIT LOSSES Table 8 ($ in millions) 1Q 4Q 3Q 2Q 1Q 2004 2003 2003 2003 2003 Balance, beginning of period $2,368.6 $2,367.7 $2,367.6 $2,408.5 $2,422.0 Net charge-offs Commercial 53.6 100.9 123.9 122.9 137.9 Lease financing 21.3 14.9 19.2 26.9 23.0 Total commercial 74.9 115.8 143.1 149.8 160.9 Commercial mortgages 4.6 10.0 5.9 9.3 2.9 Construction and development 4.7 2.9 4.6 2.5 1.0 Total commercial real estate 9.3 12.9 10.5 11.8 3.9 Residential mortgages 7.3 7.2 7.3 6.5 5.9 Credit card 63.4 62.3 59.3 64.5 68.7 Retail leasing 11.0 11.3 12.2 12.6 13.9 Home equity and second mortgages 19.5 20.4 23.2 23.9 25.4 Other retail 48.5 55.2 54.3 53.8 55.1 Total retail 142.4 149.2 149.0 154.8 163.1 Total net charge-offs 233.9 285.1 309.9 322.9 333.8 Provision for credit losses 235.0 286.0 310.0 323.0 335.0 Acquisitions and other changes -- -- -- (41.0) (14.7) Balance, end of period $2,369.7 $2,368.6 $2,367.7 $2,367.6 $2,408.5 Components Allowance for loan losses $2,238.3 $2,235.0 $2,241.2 $2,266.2 $2,295.0 Liability for unfunded credit commitments * 131.4 133.6 126.5 101.4 113.5 Total allowance for credit losses $2,369.7 $2,368.6 $2,367.7 $2,367.6 $2,408.5 Net charge-offs to average loans (%) 0.79 0.95 1.02 1.10 1.16 Allowance for credit losses as a percentage of: Period-end loans 1.98 2.00 1.98 1.98 2.06 Nonperforming loans 258 232 202 194 194 Nonperforming assets 226 206 180 174 177 * During the first quarter of 2004, the Company reclassified the portion of its allowance for credit losses related to commercial off-balance sheet loan commitments and letters of credit to a separate liability account. Credit Quality The allowance for credit losses was $2,369.7 million at March 31, 2004, compared with the allowance for credit losses of $2,368.6 million at December 31, 2003, and $2,408.5 million at March 31, 2003. The ratio of the allowance for credit losses to period-end loans was 1.98 percent at March 31, 2004, compared with 2.00 percent at December 31, 2003, and 2.06 percent at March 31, 2003. The ratio of the allowance for credit losses to nonperforming loans was 258 percent at March 31, 2004, compared with 232 percent at December 31, 2003, and 194 percent at March 31, 2003. Total net charge-offs in the first quarter of 2004 were $233.9 million, compared with the fourth quarter of 2003 net charge-offs of $285.1 million and the first quarter of 2003 net charge-offs of $333.8 million. Commercial and commercial real estate loan net charge-offs were $84.2 million for the first quarter of 2004, or .52 percent of average loans outstanding, compared with $128.7 million, or .76 percent of average loans outstanding, in the fourth quarter of 2003 and $164.8 million, or .98 percent of average loans outstanding, in the first quarter of 2003. The decline in net charge-offs was broad-based across most industries within the commercial loan portfolio. Retail loan net charge-offs of $142.4 million in the first quarter of 2004 were $6.8 million (4.6 percent) lower than the fourth quarter of 2003 and $20.7 million (12.7 percent) lower than the first quarter of 2003. Retail loan net charge-offs as a percent of average loans outstanding were 1.45 percent in the first quarter of 2004, compared with 1.53 percent and 1.75 percent in the fourth quarter of 2003 and first quarter of 2003, respectively. Lower levels of retail loan net charges-offs principally reflected the Company's improvement in ongoing collection efforts and risk management. CREDIT RATIOS Table 9 (Percent) 1Q 4Q 3Q 2Q 1Q 2004 2003 2003 2003 2003 Net charge-offs ratios* Commercial 0.64 1.14 1.33 1.35 1.54 Lease financing 1.75 1.19 1.52 2.11 1.78 Total commercial 0.78 1.15 1.35 1.44 1.57 Commercial mortgages 0.09 0.20 0.12 0.19 0.06 Construction and development 0.29 0.16 0.25 0.14 0.06 Total commercial real estate 0.14 0.19 0.15 0.17 0.06 Residential mortgages 0.22 0.21 0.24 0.24 0.24 Credit card 4.34 4.33 4.20 4.80 5.17 Retail leasing 0.71 0.76 0.83 0.88 0.98 Home equity and second mortgages 0.59 0.62 0.70 0.72 0.76 Other retail 1.38 1.57 1.55 1.59 1.69 Total retail 1.45 1.53 1.54 1.63 1.75 Total net charge-offs 0.79 0.95 1.02 1.10 1.16 Delinquent loan ratios - 90 days or more past due excluding nonperforming loans** Commercial 