U.S. Bancorp Annual Report 2001

Plain-text annual report

This changes banking forever. 2001 ANNUAL REPORT AND FORM 10-K Contents The New U.S. Bancorp 1 Delivering Five Star Service Guaranteed 2 Graphs of Selected Financial Highlights 3 5 Financial Summary Letter to Shareholders 6 Growing Diversiﬁed Businesses 8 Providing Convenient Access 10 Building the Best Bank in America 12 Capitalizing on Growth Opportunities 14 Providing Local Market Leadership and Community Support Financial Section 16 Management's Discussion and Analysis 48 Responsibility for Financial Statements 48 Report of Independent Accountants 49 Consolidated Financial Statements 53 Notes to Consolidated Financial Statements 84 Five-Year Consolidated Financial Statements 88 Quarterly Consolidated Financial Data 89 Supplemental Financial Data 90 Annual Report on Form 10-K 94 Executive Ofﬁcers 96 Directors Inside back cover Corporate Information Back cover Corporate Proﬁle Delivering Five Star Service Guaranteed This changes banking forever. Guaranteed customer service by every business line and every employee for every transaction, every day. Our exclusive Five Star Service Guarantee puts customer needs ﬁrst and foremost. Outstanding customer service is so fundamental to the way we do business that our employees wear lapel pins with the inscription “Service Guaranteed” as a visible symbol of our commitment to customers. A replica of that pin is on the cover of this report, signifying its impor- tance to U.S. Bank ®. In 1996, we created the original Five Star Service Guarantee for all of our customers who bank in a branch ofﬁce. Our goal: to bring customers the highest level of service they have ever experienced from a ﬁnancial institution. Since then, our pursuit of excellence has expanded to every line of business and department at U.S. Bank. Each one has its own set of Five Star Service Guarantees — more than 80 guarantees in all, delivered by all business lines throughout our organization. This means that every employee is working every day not just to meet cus- tomer needs, but to exceed them. And, if anyone at U.S. Bank fails to keep any of our guarantees, we pay the customer for the inconvenience. We recognize that our service is what differentiates U.S. Bank from our competition. Product features and rates may be similar among banks, but guaranteed, outstanding service makes U.S. Bank unique. We say that some banks talk about great service, but only U.S. Bank guarantees it. Circle of Service Excellence Our Five Star Service Guarantee is built on the outstanding efforts of our employees and their commitment and contribution to delivering the highest level of quality service for our customers. Each quarter we choose a select few employees who exemplify outstanding service for induction into the Circle of Service Excellence. We honor them at a luncheon hosted by U.S. Bancorp executives and at a Board of Directors meeting. We prominently display their portraits at our Five Star Halls of Fame, located in seven major markets. Stock options and local recognition are among the other ways we reward these top performers. We invite you to nominate an outstanding employee for our Circle of Service Excellence using the attached self-addressed, postage-paid nomination form. U.S. Bancorp 1 Diluted Earnings Per Common Share (In dollars) Dividends Declared Per Common Share (b) (In dollars) Financial Summary Return on Average Assets (In percents) Return on Average Common Equity (In percents) Dividend Payout Ratio (In percents) 3,200 2,400 1,600 800 0 2.00 1.50 1.00 .50 0 Net Income (In millions of dollars) 2,519.3 2,799.0 2,381.8 3,106.9 2,875.6 2,550.8 2,123.9 2,123.9 1,599.3 1,706.5 9797 9898 9999 0000 0101 Operating Earnings(a) Net Income 1.96 1.81 1.76 1.49 1.86 1.59 1.64 1.24 1.54 1.03 9797 9898 9999 0000 0101 Return on Average Assets (Operating Basis)(a) Return on Average Assets Net Interest Margin (In percents) 5.00 4.72 4.44 4.44 4.36 4.45 3.75 2.50 1.25 0 9797 9898 9999 0000 0101 Average Assets (In millions of dollars) 200,000 150,000 129,493 142,887 150,167 158,481 165,944 100,000 50,000 0 9797 9898 9999 0000 0101 2 U.S. Bancorp 2.00 1.50 1.00 .50 0 1.62 1.50 1.45 1.23 1.30 1.10 1.32 .88 1.13 .85 9797 9898 9999 0000 0101 Diluted Earnings Per Common Share (Operating Basis)(a) Diluted Earnings Per Common Share .75 .50 .25 0 .75 .65 .46 .33 .27 9797 9898 9999 0000 0101 25 20 15 10 5 0 60 40 20 0 20,000 15,000 10,000 5,000 0 19.5 20.3 21.2 21.6 20.0 17.2 18.0 14.7 15.7 10.5 9797 9898 9999 0000 0101 Return on Average Common Equity (Operating Basis)(a) Return on Average Common Equity 100 75 50 25 0 85.2 57.0 43.4 40.1 37.3 31.6 23.8 25.3 29.9 31.7 9797 9898 9999 0000 0101 Dividend Payout Ratio (Operating Basis)(a) Dividend Payout Ratio Efficiency Ratio (In percents) Banking Efficiency Ratio (c) (In percents) 59.9 58.3 52.2 52.2 55.7 50.5 51.9 48.8 49.5 57.5 9797 9898 9999 0000 0101 Efficiency Ratio (Operating Basis)(a) Efficiency Ratio Average Shareholders’ Equity (In millions of dollars) 12,383 13,221 14,365 10,882 16,201 9797 9898 9999 0000 0101 60 40 20 0 10 8 6 4 2 0 59.5 51.7 56.1 49.7 52.1 46.3 52.5 46.8 43.5 45.2 9797 9898 9999 0000 0101 Banking Efficiency Ratio (Operating Basis)(a) Banking Efficiency Ratio Average Equity to Average Assets (In percents) 8.67 8.80 9.06 8.40 9.76 9797 9898 9999 0000 0101 (Dollars in Millions, Except Per Share Data) 2001 Operating earnings (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger and restructuring-related items (after-tax) . . . . . . . . . . . . . . . $ 2,550.8 (844.3) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,706.5 Per Common Share Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared per share (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .89 .88 .75 8.43 20.93 2000 $ 3,106.9 (231.3) $ 2,875.6 $ 1.51 1.50 .65 7.97 23.25 1999 $ 2,799.0 (417.2) $ 2,381.8 $ 1.25 1.23 .46 7.23 21.13 Percent Change 2001 Percent Change 2000 (17.9)% 11.0% (40.7) 20.7 (41.1)% (41.3) 15.4 5.8 (10.0) 20.8% 22.0 41.3 10.2 10.0 Financial Ratios Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin (taxable-equivalent basis) . . . . . . . . . . . . . . . . . . Efﬁciency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Ratios Excluding Merger and Restructuring-Related Items (a) Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efﬁciency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Banking efﬁciency ratio (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average Balances Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Period End Balances Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory capital ratios Tangible common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.03% 10.5 4.45 57.5 1.54% 15.7 49.5 45.2 $118,177 145,165 165,944 104,956 16,201 $114,405 2,457 171,390 105,219 16,461 1.81% 20.0 4.36 51.9 1.96% 21.6 48.8 43.5 $118,317 140,606 158,481 103,426 14,365 $122,365 1,787 164,921 109,535 15,168 1.59% 18.0 4.44 55.7 1.86% 21.2 50.5 46.3 $109,638 133,757 150,167 99,920 13,221 $113,229 1,710 154,318 103,417 13,947 5.7% 7.7 11.7 7.7 6.3% 7.2 10.6 7.4 6.7% 7.4 11.0 7.5 (.1)% 3.2 4.7 1.5 12.8 (6.5)% 37.5 3.9 (3.9) 8.5 7.9% 5.1 5.5 3.5 8.7 8.1% 4.5 6.9 5.9 8.8 (a) The Company analyzes its performance on a net income basis in accordance with accounting principles generally accepted in the United States, as well as on an operating basis before merger and restructuring-related items referred to as “operating earnings.” Operating earnings are presented as supplemental information to enhance the reader’s understanding of, and highlight trends in, the Company’s ﬁnancial results excluding the impact of merger and restructuring-related items of speciﬁc business acquisitions and restructuring activities. Operating earnings should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. Merger and restructuring-related items excluded from net income to derive operating earnings may be signiﬁcant and may not be comparable to other companies. (b) Dividends per share have not been restated for the 2001 merger of Firstar and the former U.S. Bancorp (“USBM”). (c) Without investment banking and brokerage activity. 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. 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) the Company could encounter unforeseen complications in connection with the ongoing integration of the products, operations and information systems of Firstar with USBM that could adversely affect the Company’s operations or customer relationships; (iii) changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; (iv) the conditions of the securities markets could change, adversely affecting revenues from capital markets businesses, 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; (v) changes in the extensive laws, regulations and policies governing ﬁnancial services companies could alter the Company's business environment or affect operations; (vi) 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; (vii) 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; (viii) acquisitions may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated, or may result in unforeseen integration difﬁculties; and (ix) capital investments in the Company’s businesses may not produce expected growth in earnings anticipated at the time of the expenditure. 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 3 Financial Summary (Dollars in Millions, Except Per Share Data) 2001 Operating earnings (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger and restructuring-related items (after-tax) . . . . . . . . . . . . . . . $ 2,550.8 (844.3) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,706.5 Per Common Share Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared per share (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .89 .88 .75 8.43 20.93 2000 $ 3,106.9 (231.3) $ 2,875.6 $ 1.51 1.50 .65 7.97 23.25 1999 $ 2,799.0 (417.2) $ 2,381.8 $ 1.25 1.23 .46 7.23 21.13 Percent Change 2001 Percent Change 2000 (17.9)% 11.0% (40.7) 20.7 (41.1)% (41.3) 15.4 5.8 (10.0) 20.8% 22.0 41.3 10.2 10.0 Financial Ratios Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin (taxable-equivalent basis) . . . . . . . . . . . . . . . . . . Efﬁciency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Ratios Excluding Merger and Restructuring-Related Items (a) Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efﬁciency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Banking efﬁciency ratio (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average Balances Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Period End Balances Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory capital ratios Tangible common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.03% 10.5 4.45 57.5 1.54% 15.7 49.5 45.2 $118,177 145,165 165,944 104,956 16,201 $114,405 2,457 171,390 105,219 16,461 1.81% 20.0 4.36 51.9 1.96% 21.6 48.8 43.5 $118,317 140,606 158,481 103,426 14,365 $122,365 1,787 164,921 109,535 15,168 1.59% 18.0 4.44 55.7 1.86% 21.2 50.5 46.3 $109,638 133,757 150,167 99,920 13,221 $113,229 1,710 154,318 103,417 13,947 5.7% 7.7 11.7 7.7 6.3% 7.2 10.6 7.4 6.7% 7.4 11.0 7.5 (.1)% 3.2 4.7 1.5 12.8 (6.5)% 37.5 3.9 (3.9) 8.5 7.9% 5.1 5.5 3.5 8.7 8.1% 4.5 6.9 5.9 8.8 (a) The Company analyzes its performance on a net income basis in accordance with accounting principles generally accepted in the United States, as well as on an operating basis before merger and restructuring-related items referred to as “operating earnings.” Operating earnings are presented as supplemental information to enhance the reader’s understanding of, and highlight trends in, the Company’s ﬁnancial results excluding the impact of merger and restructuring-related items of speciﬁc business acquisitions and restructuring activities. Operating earnings should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. Merger and restructuring-related items excluded from net income to derive operating earnings may be signiﬁcant and may not be comparable to other companies. (b) Dividends per share have not been restated for the 2001 merger of Firstar and the former U.S. Bancorp (“USBM”). (c) Without investment banking and brokerage activity. 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. 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) the Company could encounter unforeseen complications in connection with the ongoing integration of the products, operations and information systems of Firstar with USBM that could adversely affect the Company’s operations or customer relationships; (iii) changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; (iv) the conditions of the securities markets could change, adversely affecting revenues from capital markets businesses, 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; (v) changes in the extensive laws, regulations and policies governing ﬁnancial services companies could alter the Company's business environment or affect operations; (vi) 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; (vii) 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; (viii) acquisitions may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated, or may result in unforeseen integration difﬁculties; and (ix) capital investments in the Company’s businesses may not produce expected growth in earnings anticipated at the time of the expenditure. 