0.06 0.06 0.11 0.09 0.10 Commercial real estate 0.01 0.02 0.01 0.02 0.03 Residential mortgages 0.56 0.61 0.63 0.65 0.82 Retail 0.54 0.56 0.57 0.63 0.71 Total loans 0.27 0.28 0.29 0.30 0.34 Delinquent loan ratios - 90 days or more past due including nonperforming loans** Commercial 1.67 1.97 2.31 2.27 2.33 Commercial real estate 0.85 0.82 0.75 0.82 0.85 Residential mortgages 0.87 0.91 0.98 1.13 1.37 Retail 0.59 0.62 0.63 0.70 0.77 Total loans 1.03 1.14 1.27 1.32 1.40 * annualized and calculated on average loan balances ** ratios are expressed as a percent of ending loan balances The overall level of net charge-offs in the first quarter of 2004 reflected the Company's ongoing efforts to reduce the overall risk profile of the organization. Net charge-offs are expected to continue to trend modestly lower. ASSET QUALITY Table 10 ($ in millions) Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 2004 2003 2003 2003 2003 Nonperforming loans Commercial $510.7 $623.5 $793.9 $795.2 $808.4 Lease financing 115.6 113.3 111.6 126.6 129.4 Total commercial 626.3 736.8 905.5 921.8 937.8 Commercial mortgages 184.9 177.6 161.5 182.0 174.6 Construction and development 43.6 39.9 40.2 35.3 46.1 Commercial real estate 228.5 217.5 201.7 217.3 220.7 Residential mortgages 42.1 40.5 46.1 56.0 57.4 Retail 20.4 25.2 21.6 24.2 23.9 Total nonperforming loans 917.3 1,020.0 1,174.9 1,219.3 1,239.8 Other real estate 76.0 72.6 70.4 71.5 66.2 Other nonperforming assets 53.3 55.5 73.0 68.9 56.6 Total nonperforming assets* $1,046.6 $1,148.1 $1,318.3 $1,359.7 $1,362.6 Accruing loans 90 days or more past due $319.2 $329.4 $352.4 $360.7 $403.5 Nonperforming assets to loans plus ORE (%) 0.87 0.97 1.10 1.14 1.16 * does not include accruing loans 90 days or more past due Nonperforming assets at March 31, 2004, totaled $1,046.6 million, compared with $1,148.1 million at December 31, 2003, and $1,362.6 million at March 31, 2003. The ratio of nonperforming assets to loans and other real estate was .87 percent at March 31, 2004, compared with .97 percent at December 31, 2003, and 1.16 percent at March 31, 2003. Given the Company's ongoing efforts to reduce the overall risk profile of the organization, nonperforming assets are expected to continue to trend lower. CAPITAL POSITION Table 11 ($ in millions) Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 2004 2003 2003 2003 2003 Total shareholders' equity $19,452 $19,242 $19,771 $19,521 $18,862 Tier 1 capital 14,499 14,623 14,589 13,950 13,215 Total risk-based capital 21,559 21,710 21,859 21,392 20,242 Common equity to assets 10.1% 10.2% 10.5% 10.0% 10.4% Tangible common equity to assets 6.4 6.5 6.6 6.0 6.0 Tier 1 capital ratio 8.9 9.1 9.0 8.5 8.2 Total risk-based capital ratio 13.3 13.6 13.5 13.0 12.6 Leverage ratio 8.0 8.0 8.0 7.8 7.6 Total shareholders' equity was $19.5 billion at March 31, 2004, compared with $18.9 billion at March 31, 2003. The increase was the result of corporate earnings offset primarily by dividends, including the special dividend of $685 million related to the spin-off of Piper Jaffray Companies, and share buybacks. Tangible common equity to assets was 6.4 percent at March 31, 2004, compared with 6.5 percent at December 31, 2003, and 6.0 percent at March 31, 2003. The Tier 1 capital ratio was 8.9 percent at March 31, 2004, compared with 9.1 percent at December 31, 2003, and 8.2 percent at March 31, 2003. The total risk-based capital ratio was 13.3 percent at March 31, 2004, compared with 13.6 percent at December 31, 2003, and 12.6 percent at March 31, 2003. The leverage ratio was 8.0 percent at March 31, 2004, compared with 8.0 percent at December 31, 2003, and 7.6 percent at March 31, 2003. All regulatory ratios continue to be in excess of stated "well capitalized" requirements. COMMON SHARES Table 12 (Millions) 1Q 4Q 3Q 2Q 1Q 2004 2003 2003 2003 2003 Beginning shares outstanding 1,922.9 1,927.4 1,924.5 1,919.0 1,917.0 Shares issued for stock option and stock purchase plans, acquisitions and other corporate purposes 12.1 10.5 2.9 5.5 2.0 Shares repurchased (33.8) (15.0) -- -- -- Ending shares outstanding 1,901.2 1,922.9 1,927.4 1,924.5 1,919.0 On December 16, 2003, the board of directors of U.S. Bancorp approved an authorization to repurchase 150 million shares of outstanding common stock during the following 24 months. During the first quarter of 2004, the Company repurchased 33.8 million shares of common stock in both open market and privately negotiated transactions. As of March 31, 2004, there were approximately 108 million shares remaining to be repurchased under the current authorization. LINE OF BUSINESS FINANCIAL PERFORMANCE* Table 13 ($ in millions) Net Operating Earnings** Percent Change 1Q 2004 1Q 4Q 1Q 1Q04 vs 1Q04 vs Earnings Business Line 2004 2003 2003 4Q03 1Q03 Composition Wholesale Banking $264.7 $234.8 $226.0 12.7 17.1 26% Consumer Banking*** 321.2 367.7 349.5 (12.6) (8.1) 32 Private Client, Trust and Asset Management 123.8 117.6 98.0 5.3 26.3 12 Payment Services 160.5 163.3 132.9 (1.7) 20.8 16 Treasury and Corporate Support 138.2 91.9 89.2 50.4 54.9 14 Consolidated Company $1,008.4 $975.3 $895.6 3.4 12.6 100% * preliminary data ** earnings before merger and restructuring-related items and discontinued operations *** In 1Q04 Consumer Banking's retail banking business grew net operating earnings by 8.5 percent and 18.6 percent over 4Q03 and 1Q03, respectively. The Consumer Bank's mortgage banking business profitability declined in 1Q04 due to MSR impairment of $109.3 million that was not offset by realizing securities gains in the quarter. Lines of Business Within the Company, financial performance is measured by major lines of business which include Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance. Designations, assignments and allocations may change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to our diverse customer base. During 2004, a methodology change was made to allocate operational expenses incurred by Treasury and Corporate Support on behalf of the other major lines of business back to the appropriate operating segment. These allocations are identified as net shared services expense on the business lines' income statements. Accordingly, results for 2003 have been restated and presented on a comparable basis. Wholesale Banking offers lending, depository, treasury management and other financial services to middle market, large corporate and public sector clients. Wholesale Banking contributed $264.7 million of the Company's operating earnings in the first quarter of 2004, a 17.1 percent increase over the same period of 2003 and a 12.7 percent increase over the fourth quarter of 2003. The increase in Wholesale Banking's first quarter 2004 contribution over the first quarter of 2003 was the result of favorable variances in total noninterest expense (5.5 percent) and the provision for credit losses (70.4 percent), partially offset by a decrease in total net revenue (4.6 percent). Total net revenue in the first quarter of 2004 was lower than in the first quarter of 2003, reflecting unfavorable variances in both net interest income (5.3 percent) and noninterest income (3.4 percent). The decrease in net interest income was primarily due to declines in average total loans outstanding (6.2 percent), partially offset by higher average total deposits (4.6 percent). Although treasury management fees were higher (9.7 percent) year-over-year, the growth was more than offset by unfavorable variances in commercial products revenue (5.9 percent), primarily conduit servicing fees, and other revenue. The increase in treasury management fees was principally driven by a change during the third quarter of 2003 in the Federal government's payment methodology for treasury management services from compensating balances to fees. Wholesale Banking's favorable variance in total noninterest expense year-over-year was driven by a decrease in other expense, the result of lower loan workout-related expense relative to the first quarter of 2003, partially offset by an increase in net shared services expense, which is primarily driven by customer transaction volume and account activities. The decrease in the provision for credit losses year-over-year was the result of a reduction in net charge-offs. The increase in Wholesale Banking's contribution to operating earnings in the first quarter of 2004 over the fourth quarter of 2003 was the net result of favorable variances