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 3 This changes banking forever. 4 U.S. Bancorp Dear Fellow Shareholders: We are pleased to tell you that the length or the timing of a genuine recovery. seamless integration of Firstar and For a company that prides itself on U.S. Bancorp proceeds on schedule to be consistent earnings, our third quarter completed by the end of the third quarter action was not an easy step to take. of 2002. We continue to successfully However, it helped us accomplish one convert major systems and products to of our primary objectives: having a single operating platforms with virtually balance sheet and a risk proﬁle among no customer disruption. The integration the strongest in the industry. We have process has been thoughtful and inten- positioned ourselves to manage through tional. We have worked very diligently the current economic cycle. Our credit to blend the best practices, people and quality remained stable in the fourth products of both organizations. quarter, but we are prepared for the Your corporation ended 2001 likelihood that nonperforming loans and with strong fourth quarter performance, charge-offs will increase throughout 2002. ing and fast-growing markets, and we highlighted by revenue momentum, Providing outstanding service to all have a multi-tiered and comprehensive margin improvement and a companywide customers, backed by our exclusive distribution system throughout those focus on customer service quality. We Five Star Service Guarantee, is an ongoing markets. Our scope and scale make us are committed to seeing these trends priority at U.S. Bancorp, as is selling more a low-cost provider with signiﬁcant com- continue through 2002. of our products and services. You can petitive advantages. We have a proven The year 2001 brought unprece- read more about our Five Star Service track record and skilled professionals dented challenges for our country and Guarantee at the front of this report. who are the best in the industry running our company. During the third quarter, Our operating revenue growth in the our businesses. we took action to increase our reserves fourth quarter is a sure sign that our We assure you that, as always, our for potential loan losses and to strengthen sales and service culture is taking effect. highest priority is to increase the value our balance sheet. While we were Although our combined franchise of your investment in U.S. Bancorp. It is disappointed in the resulting adverse has yet to fulﬁll all of its potential, we the reason we come to work each day. effect on earnings, U.S. Bancorp now are off to a strong start on a solid foun- ranks among the top of our peer group dation. The success of our integration to Sincerely, in the strength of our credit reserves. date and the beneﬁts of the merger We prudently recognized the economic became evident in our year-end results. slowdown and our inability to predict its We operate in stable, moderately grow- U.S. Bancorp is well positioned to capitalize on growth opportunities. Jerry A. Grundhofer President and Chief Executive Ofﬁcer John F. Grundhofer Chairman February 22, 2002 This changes banking forever. 4 U.S. Bancorp U.S. Bancorp 5 Growing Diversified Businesses Each U.S. Bancorp business line focuses on unique customer segments, enabling us to best meet the needs of our broad customer base. * Treasury and Corporate Support contributed (1.0)% of 2001 operating income. Operating income represents pretax earnings before the provision for credit losses and merger and restructuring-related items. ** Assets are as of December 31, 2001 and reﬂect U.S. Bancorp Asset Management, Inc. and its afﬁliated private asset management group within U.S. Bank National Association. Investment products, including shares of mutual funds, are not obligations of, or guaranteed by, any bank, including U.S. Bank or any U.S. Bancorp afﬁliate, nor are they insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other agency. An investment in such products involves investment risk, including possible loss of principal. 6 U.S. Bancorp Consumer Banking Delivers comprehensive ﬁnancial products and services to the broad consumer and small business markets through 2,147 banking ofﬁces, telesales and telephone customer service, online banking, direct mail and 4,904 automated teller machines (ATMs) Wholesale Banking Offers relationship-based lending, depository, treasury management, foreign exchange, international banking, leasing and other ﬁnan- cial services primarily to middle market, large corporate, ﬁnancial institution and public sector clients Payment Services Includes consumer and business credit and debit cards, corporate and purchasing card services, consumer lines of credit, ATM pro- cessing and merchant processing Private Client, Trust and Asset Management Provides a comprehensive array of private banking, personal, corporate and institutional trust, investment management, ﬁnancial advisory, mutual fund and asset management services to afﬂuent individuals, businesses, institutions and mutual funds Capital Markets Under the U.S. Bancorp Piper Jaffray® brand, provides ﬁnancial advisory and securities brokerage services, mutual funds, annuities and insurance products to individ- uals and businesses; for corporate and public sector clients, engages in equity and ﬁxed income trading activities and investment banking and underwriting services Contribution to 2001 U.S. Bancorp Operating Income* 37.5%37.5% Contribution to 2001 U.S. Bancorp Operating Income* 32.1% Contribution to 2001 U.S. Bancorp Operating Income* 18.9% Contribution to 2001 U.S. Bancorp Operating Income* 10.7% Key Business Units (cid:1) Community Banking serves smaller and non-urban markets (cid:1) Metropolitan Banking serves larger urban and high-growth markets Strengths and Successes (cid:1) Consumer Lending provides student (cid:1) Segmented business model loans and serves consumers purchasing or leasing vehicles or marine equipment through franchised dealers (cid:1) Strong sales culture (cid:1) Top 3 small business lender (cid:1) In-Store Banking complements tradi- (cid:1) Consumer Finance serves customers tional branches with accessible facilities in supermarkets, convenience stores and other locations (cid:1) Small Business Banking provides comprehensive ﬁnancial solutions to businesses with annual revenue up to $5 million outside the traditional bank credit proﬁle (cid:1) Home Mortgage Lending originates, purchases, sells and services residential mortgage loans (cid:1) Retail Brokerage and Insurance provides mutual funds, variable and ﬁxed annuities, general securities and discount brokerage (cid:1) Top 3 Small Business Administration bank lender (cid:1) Top 4 bank branch network (cid:1) Top 7 home equity lender (cid:1) Top 8 consumer lender Key Business Units (cid:1) Commercial Banking serves middle market clients with annual sales between $5 million and $250 million, and clients in the commercial real estate, commercial vehicle dealership and energy industries (cid:1) Corporate Banking serves clients with annual sales greater than $250 million, those with specialized lending, equipment finance and leasing needs, companies in diverse specialty industries (such as agribusiness, health care, mortgage banking and media/communications), correspondent banks, government entities, and all wholesale clients in our headquarters market (cid:1) Treasury Management provides comprehensive cash management solutions to business clients, facilitating their deposits and the collection of funds, payments, and information to assist in the management and optimization of their cash position Strengths and Successes (cid:1) Strong distribution system (cid:1) Comprehensive product set (cid:1) Relationship manager tenure and expertise (cid:1) Leading depository bank for federal, state and municipal governments (cid:1) Top 5 bank-owned leasing company (cid:1) Top 7 treasury management provider Key Business Units (cid:1) Corporate Payment Systems provides Visa® corporate and purchasing cards and other payment solutions to compa- nies with annual sales greater than $50 million, as well as federal, state and local governments (cid:1) Card Services provides credit and debit card products to consumer and small business customers of U.S. Bancorp, correspondent ﬁnancial institutions and co-brand partners Key Business Units (cid:1) Private Client Group fulﬁlls private banking, personal trust and investment management needs for afﬂuent clients and has $79 billion in assets under administration (cid:1) Corporate Trust Services provides trustee services for more than $650 billion in municipal, corporate, asset-backed and international bonds (cid:1) Institutional Trust and Custody provides retirement, investment and custodian services to institutional clients Key Business Units (cid:1) Private Advisory Services helps afﬂuent clients meet their ﬁnancial goals through a network of 123 brokerage ofﬁces (cid:1) Equity Capital Markets provides research, trading, sales and equity investment banking activities, including public offerings and advisory services for mergers and acquisitions, with niches in communications, consumer, health care, ﬁnancial institutions, industrial growth and technology (cid:1) NOVA Information Systems, Inc. specializes in integrated credit and debit card payment processing services, related software application products and value-added services for more than 650,000 U.S. merchant locations (cid:1) Transaction Services specializes in ATM processing, supporting U.S. Bank ATMs and facilitating electronic transactions for other ﬁnancial institutions and cor- porations through ATMs, debit cards, two proprietary regional networks and a network gateway Strengths and Successes (cid:1) Industry-leading products (cid:1) Proprietary technology (cid:1) Operational economies of scale (cid:1) No. 1 Visa commercial card issuer (cid:1) Top 2 universal ﬂeet card provider (cid:1) Top 3 bank-owned ATM network (cid:1) Top 3 merchant processor (cid:1) Top 6 Visa and MasterCard® issuer (cid:1) Fund Services provides transfer agent, fund accounting, fund administration/ compliance and distribution to mutual fund complexes (cid:1) U.S. Bancorp Asset Management, Inc., with more than $121 billion** in assets under management, advises the $54 billion** First American® family of mutual funds and provides customized portfolio management for individuals, corporations, endowments, foundations, pension funds, public entities and labor unions Strengths and Successes (cid:1) Creative, needs-based solutions (cid:1) Leading technology and operational economies of scale (cid:1) Breadth of asset management products (cid:1) Top 2 municipal trustee (cid:1) Top 3 transfer agent (cid:1) Top 5 bank-afﬁliated U.S. mutual fund family (cid:1) Top 6 among banks in record keeping assets (cid:1) Fixed Income Capital Markets provides ﬁnancing and investment expertise to public ﬁnance issuers, corporate debt issuers and institutional investors Strengths and Successes (cid:1) Strong retail distribution network (cid:1) “Middle Market Mergers & Acquisitions Bank of the Year,” Mergers & Acquisitions magazine, February 2001 (cid:1) Top-performing equity bookrunner for lead- managed IPOs and follow-on offerings (cid:1) Record year for Fixed Income Capital Markets (cid:1) Leading manager of ﬁxed income new issuance, underwriting $11.5 billion in agency securities and $6.3 billion in municipal bonds Contribution to 2001 U.S. Bancorp Operating Income* 1.8% U.S. Bancorp 7 Providing Convenient Access Our customers can choose the easiest way to bank, whether in person, by telephone, via ATM or online. 