in total noninterest expense (4.4 percent) and the provision for credit losses, partially offset by slightly lower total net revenue (.2 percent). Total net revenue in the first quarter of 2004 was lower than the previous quarter due to lower net interest income (2.8 percent) partially offset by growth in noninterest income (5.6 percent). The change in net interest income reflected reductions from the prior quarter in the business line's average loans outstanding and average deposits. The growth quarter-to-quarter in noninterest income was attributed to higher commercial products revenue, primarily syndication revenue, lease residual gains and letter of credit fees. The decrease in noninterest expense was principally due to lower loan-related expense. Lower net charge-offs from improving credit quality drove the favorable variance in provision for credit losses. Consumer Banking delivers products and services to the broad consumer market and small businesses through banking offices, telemarketing, on-line services, direct mail and automated teller machines ("ATMs"). It encompasses community banking, metropolitan banking, small business banking, including lending guaranteed by the Small Business Administration, small-ticket leasing, consumer lending, mortgage banking, workplace banking, student banking, 24- hour banking, and investment product and insurance sales. Consumer Banking contributed $321.2 million of the Company's operating earnings in the first quarter of 2004, an 8.1 percent decrease from the same period of 2003 and a 12.6 percent decline from the fourth quarter of 2003. While the retail banking business segment grew net operating earnings by 18.6 percent and 8.5 percent over the first quarter of 2003 and the fourth quarter of 2003, respectively, the contribution of the mortgage banking business declined. The decrease in the mortgage banking business from the first quarter of 2003 was primarily the result of a reduction in gains on the sale of securities of $105.8 million that, generally, are utilized by the Company to offset impairment of mortgage servicing rights. In the first quarter of 2004, the Company elected not to sell higher yielding securities to offset MSR impairment within the mortgage banking business segment. For the Consumer Banking business, as a whole, the unfavorable variance in gains on the sale of securities was partially offset with favorable variances in net interest income (.4 percent), noninterest income (9.7 percent), total noninterest expense (2.2 percent) and the provision for credit losses (3.9 percent). Net interest income improved year-over-year (.4 percent), the result of increases in average loans and average core deposits, partially offset by a decline in the business line's net interest margin. Noninterest income also improved in the first quarter of 2004 over the same period of 2003, primarily due to growth in deposit service charges, investment products fees and commissions and other revenue. Other revenue was higher due to lower lease residual losses relative to the first quarter of 2003. Total noninterest expense in the first quarter of 2004 was lower than the first quarter of 2003 (2.2 percent), mainly due to favorable changes in net shared services expense and lower MSR impairment relative to 2003. A reduction in net charge-offs year-over-year drove the positive variance in the business line's provision for credit losses. The decline in Consumer Banking's contribution in the first quarter of 2004 from the fourth quarter of 2003 was primarily the result of the recognition of $109.3 million of MSR impairment in 2004. Offsetting this unfavorable variance were positive changes in total net revenue (1.0 percent), noninterest expense (3.8 percent) and the provision for credit losses (1.2 percent). Private Client, Trust and Asset Management provides trust, private banking, financial advisory, investment management and mutual fund and alternative investment product services through five businesses: Private Client Group, Corporate Trust, Asset Management, Institutional Trust, and Custody and Fund Services, LLC. Private Client, Trust and Asset Management contributed $123.8 million of the Company's operating earnings