8 U.S. Bancorp Cutting-Edge Delivery Technologies 24-Hour Banking: Our Consumer Banking customer serv- ice call centers handled 126,207,713 inbound inquiries in 2001, including 99,783,801 served by our interactive voice response system. ATM Banking: 4,904 leading- edge terminals are available around the clock throughout our 24-state banking region. Internet Banking: 1,155,733 consumer and small business customers are registered to conduct most transactions and inquiries at the click of a mouse. Consumer and business customers ATM Banking Internet. Our Customer Automation alike increasingly use technology to Our ATM network is great in number Reporting Environment (C.A.R.E.) pro- access their accounts with us. They also as well as functionality. We are upgrading vides Internet access for corporate and frequent our extensive network of bank approximately 1,500 branch terminals to purchasing card customers, merchants branches and specialized ofﬁces, which Super ATMs, bringing the total number and government clients, who can gener- remain the foundation of our command- of Super ATMs to 3,444. These state-of- ate customized reports at any time. And ing presence in many of the highest the-art ATMs enable customers not only we recently became the ﬁrst institution growth, most diversiﬁed markets in the to access funds, check balances and make to offer complete Web-based reporting United States. Wherever customers inter- deposits, but also to obtain statements, and processing for money market instru- act with us, they can count on consistent, order checks, request check copies, ment issuers. It’s all part of “e-enabling” leading-edge service. purchase stamps and phone minutes… our customers and employees with the Branch Banking Our Community and Metropolitan Banking branches deliver all the products and services U.S. Bank has to offer. In Internet Banking and more. Updated ATMs feature the new latest technology. bright and colorful U.S. Bank look — signaling the best ATM service available. Relationship Banking Relationships, complemented by com- prehensive products and services, drive our larger markets, branch staff act as We offer comprehensive, fast, secure several of our key businesses, including concierges, connecting customers with online service on all accounts across all Wholesale Banking, Private Client, Trust experts across the company for specialized business lines. Consumers enjoy the latest and Asset Management, and U.S. Bancorp services. Nontraditional branch locations Internet banking capabilities available on Piper Jaffray. Clients of these businesses bring banking directly to where our cus- www.usbank.com or www.ﬁrstar.com, not only want quick, convenient access tomers live, work, study and shop inside where they can learn about products, to conduct transactions, they also need retirement centers, workplaces and corpo- open deposit accounts in real time, apply expert advice and support. We offer both. rate sites, colleges and universities, and for loans and lines of credit, access Clients always have access to an experi- grocery and convenience stores. These account information, pay bills and more. enced relationship manager— an ambassa- dynamic locations feature special products, Businesses and investors also beneﬁt dor who can help fulﬁll their day-to-day services and hours geared to the unique from increasingly sophisticated, specialized needs or direct them, as needed, to appro- needs of local customers. Additionally, online tools. For example, we offer priate specialists across our organization many specialized ofﬁces within and beyond advanced capabilities to deliver check in areas as diverse as asset management, our 24-state region serve unique customer images to commercial customers via the investment banking and leasing. segments such as brokerage, home mort- gage and trust. Telephone Banking Using 24-Hour Banking, consumers have anytime, anywhere access to their accounts by telephone, including Spanish language options. Dedicated call centers provide expertise to various business customer segments and others with specialized needs. Our telesales efforts offer customers new products and services to meet more of their ﬁnancial needs while generating revenue growth for the company. Consumer Banking alone handled 1,402,849 inbound and outbound telesales calls in 2001. Branch Banking and Specialized Services/Ofﬁces AK VT NH ME NY MA RI MI HI NM OK MS AL GA TX LA CT NJ DE MD DC PA WV VA NC SC FL Branch Banking Specialized Services/Offices 2,147 branch 2,147 branch banking offices banking offices in 24 states in 24 states All Firstar locations All Firstar locations will operate as U.S. Bank will operate as U.S. Bank by mid-2002. by mid-2002. Commercial Banking Commercial Banking Consumer Banking Consumer Banking Corporate Banking Corporate Banking Payment Services Payment Services Private Client, Trust and Asset Management Private Client, Trust and Asset Management Technology and Operations Services Technology and Operations Services U.S. Bancorp Piper Jaffray U.S. Bancorp Piper Jaffray Hong Kong Canada Buenos Aires Cayman Islands London Tel Aviv U.S. Bancorp 9 Building the Best Bank in America Disciplined. Detailed. Deliberate. The ongoing integration of Firstar and U.S. Bank is seamlessly creating one ﬁnancial powerhouse, united by a single brand. Structure and Process Every week for more than a year, corporate and line-of-business leaders from across U.S. Bancorp have been gathering to execute our comprehensive plan to integrate Firstar and U.S. Bank. They are united by a common goal: to ensure a ﬂawless, cost-effective integration for the beneﬁt of customers, shareholders and employees. Their stellar track record— years of experience executing dozens of successful mergers — produces out- standing results. The integration has been a textbook example of careful planning and smooth execution. Thorough preparation, employee training, systems testing and customer communication has ensured success. A series of systems conversions is bringing all our markets together on common operating and delivery platforms. Together we are equipped to handle increased capacity, enhanced functionality, and high-quality, consistent service wher- ever customers interact with us. 10 U.S. Bancorp Quality Control and Monitoring Exacting quality control and moni- organizational structure. We have devel- Completing the Integration oped common employee beneﬁts, pro- Our entire organization has embraced toring — before and after conversion grams and policies, including incentives events — ensure that our conversions that drive employees to generate revenue proceed smoothly. Command centers while fulﬁlling customers’ needs. We have track any issues so that customer service selected the best products and services continues uninterrupted. from our combined resources— or, through Branch employee “ambassadors” expanded capabilities, created new ones. with expert knowledge of our combined Along the way, we have invested in our exclusive Five Star Service Guarantee. Soon we’ll be completely united under one strong brand — the new U.S. Bank. Starting in January and continuing through July 2002, the distinctive new red, white and blue U.S. Bank signs are rising market-by-market. All locations, including our ATM network, are in the products, systems and processes are on cutting-edge, fully automated infrastruc- process of displaying the updated identity, location at newly converted branches and ture that lays a solid foundation for other front-ofﬁce operations after conver- growth. In migrating to new, cost-effec- sion. They provide ongoing training and tive network technology, we have estab- support for employees and ensure that lished greater connectivity between our customers experience business as usual. front and back ofﬁces. We have e-enabled “Mystery shoppers” measure service levels employees and customers to access before and after conversion events. information and conduct transactions Key Accomplishments with unprecedented accuracy and efﬁ- ciency. Gone are closed-end, self-contained During the past year, we have worked processing systems. Evolving is a dedicated diligently to combine our two predecessor organizations into an even stronger com- pany. Together, we have created a better way to do business. open Internet protocol network that supports more than 300 million transac- tions a month and is backed by the Five Star Service Guarantee — testament to which promises “Five Star Service Guaranteed.” In addition, all advertising and marketing materials, business supplies and customer documents reinforce our new brand. After ﬁnal systems conversions in the third quarter of 2002, all customers will have convenient access to our new, improved product and service offerings wherever we operate. They will be able to make deposits and conduct other transactions at any of our branches across 24 states. Including our specialized businesses, the new U.S. Bank brand is recognizable from coast to coast. When customers see the U.S. Bank name, they can expect We have established a new, efﬁcient our conﬁdence in our systems and staff. familiar faces, convenient access, top- quality solutions and unmatched service excellence — guaranteed! Integration Highlights 3Q01 • U.S. Bancorp closes acquisition of NOVA Corporation • U.S. Bancorp closes acquisition of 20 Southern 1Q02 California branches from Paciﬁc Century Bank • Name change begins in selected markets 1Q01 • Commercial loan centers consolidate • Integration of major deposit-related systems • Firstar and • Firstar Funds merge into First American Funds® begins in selected markets U.S. Bancorp join forces • Major trust systems convert to common platform 2Q01 4Q01 3Q02 • First American Asset Management • Branded credit cards merge • Name change and deposit and FIRMCO merge into U.S. Bancorp onto common platform integrations to be completed Asset Management, Inc. • Mortgage loans convert to common platform • Consumer loans convert to • Teller and personal banker system common platform • Five Star Service Guarantee promotion launches across all 2Q02 upgrades to be completed business lines • Teller and personal banker system • Human Resources systems upgrades begin in selected markets convert to common platform • Name change and deposit integrations continue in selected markets U.S. Bancorp 11 Capitalizing on Growth Opportunities The combination of Firstar and Our future begins with our basic where by our Five Star Service Guarantee. U.S. Bancorp has created a larger, banking operations. We already rank Consumers enjoy expanded access stronger company with a solid founda- among the top three commercial banks in through 2,147 branches and 4,904 ATMs tion for growth. We will grow by using 50 metropolitan areas based on deposits. in 24 states, plus state-of-the-art telephone strategic cost advantage to gain market We are penetrating all our markets even and Internet banking channels. Businesses share, emphasizing customer service and further with our expanded, improved set also beneﬁt from our expanded geographic investing in higher-growth businesses. of high-quality products — backed every- reach and technology investments. Outstanding products. High-growth markets. Flourishing businesses. Convenient, efﬁcient delivery. U.S. Bancorp is positioned to soar. 12 U.S. Bancorp National retailers, in particular, are bene- Hispanic populations, both English- and ﬁting from enhanced depository and Spanish-speaking. More than ever before, treasury management products accessible we are hiring additional Hispanic employ- through common accounts across the ees who reﬂect the diversity of their local region, including the expansion of our communities and who communicate cash vault capabilities to new markets. more effectively with customers. Our stored as a single electronic document Trust customers beneﬁt from our greater employees are visible community leaders that is instantly available to both shipper economies of scale and state-of-the-art who have strong relationships with and carrier. By eliminating manual rec- products and systems. Hispanic individuals, businesses and onciliation of invoices and freight bills, We continually strive to serve cus- community organizations. companies can save signiﬁcantly on each tomers across business lines, gaining more Our ATMs and 24-Hour Banking transaction. With expansion into other of their business. In 2001, for example, system feature expanded Spanish language industries, PowerTrack delivers the U.S. Bancorp Piper Jaffray Fixed Income options. Additionally, we have telephone future — faster, more accurate payments Capital Markets had a record year in customer service representatives who speak and exceptional analytical reporting corporate debt issuance, managing 35 Spanish and other foreign languages. tools for better management decisions. issues with a par amount of more than We also are displaying more signs and The result is more efﬁciency and control $19 billion, including preferred stock and materials in Spanish. for both buyer and seller. note issues for U.S. Bancorp. Meanwhile, customers deposited more than $490 We offer many programs that help meet the needs of various segments of In 2001 we closed on our purchase of NOVA Corporation, now known as million into U.S. Bancorp Piper Jaffray Prime AccountsSM and other brokerage Hispanic customers. To help ﬁrst-time NOVA Information Systems, Inc., a wholly borrowers, we created the Credit Builder owned subsidiary of U.S. Bancorp. This accounts through U.S. Bank branches and Secured Loan. We also accept identiﬁca- merchant payment processor ranks as the ATMs— up over 134 percent from a year earlier. When the integration is completed, tion issued by the Consulate of Mexico, issue the Visa® Payroll Card and offer a third-largest in the United States, serving 650,000 businesses of all sizes. Merchants investors will have access to their broker- low-cost money transfer program. beneﬁt from our industry-leading product age accounts at all of our bank branches. Our Hispanic Initiative extends to offerings, including electronic check Ultimately, our growth depends on partnerships with Hispanic Chambers of processing, a variety of Web-enabled our people. We have created a sales Commerce and other organizations, and tools, and a full array of point-of-sale culture driven by customer needs and to community service. Free seminars, for applications in addition to credit card rewarded by incentives for outstanding, example, cover topics ranging from the and debit card processing. measurable performance. Every employee, basics of banking in the United States Within our Transaction Services from the front line to the back ofﬁce, (especially geared to Spanish-speaking division, Elan Financial Services serves is eligible for incentives to strengthen immigrants) to ﬁrst-time home owner- more than 3,000 ﬁnancial institutions existing customer relationships, build ship. Hispanic customers know they can through a complete range of products and new ones, and provide outstanding turn to U.S. Bank to turn their American services including credit card issuing, and guaranteed service to all customers, Dream into reality. whether external or internal. Payment Services: Growth Engine Hispanic Initiative Taps Success The U.S. Hispanic community num- Payment Services represents one of our greatest growth opportunities. We bers more than 35 million consumers continue to build our core commercial with $450 billion in spending and invest- and consumer card businesses while ment power. Approximately 1.2 million investing in other industry-leading, Hispanic businesses have $200 billion payment-related businesses. in revenues. It’s a remarkable success PowerTrack®, our innovative online ATM, debit card and merchant processing. Elan also provides full-service support and management tools that are offered uniquely through a single source. The suite of products enables small- to mid-sized ﬁnancial institution clients to compete effectively with larger institutions. Elan leverages these unique capabilities to also provide ATM driving and deployment, and debit gateway services to large story — and opportunity. payment processing and transaction corporate clients. Our Hispanic Initiative, launched in tracking system, has seemingly unlimited 2001, is our coordinated program to be potential. First introduced to the freight an outstanding bank, responsive business industry, this single-source information partner and superior employer in key center provides powerful control for the markets. It focuses on more than 300 logistics process. On the Internet or via a branches serving communities with large private network, shipment information is U.S. Bancorp 13 Providing Local Market Leadership and Community Support 14 U.S. Bancorp Local Market Leadership The boards include local business and U.S. Bank markets are segmented civic leaders in addition to U.S. Bank into Metropolitan Banking in large executives. The perspective of these board urban areas and Community Banking in members is invaluable. U.S. Bancorp Foundation 2001 Charitable Contributions by Program Area smaller urban and non-urban locales. U.S. Bank maximizes its ability to serve our Metropolitan Banking markets through the independent management of our major lines of business. In Commu- nity Banking markets, however, all lines of business are offered and marketed through branch ofﬁces. In every market, large or small, our local management teams make the decisions that most directly affect their customers. Local autonomy in resource allocation, com- munity affairs, pricing and business devel- opment enhances local market control. Community Involvement At U.S. Bancorp, community is more than a location. Community is the corporate spirit of accepting the role as a facilitator for the people, businesses and nonproﬁt organizations in our markets to achieve their ﬁnancial goals and enrich their lives. 32% United Way & Human Services 28% Economic Opportunity 18% Arts & Culture 16% Education 5% Employee Matching Gifts 1% Miscellaneous To that end, we provide both corpo- Through the U.S. Bancorp Founda- rate and local leadership on issues of tion, we contribute millions of dollars community importance; we tailor our back to the communities in which we do products and services to our communi- business through charitable grants to ties’ diverse needs; our local managers nonproﬁt organizations. We provide are visible and involved in community critical ﬁnancing for revitalization efforts, Local Bank Boards organizations and economic development job programs and affordable housing. The best decisions and the best cus- efforts; and we encourage and support We sponsor the United Way at generous tomer service come from knowing our our employees’ ongoing volunteer efforts. levels to meet critical human service needs. markets and our customers. To enhance We believe that our success depends on We sponsor a wide variety of amateur our own management’s understanding of the vitality of the communities we serve, and professional artistic groups; profes- local economies, critical issues, business and we bring together many resources to sional, college and high school sporting and public affairs, we have established help make possible economic, educational events and teams; and neighborhood and local bank boards throughout our markets. and cultural development. Local management. Local decisions. Local involvement. At U.S. Bancorp, we are deeply rooted in the communities we serve, and we recognize that the best solutions come most often from those who are closest to the market. civic events. From the smallest towns to the largest cities, U.S. Bancorp is an inte- gral part of the fabric of every hometown. Development Network The U.S. Bancorp Development Network comprises 35 geographically based employee chapters with a common mission — to promote the personal and professional development of our employ- ees, to provide networking opportunities within our organization and to offer a framework for involvement in commu- nity service. Individual Development Network chapters recruit public school tutors and mentors from our employee base, raise funds for many charitable causes and community efforts, partici- pate in various walkathons and races, assist elderly residents with simple home repairs and maintenance, build Habitat for Humanity homes, and become involved in other community services. U.S. Bancorp 15 Management's Discussion and Analysis OVERVIEW U.S. Bancorp and its subsidiaries (""the Company'') compose the organization created by the acquisition by Firstar Corporation (""Firstar'') of the former U.S. Bancorp of Minneapolis, Minnesota (""USBM''). The merger was completed on February 27, 2001, as a pooling-of-interests, and accordingly all Ñnancial information has been restated to include the historical information of both companies. Each share of Firstar stock was exchanged for one share of the Company's common stock while each share of USBM stock was exchanged for 1.265 shares of the Company's common stock. The new Company retained the U.S. Bancorp name. Earnings Summary The Company reported net income of $1.7 billion in 2001, or $.88 per diluted share, compared with $2.9 billion, or $1.50 per diluted share, in 2000. Return on average assets and return on average common equity were 1.03 percent and 10.5 percent in 2001, compared with returns of 1.81 percent and 20.0 percent in 2000. The year-over-year decline in earnings per diluted share and return on average assets was primarily due to a decline in capital markets activities, merger and restructuring-related items and a higher provision for credit losses which reÖected deterioration in economic conditions and credit quality relative to a year ago. The reduction in the Company's return on average common equity also reÖected the impact of recent acquisitions, which were accounted for using the purchase method. Net income included after-tax merger and restructuring-related items of $844.3 million ($1.3 billion on a pre-tax basis) in 2001 compared with $231.3 million ($348.7 million on a pre-tax basis) in 2000. Merger and restructuring-related items, on a pre-tax basis, included a $62.2 million gain on the sale of branches, $847.2 million of noninterest expenses and $382.2 million of provision for credit losses associated with the merger of Firstar and USBM. Merger and restructuring- related items also included $50.7 million of expense for restructuring operations of U.S. Bancorp Piper JaÅray, and $48.5 million related to the acquisition of NOVA Corporation (""NOVA'') and other recent acquisitions. The eÇciency ratio (the ratio of expenses to revenues) increased to 57.5 percent in 2001 compared with 51.9 percent in 2000 primarily due to the impact of merger and restructuring-related items. Refer to page 22 for further discussion of merger and restructuring-related items. The Company had operating earnings (net income excluding merger and restructuring-related items) of $2.6 billion in 2001, or $1.32 per diluted share, compared with $3.1 billion, or $1.62 per diluted share in 2000. Operating earnings on a ""cash basis'' (calculated by adding amortization of goodwill and other intangible assets to operating earnings) was $1.59 per diluted share in 2001, compared with $1.82 per diluted share in 2000. Return on average assets and return on average common equity, excluding merger-related items, were 1.54 percent and 15.7 percent in 2001, compared with returns of 1.96 percent and 21.6 percent in 2000. Operating earnings in 2001 reÖected total net revenue growth on a taxable- equivalent basis, excluding merger-related gains, of 6.7 percent, oÅset by growth in noninterest expenses, excluding merger and restructuring-related charges, of 5.4 percent. On an operating basis, the eÇciency ratio was 49.5 percent in 2001, compared with 48.8 percent in 2000. The banking eÇciency ratio (the ratio of expenses to revenues without the impact of investment banking and brokerage activity) before merger and restructuring-related charges was 45.2 percent in 2001, compared with 43.5 percent in 2000. The increase in the banking eÇciency ratio was primarily due to the impact of recent acquisitions including NOVA. Net income and operating earnings for 2001 included a number of signiÑcant items. During 2001, the provision for credit losses was $2.5 billion, an increase of $1.7 billion from a year ago. The change was due to an increased level of nonperforming assets and charge-oÅs, deterioration in speciÑc credit portfolios, merger-related portfolio restructurings and speciÑc actions taken by management to accelerate the Company's workout strategy for nonperforming assets. Results for 2001 also reÖect the impairment of retail leasing residuals due to sluggish pre-owned car markets, recognition of mortgage servicing rights (""MSR'') impairment during the declining rate environment and asset write-downs of commercial leasing partnerships and repossessed tractor/trailer property. These asset impairments were partially oÅset by gains related to sales of buildings and investment securities. The Company analyzes its performance on a net income basis determined in accordance with accounting principles generally accepted in the United States, as well as on an operating basis before merger-related charges referred to in this analysis as ""operating earnings''. Operating earnings and related discussions are presented as supplementary information in this analysis to enhance the readers' understanding of, and highlight trends in, the Company's core Ñnancial results excluding the non-recurring 16 U.S. Bancorp Table 1 Selected Financial Data Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data) 2001 2000 1999 1998 1997 Condensed Income Statement Interest income (taxable-equivalent basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities gains, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Noninterest income(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total net revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Noninterest expense(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for credit losses(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxes and merger and restructuring-related itemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating earnings(a)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related items (after-tax) ÏÏÏÏÏÏÏÏÏÏÏ $11,139.5 4,674.8 6,464.7 329.1 4,968.1 11,761.9 5,658.8 2,146.6 3,956.5 55.9 1,349.8 2,550.8 (844.3) $12,157.9 6,022.9 6,135.0 8.1 4,875.1 11,018.2 5,368.3 828.0 4,821.9 85.4 1,629.6 3,106.9 (231.3) $10,723.0 4,790.3 5,932.7 13.2 4,231.7 10,177.6 5,128.5 638.5 4,410.6 96.3 1,515.3 2,799.0 (417.2) $10,535.9 4,859.7 $ 9,921.8 4,389.8 5,676.2 29.1 3,572.8 9,278.1 4,829.6 453.4 3,995.1 111.2 1,364.6 2,519.3 (386.4) 5,532.0 7.3 2,711.3 8,250.6 4,306.7 619.6 3,324.3 121.1 1,079.3 2,123.9 (524.6) Net income in accordance with GAAPÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,706.5 $ 2,875.6 $ 2,381.8 $ 2,132.9 $ 1,599.3 Per Common Share Earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends declared per share(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average shares outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average diluted shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial Ratios Return on average assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Return on average equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest margin (taxable-equivalent basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÇciency ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial Ratios Excluding Merger and Restructuring-Related Items(a) Return on average assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Return on average equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÇciency ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Banking eÇciency ratio(c) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average Balance Sheet Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Noninterest-bearing deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DepositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total shareholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Year-end Balance Sheet Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DepositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total shareholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .89 .88 .75 1,927.9 1,939.5 $ 1.51 1.50 .65 1,906.0 1,918.5 $ 1.25 1.23 .46 1,907.8 1,930.0 $ 1.12 1.10 .33 1,898.8 1,930.5 $ .86 .85 .27 1,841.0 1,872.2 1.03% 10.5 4.45 57.5 1.54% 15.7 49.5 45.2 $ 118,177 1,911 21,916 145,165 165,944 25,109 104,956 12,980 24,608 16,201 $ 114,405 26,608 171,390 105,219 25,716 16,461 1.81% 20.0 4.36 51.9 1.96% 21.6 48.8 43.5 $ 118,317 1,303 17,311 140,606 158,481 23,820 103,426 12,586 22,410 14,365 $ 122,365 17,642 164,921 109,535 21,876 15,168 1.59% 18.0 4.44 55.7 1.86% 21.2 50.5 46.3 $ 109,638 1,450 19,271 133,757 150,167 23,556 99,920 11,707 20,248 13,221 $ 113,229 17,449 154,318 103,417 21,027 13,947 1.49% 17.2 4.44 58.3 1.76% 20.3 52.2 49.7 $ 102,451 1,264 21,114 127,738 142,887 23,011 98,940 11,102 15,732 12,383 $ 106,958 20,965 150,714 104,346 18,679 12,574 1.24% 14.7 4.72 59.9 1.64% 19.5 52.2 51.7 $ 95,149 549 19,123 117,173 129,493 20,984 93,322 11,791 9,481 10,882 $ 99,029 20,442 137,488 98,323 13,181 11,402 (a) The Company analyzes its performance on a net income basis in accordance with accounting principles generally accepted in the United States, as well as on an operating basis before merger and restructuring-related items referred to as ""operating earnings.'' Operating earnings are presented as supplemental information to enhance the readers' understanding of, and highlight trends in, the Company's Ñnancial results excluding the impact of merger and restructuring-related items of speciÑc business acquisitions and restructuring activities. Operating earnings should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. Merger and restructuring-related items excluded from net income to derive operating earnings may be signiÑcant and may not be comparable to other companies. (b) Dividends per share have not been restated for the 2001 merger of Firstar and USBM. (c) Without investment banking and brokerage activity. eÅects of discrete business acquisitions and restructuring activities. Operating earnings should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. Merger and restructuring-related items excluded from net income to derive operating earnings may be signiÑcant and may not be comparable to other companies. U.S. Bancorp 17 Table 2 Reconciliation of Operating Earnings(a) to Net Income in Accordance with GAAP Year Ended December 31 (Dollars in Millions) 2001 2000 1999 1998 1997 Operating earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related items $ 2,550.8 $3,106.9 $2,799.0 $2,519.3 $2,123.9 Gains on the sale of branches ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Integration, conversion and other chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities losses to restructure portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for credit losses(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62.2 (946.4) Ì (382.2) Pretax impactÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Applicable tax beneÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,266.4) 422.1 Ì (348.7) Ì Ì (348.7) 117.4 Ì (355.1) (177.7) (7.5) (540.3) 123.1 48.1 (593.8) Ì (37.9) (583.6) 197.2 Ì (633.0) Ì (20.3) (653.3) 128.7 Net income in accordance with GAAP ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,706.5 $2,875.6 $2,381.8 $2,132.9 $1,599.3 (a) The Company analyzes its performance on a net income basis in accordance with accounting principles generally accepted in the United States, as well as on an operating basis before merger and restructuring-related items referred to as ""operating earnings.'' Operating earnings are presented as supplemental information to enhance the readers' understanding of, and highlight trends in, the Company's Ñnancial results excluding the impact of merger and restructuring-related items of speciÑc business acquisitions and restructuring activities. Operating earnings should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. Merger and restructuring-related items excluded from net income to derive operating earnings may be signiÑcant and may not be comparable to other companies. (b) Provision for credit losses in 2001 includes losses of $201.3 million on the disposition of an unsecured small business credit line portfolio, losses of $76.6 million on the sales of high loan-to-value home equity and indirect automobile loan portfolios, $90.0 million of charges to align credit policies and risk management practices, and $14.3 million to restructure a co-branding credit card relationship. Acquisition and Divestiture Activity In addition to restating all prior periods to reÖect the merger of Firstar and USBM, operating results for 2001 reÖect the following transactions accounted for as purchases from the date of completion. On July 24, 2001, the Company acquired NOVA, the nation's third largest merchant processing service provider, in a stock and cash transaction valued at approximately $2.1 billion. On September 7, 2001, the Company acquired PaciÑc Century Bank in a cash transaction. The acquisition included 20 branches located in Southern California with approximately $712 million in deposits and $570 million in loans. On October 13, 2000, the Company acquired Scripps Financial Corporation of San Diego, which had 10 branches in San Diego County and total assets of $650 million. On September 28, 2000, the Company acquired Lyon Financial Services, Inc., a wholly owned subsidiary of the privately held Schwan's Sales Enterprises Inc. in Marshall, Minnesota. Lyon Financial specializes in small-ticket lease transactions and had $1.3 billion in assets. On April 7, 2000, the Company acquired Oliver-Allen Corporation, Inc., a privately held information technology equipment leasing company with total assets of $280 million. On January 14, 2000, the Company acquired Peninsula Bank of San Diego, which had 11 branches in San Diego County and total assets of $491 million. In addition to these business combinations, the Company purchased 41 branches in Tennessee from First Union National Bank on December 8, 2000, representing approximately $450 million in assets and $1.8 billion in deposits. On September 20, 1999, Firstar and Mercantile Bancorporation, Inc. (""Mercantile'') merged in a pooling- of-interests transaction and accordingly all Ñnancial information has been restated to include the historical information of both companies. Each share of Mercantile stock was exchanged for 2.091 shares of Firstar common stock. Refer to Note 3 and Note 4 of the Notes to Consolidated Financial Statements for additional information regarding business combinations. On January 18, 2002, the Company announced a deÑnitive agreement to acquire The Leader Mortgage Company, LLC (""Leader''), a wholly owned subsidiary of First DeÑance Financial Corporation, in a cash transaction. Leader specializes in acquiring servicing of loans originated for state and local housing authorities. Leader had $506 million in assets at December 31, 2001. In 2001, it had $2.1 billion in mortgage production and an $8.6 billion servicing portfolio at December 31, 2001. The transaction is expected to close in the second quarter of 2002. STATEMENT OF INCOME ANALYSIS Net Interest Income Net interest income on a taxable- equivalent basis was $6.5 billion in 2001, compared with $6.1 billion in 2000 and $5.9 billion in 1999. The 5.4 percent increase in 2001 as compared with 2000 was due to improving net interest margin and growth in average earning assets. The net interest margin in 2001 was 4.45 percent, compared with 4.36 percent in 2000. The improvement in the net interest margin was due to the funding beneÑt of the declining rate environment and improved spreads due to product re-pricing dynamics and loan conduit activities. This was oÅset somewhat by the Ñrst quarter 2001 sales of the high loan-to-value (""LTV'') home equity portfolios and lower yields on the investment portfolio. Average earning assets for 2001 increased $4.6 billion (3.2 percent) over 2000. The increase was primarily driven by increases in the investment portfolio, core retail loan growth and the impact of acquisitions. This growth was partially oÅset by a $2.7 billion decline in lower margin residential mortgages and a $2.2 billion 18 U.S. Bancorp Table 3 Analysis of Net Interest Income (Dollars in Millions) 2001 2000 1999 Components of net interest income Income on earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expenses on interest bearing liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,139.5 4,674.8 $12,157.9 6,022.9 $10,723.0 4,790.3 Net interest income (taxable-equivalent basis) ÏÏÏÏÏÏÏÏÏÏÏ $ 6,464.7 $ 6,135.0 $ 5,932.7 Net interest income, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,408.8 $ 6,049.6 $ 5,836.4 2001 v 2000 2000 v 1999 $(1,018.4) (1,348.1) $ $ 329.7 359.2 $1,434.9 1,232.6 $ 202.3 $ 213.2 Average yields and rates paid (taxable-equivalent basis) Earning assets yieldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rate paid on interest-bearing liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross interest margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average balances 7.67% 3.92 3.75% 4.45% 8.65% 5.19 3.46% 4.36% 8.02% 4.37 3.65% 4.44% (.98)% (1.27) .29% .09% .63% .82 (.19)% (.08)% Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ LoansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net free funds(a)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 21,916 118,177 145,165 119,390 25,775 $ 17,311 118,317 140,606 116,002 24,604 $ 19,271 109,638 133,757 109,719 24,038 $ 4,605 (140) 4,559 3,388 1,171 $ (1,960) 8,679 6,849 6,283 566 (a) Represents noninterest-bearing deposits, allowance for credit losses, non-earning assets, other liabilities and equity. reduction related to transfers of short-term, high credit quality, low margin commercial loans to Stellar Funding Group, Inc. (""loan conduit''). Average investment securities were $4.6 billion (26.6 percent) higher in 2001 compared with 2000, reÖecting net purchases of securities. Average interest-bearing deposits increased $241 million (.3 percent) from 2000. Growth in average interest checking and money market deposits was more than oÅset by reductions in the average balances of higher cost time certiÑcates of deposit less than $100,000. The decline in time certiÑcates of deposit less than $100,000 reÖects funding decisions toward more favorably priced wholesale funding sources given the interest rate environment during 2001. Average net free funds increased $1.2 billion from a year ago including an increase in noninterest-bearing deposits of $1.3 billion (5.4 percent) compared with 2000. Net interest income on a taxable-equivalent basis increased $202.3 million (3.4 percent) in 2000 compared with 1999. The increase was primarily due to growth in earning assets oÅset somewhat by a declining net interest margin. Average earning assets increased $6.8 billion (5.1 percent) in 2000, primarily due to strong core loan growth and acquisitions partially oÅset by reductions in residential mortgages and securities. Average loans for 2000 were up $8.7 billion (7.9 percent) from 1999, reÖecting growth in commercial loans, retail loans, and acquisitions, oÅset by reductions in residential mortgage loans. Average investment securities were $2.0 billion (10.2 percent) lower in 2000 compared with 1999, reÖecting both maturities and sales of