in the first quarter of 2004, 26.3 percent higher than the same period of 2003 and 5.3 percent higher than the fourth quarter of 2003. The favorable variance in the business line's contribution in the first quarter of 2004 over the first quarter of 2003 was the result of favorable variances in total net revenue (12.0 percent) and total noninterest expense (2.1 percent). Higher average total deposit balances (45.5 percent) favorably impacted net interest income year-over-year, while noninterest income benefited from higher asset management revenue due to improving equity market valuations. The favorable variance in expense was primarily due to business line cost savings year-over- year and slightly lower intangible amortization. The increase in the business line's contribution (5.3 percent) in the first quarter of 2004 over the fourth quarter of 2003 was the result of higher total net revenue (2.0 percent), lower total noninterest expense (1.4 percent) and a decrease in the provision for credit losses. The increase in net interest income from the fourth quarter of 2003 to the first quarter of 2004 was primarily driven by an increase in average total deposits (8.2 percent), while noninterest income benefited from higher equity market valuations. Payment Services includes consumer and business credit cards, corporate and purchasing card services, consumer lines of credit, ATM processing, merchant processing, and debit cards. Payment Services contributed $160.5 million of the Company's operating earnings in the first quarter of 2004, a 20.8 percent increase over the same period of 2003, but a 1.7 percent decrease over the fourth quarter of 2003. The increase in Payment Services' contribution in the first quarter of 2004 from the same period of 2003 was the result of higher total net revenue (5.2 percent) and a lower provision for credit losses (14.6 percent). The increase in total net revenue year-over- year was primarily due to growth in noninterest income (10.5 percent), partially offset by lower net interest income (7.1 percent), which reflected lower spreads on retail credit cards and a reduction in late fees relative to the prior year's quarter. The increase in noninterest income was principally the result of growth in credit and debit card revenue (11.1 percent), corporate payment products revenue (10.2 percent) and merchant processing services revenue (10.8 percent). Although credit and debit card revenue was negatively impacted in the first quarter of 2004 by the VISA debit card settlement and higher customer loyalty rewards expense, increases in transaction volumes and other rate adjustments more than offset these detrimental changes. The decrease in Payment Services' contribution in the first quarter of 2004 from the fourth quarter of 2003 was primarily due to seasonally lower total net revenue (2.1 percent), offset by a reduction in the provision for credit losses, the result of a favorable change in net charge- offs. Treasury and Corporate Support includes the Company's investment portfolios, funding, capital management and asset securitization activities, interest rate risk management, the net effect of transfer pricing related to average balances and business activities managed on a corporate basis, including enterprise-wide operations and administrative support functions. Operational expenses incurred by Treasury and Corporate Support on behalf of the other business lines are allocated back primarily based on customer transaction volume and account activities to the appropriate business unit and are identified as net shared services expense. Treasury and Corporate Support recorded operating earnings of $138.2 million in the first quarter of 2004, compared with operating earnings of $89.2 million in the first quarter of 2003 and $91.9 million in the fourth quarter of 2003. The increase in operating earnings in the current quarter over the first quarter of 2003 was largely the net result of a $90.0 million reduction in income tax expense related to the resolution of federal tax examinations for the years 1995 through 1999 and a $35.4 million charge associated with the prepayment of a portion of the Company's debt in the first quarter of 2004. In