securities. Average interest-bearing deposits increased $3.2 billion (4.2 percent) from 1999. This increase in interest-bearing deposits was primarily due to a $4.2 billion increase (48.8 percent) in time deposits greater than $100,000 reÖecting the rising interest rate environment during 2000. Average net free funds increased $566 million in 2000 including an increase in noninterest-bearing deposits of $264 million (1.1 percent) compared with 1999. The net interest margin declined from 4.44 percent in 1999 to 4.36 percent in 2000, as lagging deposit growth in 2000 relative to total earning assets increased the Company's incremental cost of funding. Refer to the Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 86 and 87 for further interest margin detail. Provision for Credit Losses The provision for credit losses is recorded to bring the allowance for credit losses to a level deemed appropriate by management based on factors discussed in ""Analysis and Determination of Allowance for Credit Losses'' on pages 34 through 36. During 2001, the provision for credit losses was $2,528.8 million, compared with $828.0 million in 2000 and $646.0 million in 1999. Included in the provision for credit losses for 2001 was 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-oÅ policies and expedite the transition out of a speciÑc segment of the healthcare industry not meeting the risk appetite of the Company; a $76.6 million provision for losses related to the sales of high LTV home equity loans and the indirect automobile loan portfolio of USBM; and a $14.3 million charge related U.S. Bancorp 19 Table 4 Net Interest Income Ì Changes Due to Rate and Volume (Dollars in Millions) Increase (decrease) in Interest income 2001 v 2000 2000 v 1999 Volume Yield/Rate Total Volume Yield/Rate Total Commercial loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .9 3.6 (204.6) 254.4 Total loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market investments ÏÏÏÏÏÏÏÏÏÏÏ Trading securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense Interest checking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Savings accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Time certiÑcates of deposit less than $100,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Time deposits greater than $100,000 ÏÏ Total interest-bearing depositsÏÏÏÏÏ Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Company obligated mandatorily redeemable preferred securities ÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase (decrease) in net interest 54.3 47.7 314.1 (12.7) (.6) (22.1) 380.7 19.2 94.7 (6.7) (142.9) 9.2 (26.5) 24.5 148.1 44.4 190.5 ( $ 615.6) (297.9) (5.1) (247.1) (1,165.7) (2.9) (190.5) (14.6) 2.3 (27.7) ($ 614.7) (294.3) (209.7) 7.3 (1,111.4) 44.8 123.6 (27.3) 1.7 (49.8) $ 511.1 249.2 (233.3) 202.0 729.0 (10.5) (128.2) (6.3) 11.3 18.7 (1,399.1) (1,018.4) 614.0 (86.0) (383.7) (24.8) (74.0) (195.7) (764.2) (272.1) (495.8) (66.8) (289.0) (31.5) (216.9) (186.5) (790.7) (247.6) (347.7) 2.5 9.0 (17.5) (21.9) 225.6 197.7 43.7 120.3 (6.5) 37.9 Ì (1,538.6) (1,348.1) 361.7 $457.8 116.0 3.0 130.0 706.8 8.7 71.9 15.3 (1.5) 19.7 820.9 36.9 148.8 (20.4) 157.6 128.2 451.1 155.6 263.2 1.0 870.9 $ 968.9 365.2 (230.3) 332.0 1,435.8 (1.8) (56.3) 9.0 9.8 38.4 1,434.9 39.4 157.8 (37.9) 135.7 353.8 648.8 199.3 383.5 1.0 1,232.6 income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 190.2 $ 139.5 $ 329.7 $ 252.3 ($50.0) $ 202.3 This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis. The eÅect of changes in rates on volume changes is allocated based on the percentage relationship of changes in volume and changes in rate. This table does not take into account the level of noninterest-bearing funding, nor does it fully reÖect changes in the mix of assets and liabilities. to the restructuring of a co-branding credit card relationship. Refer to Note 4 of the Notes to Consolidated Financial Statements for further information on merger and restructuring-related items. The provision for credit losses in 2001, excluding merger and restructuring-related items, was $2,146.6 million, an increase of $1,318.6 million over 2000. The increase was primarily due to a $160.0 million charge during the Ñrst quarter of 2001 in connection with an accelerated loan workout strategy and a $1,025.0 million incremental provision recognized in the third quarter of 2001. The third quarter incremental provision for credit losses was taken after extensive reviews of the Company's commercial portfolio in light of declining economic conditions and company-speciÑc trends. This action recognized an increasing probability that the economic slowdown already occurring had accelerated and may be more prolonged than previously anticipated. Given the continuing economic stress in various industry sectors, increasing unemployment and trends in consumer delinquencies and charge-oÅs, the Company may experience higher levels of nonperforming loans and volatility in net charge-oÅs during the next several quarters. Refer to ""Corporate Risk ProÑle'' on pages 29 through 36, for further information on the factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses. Noninterest Income Noninterest income in 2001 was $5.4 billion, compared with $4.9 billion in 2000 and $4.2 billion in 1999. The increase of $476.2 million (9.8 percent) in 2001 compared with 2000 included $62.2 million of merger and restructuring-related gains in connection with the required sale of 14 branches associated with the merger of Firstar and USBM. Refer to Note 4 of the Notes to Consolidated Financial Statements for further information on merger and restructuring-related items. Excluding merger and restructuring-related gains, noninterest income was $5.3 billion in 2001, an increase of $414.0 million (8.5 percent) from 2000. Credit card fee revenue increased $12.5 million (1.6 percent) in 2001 compared to revenue growth of $113.6 million 20 U.S. Bancorp Table 5 Noninterest Income (Dollars in Millions) Credit card fee revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merchant and ATM processing revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trust and investment management feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deposit service charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash management feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage banking revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trading account proÑts and commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment products fees and commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment banking revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Insurance product revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial product revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail product revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities gains, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2001 774.3 428.8 894.4 660.6 347.3 234.0 221.6 460.1 258.2 145.4 385.9 18.1 329.1 139.4 $ 2000 761.8 230.3 926.2 551.1 292.4 189.9 258.4 466.6 360.3 145.3 304.4 69.1 8.1 319.3 $ 1999 648.2 189.6 887.1 497.2 280.6 190.4 222.4 450.8 246.6 105.3 215.7 78.0 13.2 219.8 Total operating noninterest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,297.2 62.2 4,883.2 Ì 4,244.9 Ì Total noninterest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,359.4 $ 4,883.2 $ 4,244.9 (17.5 percent) in 2000 reÖecting slower growth in corporate, purchasing and retail card transaction volumes during the year. Corporate card transaction volumes declined somewhat in late 2001 principally due to slower economic conditions and declining business travel since the events of September 11, 2001. Merchant and ATM processing revenue increased $198.5 million, or 86.2 percent, principally due to the NOVA acquisition. Deposit service charges, commercial product revenue, cash management fees, and mortgage banking revenue also improved in 2001 compared with 2000 by $109.5 million (19.9 percent), $81.5 million (26.8 percent), $54.9 million (18.8 percent), and $44.1 million (23.2 percent), respectively. The increase in deposit service charges was primarily due to the alignment and re-design of products and features following the merger of Firstar and USBM. The increase in commercial product revenue and cash management fees was primarily driven by the growth in core business, loan conduit activities and product enhancements. Mortgage banking revenue increased in 2001 compared with 2000 due to increased origination and sales fees and loan servicing revenue, partially oÅset by a decrease in gains on the sale of servicing rights. Trust and investment management fees declined $31.8 million (3.4 percent) and capital markets-related revenue declined $145.4 million (13.4 percent) reÖecting softness in equity capital markets since late 2000. Included in noninterest income for 2001 was $329.1 million of gains on the sale of investment securities and principal-only residuals compared with $8.1 million of similar gains in 2000. Other income declined $179.9 million from a year ago, primarily reÖecting a $125.0 million decline in the level of earnings from equity investments compared with 2000 and a $40.0 million impairment of retail leasing residuals in 2001. The decline in other income for 2001 also reÖected a decline in building-related gains of $42.5 million from 2000. Noninterest income in 2000 increased $638.3 million (15.0 percent) compared with 1999. The increase was driven by a $165.5 million (18.0 percent) increase in capital markets-related revenue, credit card fee revenue growth of $113.6 million (17.5 percent), increased commercial product revenue of $88.7 million (41.1 percent), increased service charges on deposit accounts of $53.9 million (10.8 percent), gains of $55.0 million on the disposal of the Company's ownership in oÇce buildings in Portland, Boise and Minneapolis, merchant and ATM processing revenue growth of $40.7 million (21.5 percent), due in part to the acquisition of the Mellon Network Services processing business, increased insurance product revenue of $40.0 million (38.0 percent), growth in trust and investment management revenue of $39.1 million (4.4 percent), and revenues associated with equity investments, partially oÅset by a $20.0 million gain on the sale of branches in Kansas and Iowa completed in 1999. Noninterest Expense Noninterest expense in 2001 was $6.6 billion compared with $5.7 billion in both 2000 and 1999. Noninterest expense included merger and restructuring-related charges of $946.4 million in 2001, compared with $348.7 million in 2000 and $532.8 million in 1999. Excluding merger and restructuring-related charges, noninterest expense on an operating basis was $5.7 billion in 2001, compared with $5.4 billion in 2000 and $5.1 billion in 1999. The increase in 2001 noninterest expense, on an operating basis, of $290.5 million (5.4 percent) was primarily the result of recent acquisitions, including NOVA, Scripps Financial Corporation, PaciÑc Century Bank, Lyon Financial Services, Inc. and 41 branches in Tennessee representing an aggregate increase of U.S. Bancorp 21 Table 6 Noninterest Expense (Dollars in Millions) 2001 2000 1999 Salaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employee beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net occupancy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Furniture and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Professional services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Advertising and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Travel and entertainment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Data processingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Communication ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Postage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PrintingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ GoodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total operating noninterest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,347.1 366.2 417.9 305.5 123.8 121.6 90.6 136.1 80.0 181.4 179.8 77.9 251.1 278.4 701.4 5,658.8 946.4 $2,427.1 399.8 396.9 308.2 109.0 122.1 107.0 111.9 149.7 138.8 174.5 86.5 235.0 157.3 444.5 5,368.3 348.7 $2,355.3 410.1 371.8 307.9 95.7 124.1 88.4 72.2 133.7 123.4 170.7 90.7 175.8 154.0 454.7 5,128.5 532.8 Total noninterest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,605.2 $5,717.0 $5,661.3 EÇciency ratio(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÇciency ratio, before merger and restructuring-related items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Banking eÇciency ratio, before merger and restructuring-related items(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57.5% 49.5 45.2 51.9% 48.8 43.5 55.7% 50.5 46.3 (a) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net (b) Without investment banking and brokerage activity. approximately $241.7 