addition, revenue declined year-over-year due to a $35.8 million decrease in gains on the sale of securities. The favorable variance in operating earnings in the first quarter of 2004 over the fourth quarter of 2003 was principally the net result of the reduction in income tax expense and the charge associated with the prepayment of debt, as well as lower revenue from equity investments relative to the fourth quarter of 2003. Additional schedules containing more detailed information about the Company's business line results are available on the web at usbank.com or by calling Investor Relations at 612-303-0781. CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, JERRY A. GRUNDHOFER, AND VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER, DAVID M. MOFFETT, WILL HOST A CONFERENCE CALL TO REVIEW THE FINANCIAL RESULTS ON TUESDAY, April 20, 2004, AT 3:00 p.m. (CDT). To access the conference call, please dial 800-540-0559 and ask for the U.S. Bancorp earnings conference call. Participants calling from outside the United States, please call 785-832-1508. For those unable to participate during the live call, a recording of the call will be available approximately one hour after the conference call ends on Tuesday, April 20, 2004, and will run through Tuesday, April 27, 2004, at 11:00 p.m. (CDT). To access the recorded message dial 888-276-5315. If calling from outside the United States, please dial 402-220-2332. Minneapolis-based U.S. Bancorp ("USB"), with $192 billion in assets, is the 7th largest financial services holding company in the United States. The company operates 2,275 banking offices and 4,472 ATMs, and provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses and institutions. U.S. Bancorp is the parent company of U.S. Bank. Visit U.S. Bancorp on the web at usbank.com. Forward-Looking Statements This press release 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 the Company. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following, in addition to those contained in the Company's reports on file with the SEC: (i) general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for credit losses, or a reduced demand for credit or fee-based products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; (iii) inflation, changes in securities market conditions and monetary fluctuations could adversely affect the value or credit quality of the Company's assets, or the availability and terms of funding necessary to meet the Company's liquidity needs; (iv) changes in the extensive laws, regulations and policies governing financial services companies could alter the Company's business environment or affect operations; (v) the potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent, could present operational issues or require significant capital spending; (vi) competitive pressures could intensify and affect the Company's profitability, including as a result of continued industry consolidation, the increased availability of financial services from non- banks, technological developments, or bank regulatory reform; (vii) changes in consumer spending and savings habits could adversely affect the Company's results of operations; (viii) changes in the financial performance and condition of the Company's borrowers could negatively affect repayment of such borrowers' loans; (ix) acquisitions may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated, or may result in unforeseen integration difficulties; (x) capital investments in the Company's businesses may not produce expected growth in earnings anticipated at the time of the expenditure; and (xi) acts or threats of terrorism, and/or political and military actions taken by the U.S. or other governments in response to acts or threats of terrorism or otherwise could adversely affect general economic or industry conditions. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update them in light of new information or future events. U.S. Bancorp Consolidated Statement Of Income (Dollars and Shares in Millions, Three Months Ended Except Per Share Data) March 31, (Unaudited) 2004 2003 Interest Income Loans $1,747.0 $1,836.7 Loans held for sale 19.9 59.6 Investment securities Taxable 464.0 396.1 Non-taxable 5.3 8.9 Other interest income 21.9 29.9 Total interest income 2,258.1 2,331.2 Interest Expense Deposits 227.0 306.6 Short-term borrowings 49.9 39.5 Long-term debt 185.9 184.3 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company 23.5 31.4 Total interest expense 486.3 561.8 Net interest income 1,771.8 1,769.4 Provision for credit losses 235.0 335.0 Net interest income after provision for credit losses 1,536.8 1,434.4 Noninterest Income Credit and debit card revenue 141.8 127.4 Corporate payment products revenue 94.8 86.0 ATM processing services 42.2 42.4 Merchant processing services 141.1 127.3 Trust and investment management fees 248.6 228.6 Deposit service charges 185.2 163.2 Treasury management fees 117.5 112.0 Commercial products revenue 110.4 104.2 Mortgage banking revenue 94.2 95.4 Investment products fees and commissions 39.3 35.1 Securities gains, net -- 140.7 Other 103.2 103.8 Total noninterest income 1,318.3 1,366.1 Noninterest Expense Compensation 535.8 546.0 Employee benefits 100.2 91.7 Net occupancy and equipment 155.7 161.3 Professional services 32.4 26.4 Marketing and business development 35.3 29.8 Technology and communications 101.7 104.9 Postage, printing and supplies 61.6 60.4 Other intangibles 226.1 235.1 Merger and restructuring-related charges -- 17.6 Other 206.1 181.4 Total noninterest expense 1,454.9 1,454.6 Income from continuing operations before income taxes 1,400.2 1,345.9 Applicable income taxes 391.8 461.8 Income from continuing operations 1,008.4 884.1 Income (loss) from discontinued operations (after-tax) -- .7 Net income $1,008.4 $884.8 Earnings Per Share Income from continuing operations $.53 $.46 Discontinued operations -- -- Net income $.53 $.46 Diluted Earnings Per Share Income from continuing operations $.52 $.46 Discontinued operations -- -- Net income $.52 $.46 Dividends declared per share $.240 $.205 Average common shares 1,915.4 1,919.0 Average diluted common shares 1,941.1 1,925.6 U.S. Bancorp Consolidated Ending Balance Sheet March December March 31, 31, 31, (Dollars in Millions) 2004 2003 2003 Assets (Unaudited) (Unaudited) Cash and due from banks $7,177 $8,630 $8,910 Investment securities Held-to-maturity 137 152 220 Available-for-sale 45,268 43,182 30,231 Loans held for sale 1,644 1,433 3,102 Loans Commercial 39,006 38,526 42,011 Commercial real estate 27,215 27,242 26,893 Residential mortgages 13,717 13,457 10,329 Retail 39,945 39,010 37,939 Total loans 119,883 118,235 117,172 Less allowance for loan losses (2,238) (2,369) (2,409) Net loans 117,645 115,866 114,763 Premises and equipment 1,924 1,957 1,655 Customers' liability on acceptances 148 121 140 Goodwill 6,095 6,025 6,332 Other intangible assets 2,025 2,124 2,181 Other assets 10,030 9,796 14,697 Total assets $192,093 $189,286 $182,231 Liabilities and Shareholders' Equity Deposits Noninterest-bearing $31,086 $32,470 $34,459 Interest-bearing 74,262 74,749 68,909 Time deposits greater than $100,000 13,616 11,833 11,853 Total deposits 118,964 119,052 115,221 Short-term borrowings 13,431 10,850 6,576 Long-term debt 30,851 31,215 32,068 Junior subordinated debentures issued to unconsolidated subsidiary trusts * 2,717 2,601 2,983 Acceptances outstanding 148 121 140 Other liabilities 6,530 6,205 6,381 Total liabilities 172,641 170,044 163,369 Shareholders' equity Common stock 20 20 20 Capital surplus 5,832 5,851 5,823 Retained earnings 15,059 14,508 13,596 Less treasury stock (1,853) (1,205) (1,222) Other comprehensive income 394 68 645 Total shareholders' equity 19,452 19,242 18,862 Total liabilities and shareholders' equity $192,093 $189,286 $182,231 * Amounts prior to 2004 represented Company-obligated mandatorily redeemable preferred securities. The subsidiary grantor trusts, which issue mandatorily redeemable preferred securities, were de-consolidated under the provisions of FIN 46 on March 31, 2004. DATASOURCE: U.S. Bancorp CONTACT: Media Relations, Steve Dale, +1-612-303-0784, or Investor Relations, H.D. McCullough, +1-612-303-0786, or Judith T. Murphy, +1-612-303-0783, all of U.S. Bancorp Web site: http://www.usbank.com/ Company News On-Call: http://www.prnewswire.com/comp/312402.html

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