million. In addition to the impact of acquisitions, noninterest expense increased over 2000 due to recognition of mortgage servicing rights (""MSR'') impairments of $60.8 million related to increasing mortgage prepayments during the declining rate environment, and asset write-downs of $52.6 million related to commercial leasing partnerships and repossessed tractor/trailer property. These increases were partially oÅset by a reduction in expenses related to capital markets activity of $108.0 million and cost savings related to merger and restructuring-related activities. The increase in 2000 noninterest expenses, on an operating basis, of $239.8 million (4.7 percent) was primarily attributed to growth in expenses related to investment banking and brokerage activity of $228.6 million, the impact of purchase acquisitions and divestitures of $175.9 million and planned spending on service-quality technology and other customer service initiatives of USBM. These increases were somewhat oÅset by cost savings related to the integration of Mercantile. The eÇciency ratio before merger-related charges increased slightly to 49.5 percent in 2001 compared with 48.8 percent in 2000 and 50.5 percent in 1999. The banking eÇciency ratio before merger-related charges was 45.2 percent for 2001, compared with 43.5 percent in 2000 and 46.3 percent in 1999. Both the eÇciency ratio and the banking eÇciency ratio increased in 2001 primarily due to the NOVA acquisition. The improved banking eÇciency ratio in 2000 compared with 1999 reÖects the results of integrating acquired banking businesses. Merger and Restructuring-Related Items The Company incurred merger and restructuring-related items in each of the last three years in conjunction with its acquisitions. In 2001, merger and restructuring-related items included in pretax earnings were $1,266.4 million, including $382.2 million in the provision for credit losses, a $62.2 million gain on the required sale of branches and $946.4 million of noninterest expense. The total merger and restructuring-related items consisted of $1,167.2 million related to the Firstar and USBM merger, $50.7 million of restructuring expenses for U.S. Bancorp Piper JaÅray and $48.5 million related to NOVA and other acquisitions. With respect to the Firstar and USBM merger, the $1,167.2 million of merger and restructuring-related items included $268.2 million for severance and employee-related costs and $477.6 million of charges to exit business lines and products, sell credit portfolios or otherwise realign business practices in the new Company. The Company also incurred $208.1 million of systems conversion and business integration costs, $48.7 million for lease cancellation and other building-related costs, $226.8 million for transaction costs, funding a charitable foundation to reaÇrm a commitment to its markets and other costs, and a $62.2 million gain related to the required sale of branches. Total merger and restructuring-related items associated with the Firstar and USBM merger are expected to reach 22 U.S. Bancorp Table 7 Loan Portfolio Distribution At December 31 (Dollars in Millions) Amount Percent of Total Amount Percent of Total Amount Percent of Total Amount Percent of Total Amount Percent of Total 2001 2000 1999 1998 1997 Commercial CommercialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 40,472 5,858 Lease Ñnancing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.4% $ 47,041 5,776 5.1 38.5% $ 42,021 3,835 4.7 37.1% $ 37,777 3,291 3.4 35.3% $33,662 2,667 3.1 34.0% 2.7 Total commercial ÏÏÏÏÏÏÏÏÏÏ 46,330 40.5 52,817 43.2 45,856 40.5 41,068 38.4 36,329 36.7 Commercial real estate Commercial mortgages ÏÏÏÏÏÏÏÏÏÏÏ Construction and development ÏÏÏÏ Total commercial real estateÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏ Retail Credit card ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail leasing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other retail Home equity and second mortgage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Revolving credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Installment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Automobile ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Student ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,765 6,608 25,373 5,746 5,889 4,906 14,318 2,673 2,292 5,660 1,218 Total other retailÏÏÏÏÏÏÏÏ 26,161 Total retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,956 16.4 5.8 22.2 5.0 5.1 4.3 12.5 2.3 2.0 5.0 1.1 22.9 32.3 19,466 6,977 26,443 7,753 6,012 4,153 13,600 2,750 2,186 5,609 1,042 25,187 35,352 15.9 5.7 21.6 6.3 4.9 3.4 11.1 2.2 1.8 4.6 .9 20.6 28.9 18,636 6,506 25,142 11,395 5,004 2,123 * * * * * 16.5 5.7 22.2 10.1 4.4 1.9 * * * * * 16,602 5,206 21,808 13,980 4,856 1,621 * * * * * 15.5 4.9 20.4 13.1 4.5 1.5 * * * * * 15,739 4,059 19,798 15,892 4,993 1,087 * * * * * 15.9 4.1 20.0 16.0 5.1 1.1 * * * * * 23,709 30,836 20.9 27.2 23,625 30,102 22.1 28.1 20,930 27,010 21.1 27.3 Total loansÏÏÏÏÏÏÏÏÏÏÏÏÏ $114,405 100.0% $122,365 100.0% $113,229 100.0% $106,958 100.0% $99,029 100.0% *Information not available $1.4 billion with integration activities substantively being completed in the third quarter of 2002. In response to signiÑcant changes in the securities markets during 2001, including increased volatility, changes in equity valuations and the increasingly competitive environment for the industry, U.S. Bancorp Piper JaÅray restructured it operations. The restructuring is expected to improve the operating eÇciency of the business by removing excess capacity from its product distribution network and by implementing more eÅective business processes. These restructuring activities were completed in 2001. In 2000, merger and restructuring-related items included noninterest expenses consisting of $227.0 million related to the merger of Firstar and Mercantile, $52.6 million related to the merger of Firstar and Star Banc and $69.1 million primarily related to other acquisitions of USBM. Included in merger and restructuring-related items were $59.4 for severance and employee-related costs, $193.5 million for systems conversions, $47.3 million for lease cancellations and other building-related costs and $48.5 million of other business integration costs. In 1999, merger and restructuring-related items included noninterest expenses consisting of $417.0 million related to the merger of Firstar and Mercantile, $95.9 million related to the merger of Firstar and Star Banc and $27.4 million primarily related to other acquisitions by USBM. Included in merger and restructuring-related items were $149.6 for severance and employee-related costs, $132.5 million for systems conversions, $177.7 million related to the restructuring of Mercantile's securities portfolio, $6.2 million for lease cancellations and other building-related costs and $66.8 million to fund charitable foundations and other business integration costs. Refer to Note 3 and Note 4 of the Notes to Consolidated Financial Statements for further information on these acquired businesses and merger and restructuring- related items. Income Tax Expense The provision for income taxes was $927.7 million in 2001, compared with $1,512.2 million in 2000 and $1,392.2 million in 1999. The Company's eÅective tax rate was 35.2 percent in 2001, compared with 34.5 percent in 2000 and 36.9 percent in 1999. The eÅective tax rate increased in 2001 compared with 2000 primarily due to a decline in tax-exempt interest related to sales of investment securities, the impact of unitary state tax apportionment factors on the Company, non-deductible merger-related costs and the acquisition of NOVA. At December 31, 2001, the Company's net deferred tax liability was $573.2 million, compared with $512.8 million at December 31, 2000. For further information on income U.S. Bancorp 23 taxes, refer to Note 19 of the Notes to Consolidated Financial Statements. BALANCE SHEET ANALYSIS Average earning assets were $145.2 billion in 2001 compared with $140.6 billion in 2000. The increase of $4.6 billion (3.2 percent) was primarily driven by increases in the investment portfolio, core retail loan growth, and the impact of acquisitions. This growth was partially oÅset by a $2.7 billion decline in lower margin residential mortgages and a $2.2 billion reduction related to transfers of short- term, high credit quality, low margin commercial loans to the loan conduit. The increase was funded with an increase in average interest-bearing liabilities of $3.4 billion consisting principally of more favorably priced long-term wholesale funds and an increase in net free funds of $1.2 billion including an increase in average noninterest- bearing deposits of $1.3 billion. For average balance information, refer to Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 86 and 87. Loans The Company's loan portfolio decreased $8.0 billion to $114.4 billion at December 31, 2001, from $122.4 billion at December 31, 2000. The change in loans outstanding was impacted by several management actions, including the sale of high LTV home equity and indirect automobile portfolios, the transfer of a discontinued unsecured small business product to loans held for sale, branch divestitures required by the merger of Firstar and USBM, and transfers of short-term, high credit quality, low margin commercial loans to the loan conduit. In addition, the Company continued its business strategy to reduce the lower margin residential mortgage portfolio. Average total loans decreased less than one percent to $118.2 billion in 2001 compared with $118.3 billion in 2000. Excluding residential mortgages, average loans for 2001 were $2.6 billion (2.4 percent) higher than 2000. Average loans on a core basis (excluding loan conduit activities, transfer of loans to held for sale and residential mortgages) increased by $4.6 billion (4.3 percent) relative to the prior year. Table 8 Selected Loan Maturity Distribution The Company's loan portfolio inherently has credit risk, which may ultimately result in loan charge-oÅs. The Company manages this risk through stringent, centralized credit policies and review procedures, as well as diversiÑcation along geographic and customer lines. Refer to ""Corporate Risk ProÑle'' on pages 29 through 36, for a more detailed discussion of the management of credit risk including the allowance for credit losses. Commercial Commercial loans, including lease Ñnancing, totaled $46.3 billion at December 31, 2001, down $6.5 billion (12.3 percent) from year-end 2000. The decline in commercial loans reÖected tighter credit underwriting throughout 2001, slower economic growth, the Company's transfer of approximately $3.7 billion of short-term, high credit quality, low margin commercial loans into the loan conduit and the transfer of $680 million in unsecured small business product to loans held for sale. This was oÅset somewhat by core growth in equipment lease Ñnancing and bank acquisitions. Average commercial loans in 2001 were Öat compared with 2000. On a core basis (without loan conduit activities and transfers to loans held for sale), average commercial loans increased by 2.1 percent from a year ago. The Company oÅers a broad array of traditional commercial lending products and specialized products such as asset-based lending, lease Ñnancing, agricultural credit and correspondent banking. The Company monitors and manages the portfolio diversiÑcation by industry, customer and geography. The commercial portfolio reÖects the Company's focus of serving small business customers, middle market and larger corporate businesses throughout its 24 state banking region and national customers within certain niche industry groups. Table 9 provides a summary of the signiÑcant industry groups and geographic locations of commercial loans outstanding at December 31, 2001 and 2000. The commercial loan portfolio is diversiÑed among various industries with somewhat higher concentrations in consumer products and services, capital goods (including manufacturing and commercial construction-related At December 31, 2001 (Dollars in Millions) Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total of loans due after one year with Predetermined interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Floating interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ One Year or Less $25,761 7,256 495 13,452 $46,964 Over One Through Five Years $17,896 12,238 954 13,417 $44,505 Over Five Years $ 2,673 5,879 4,297 10,087 $22,936 Total $ 46,330 25,373 5,746 36,956 $114,405 $ 37,420 $ 30,021 24 U.S. Bancorp Table 9 Commercial Loan Exposure by Industry Group and Geography December 31, 2001 December 31, 2000 Industry Group(Dollars in Millions) Consumer products and services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital goods ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consumer staples ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financials ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Agriculture ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TransportationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Paper and forestry products, mining and basic materials ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Private investors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Healthcare ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TechnologyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Energy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans $ 8,591 6,270 4,638 4,291 3,340 2,544 1,931 1,803 1,424 1,400 1,094 405 8,599 Percent 18.5% 13.5 10.0 9.3 7.2 5.5 4.2 3.9 3.1 3.0 2.4 .9 18.5 Loans $ 9,791 6,984 5,427 5,438 4,177 2,775 2,249 2,405 1,631 961 1,223 742 9,014 Percent 18.4% 13.2 10.3 10.3 7.9 5.3 4.3 4.6 3.1 1.8 2.3 1.4 17.1 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $46,330 100.0% $52,817 100.0% Geography California ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Colorado ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Illinois ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MinnesotaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Missouri ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ohio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Oregon ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Washington ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wisconsin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Iowa, Kansas, Nebraska, North Dakota, South Dakota ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arkansas, Indiana, Kentucky, Tennessee ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Idaho, Montana, Wyoming ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arizona, Nevada, Utah ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total banking region ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Outside the Company's banking region ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,969 2,008 2,339 6,511 2,104 2,896 2,014 3,882 3,115 5,059 1,897 1,014 1,057 37,865 8,465 8.6% 4.3 5.0 14.1 4.5 6.3 4.3 8.4 6.7 10.9 4.1 2.2 2.3 81.7 18.3 $ 3,174 2,661 3,336 8,724 2,163 2,269 2,769 4,860 3,153 4,547 2,230 1,316 1,460 42,662 10,155 6.0% 5.0 6.3 16.5 4.1 4.3 5.2 9.2 6.0 8.6 4.2 2.5 2.8 80.8 19.2 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $46,330 100.0% $52,817 100.0% businesses), and consumer staples industries. Additionally, the commercial portfolio is diversiÑed across the Company's geographical markets with 81.7 percent of total commercial loans within the 24 state banking region. Credit relationships outside of the Company's banking region are typically niche businesses including the mortgage banking and the leasing businesses. The mortgage banking sector represented approximately 3.0 percent of commercial loans at December 31, 2001, compared with 1.8 percent at December 31, 2000. Loans to mortgage banking customers are primarily warehouse lines which are collateralized with the underlying mortgages. The Company regularly monitors its mortgage collateral position to manage its risk exposure. The Company provides Ñnancing to enable customers to grow their businesses through acquisitions of existing businesses, buyouts or other recapitalizations. Such leveraged Ñnancings approximated $3.9 billion in loans outstanding at December 31, 2001, compared with approximately $4.9 billion outstanding at December 31, 2000. The decline was primarily due to tighter credit underwriting, payoÅs and the Company's aggressive workout strategies during 2001. During a business cycle with slower economic growth, businesses with leveraged capital structures may experience insuÇcient cash Öows to service their debt. The Company manages its exposure to leveraged Ñnancings by maintaining strong underwriting standards, portfolio diversiÑcation and eÅectively managing the relationship with the customer either directly or through reputable Ñnancial intermediaries. At inception of the credit relationship, the Company's underwriting standards require the businesses to have acceptable capital levels and demonstrated suÇcient cash Öows to support debt service of the loans. The Company's portfolio of leveraged Ñnancings is included in Table 9 and is diversiÑed among industry groups similar to the total commercial loan portfolio. Commercial Real Estate The Company's portfolio of commercial real estate mortgages and construction loans declined to $25.4 billion at December 31, 2001, compared with $26.4 billion at December 31, 2000. Commercial mortgages outstanding decreased to $18.8 billion at U.S. Bancorp 25 December 31, 2001, compared with $19.5 billion at December 31, 2000. Real estate construction and development loans at December 31, 2001, totaled $6.6 billion compared with $7.0 billion at year-end 2000. Average commercial real estate loans were $26.1 billion in 2001; essentially Öat compared with a year ago. Table 10 provides a summary of commercial real estate exposures by property type and geographic location. The Company maintains the real estate construction designation until the project is producing suÇcient cash Öow to service traditional mortgage Ñnancing, at which time, if retained, the loan is transferred to the commercial mortgage portfolio. Approximately $601 million of construction loans were transferred to the commercial mortgage portfolio in 2001. At year-end 2001, real estate secured $207 million of tax-exempt industrial development loans. The Company's commercial real estate mortgages and construction loans had unfunded commitments of $6.0 billion at December 31, 2001. The Company also Ñnances the operations of real estate developers and other entities with operations related to real estate. These loans are not secured directly by real estate and are subject to terms and conditions similar to commercial loans. These loans were included in the commercial loan category and totaled $1.4 billion at December 31, 2001. Residential Mortgages Residential mortgages, held in the loan portfolio, decreased to $5.7 billion at December 31, 2001, from $7.8 billion at December 31, 2000. The decline reÖected management's decision to reduce these lower yielding loans and the related adverse prepayment risk by selling most single-family residential real estate loan originations into the secondary market. Retail Total retail loans outstanding, which includes credit card, retail leasing, home equity, and other retail loans, increased $1.6 billion (4.5 percent) to $37.0 billion at December 31, 2001, from $35.4 billion at December 31, 2000. This increase was primarily related to growth in retail leases of $753 million, and home equity lines and loans of $718 million. This growth was tempered somewhat by Table 10 Commercial Real Estate Exposure by Property Type and Geography December 31, 2001 December 31, 2000 Property Type (Dollars in Millions) Business owner occupied ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Multi-familyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial property IndustrialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Homebuilders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hotel/motel ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Healthcare facilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans $ 5,159 2,842 1,995 2,948 2,704 1,949 1,417 1,985 1,183 3,191 Percent 20.3% 11.2 Loans $ 6,245 3,908 Percent 23.6% 14.8 7.9 11.6 10.7 7.7 5.6 7.8 4,7 12.5 1,923 2,761 2,537 2,755 1,521 1,916 1,084 1,793 7.3 10.4 9.6 10.4 5.8 7.2 4.1 6.8 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25,373 100.0% $26,443 100.0% Geography California ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Colorado ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Illinois ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MinnesotaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Missouri ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ohio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Oregon ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Washington ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wisconsin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Iowa, Kansas, Nebraska, North Dakota, South Dakota ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arkansas, Indiana, Kentucky, Tennessee ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Idaho, Montana, Wyoming ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arizona, Nevada, Utah ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total banking region ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Outside the Company's banking region ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,399 840 1,581 1,401 2,439 2,274 1,427 2,671 2,128 2,016 2,055 690 1,182 24,103 1,270 13.4% 3.3 6.2 5.5 9.6 9.0 5.6 10.5 8.4 8.0 8.1 2.7 4.7 95.0 5.0 $ 3,255 855 836 1,088 2,842 2,425 1,638 2,937 2,113 2,982 1,798 573 1,264 24,606 1,837 12.3% 3.2 3.2 4.1 10.7 9.2 6.2 11.1 8.0 11.3 6.8 2.2 4.8 93.1 6.9 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25,373 100.0% $26,443 100.0% 26 U.S. Bancorp portfolio sales of $1.3 billion related to the high LTV home equity portfolio and indirect automobile loans completed in the Ñrst quarter of 2001. Average retail loans increased $2.5 billion (7.7 percent) to $35.2 billion in 2001. On a core basis, average retail loans increased 12.2 percent from a year ago with growth in most retail loan categories. Of the total retail loans and residential mortgages outstanding, approximately 93 percent are to customers located in the Company's banking region. Loans Held for Sale At December 31, 2001, loans held for sale (""LHFS''), which consisted primarily of residential mortgage loans to be sold in the secondary markets, were $2.8 billion compared with $764 million at December 31, 2000. The increase reÖected the surge in residential mortgage production volume in 2001 due to declining Table 11 Investment Securities interest rates. Residential mortgage production increased to $15.6 billion in 2001 compared with $6.7 billion in 2000. Securities The Company uses its investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, generates interest and dividend income from the investment of excess funds depending on loan demand, provides liquidity to meet liquidity requirements and is used as collateral for public deposits and wholesale funding sources. At December 31, 2001, investment securities of $26.6 billion consisted of securities available-for-sale ($26.3 billion) and held-to-maturity ($.3 billion), compared with total investment securities of $17.6 billion at December 31, 2000. During the year, management realigned the portfolio to hedge against interest rate changes and the Available-for-Sale Weighted Average Fair Maturity in Years Value Amortized Cost Weighted Average Yield Amortized Cost Held-to-Maturity Weighted Average Fair Maturity in Years Value Weighted Average Yield December 31, 2001 (Dollars in Millions) U.S. Treasuries and agencies Maturing in one year or less ÏÏÏÏÏÏÏÏÏÏÏ Maturing after one year through Ñve yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maturing after five years through ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maturing after ten yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage and asset-backed securities Maturing in one year or less ÏÏÏÏÏÏÏÏÏÏÏ Maturing after one year through Ñve yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maturing after five years through ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maturing after ten yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 105 $ 106 290 44 Ì 439 40 $ $ 298 45 Ì 449 40 $ $ 13,626 13,704 8,786 1,576 8,718 1,566 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $24,028 $24,028 Obligations of states and political subdivisions Maturing in one year or less ÏÏÏÏÏÏÏÏÏÏÏ Maturing after one year through Ñve yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maturing after five years through ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maturing after ten yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other debt securities Maturing in one year or less ÏÏÏÏÏÏÏÏÏÏÏ Maturing after one year through Ñve yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maturing after five years through ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maturing after ten yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 185 $ 187 384 228 80 877 137 69 7 262 475 475 $ $ $ $ 393 231 80 891 138 70 6 235 449 492 $ $ $ $ Total investment securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,294 $26,309 .37 2.35 5.83 Ì 2.22 .61 3.90 5.84 14.57 5.30 .46 2.79 7.00 16.05 4.60 .53 1.93 6.46 25.35 14.51 Ì 5.40 4.29% $ Ì $ Ì 4.74 4.86 Ì 4.64 5.59 5.91 5.44 3.37 5.57 7.26 7.33 7.01 8.68 7.35 2.84 6.11 8.03 3.03 3.49 Ì 5.58% Ì Ì Ì Ì Ì Ì $ Ì $ Ì $ Ì $ Ì 28 Ì Ì 28 Ì Ì $ 28 $ 28 $ 83 $ 84 67 64 57 69 67 58 $271 $278 $ Ì $ Ì Ì Ì Ì $ Ì $ Ì $299 Ì Ì Ì $ Ì $ Ì $306 Ì Ì Ì Ì Ì Ì 4.05 Ì Ì 4.05 .54 3.11 7.74 15.04 5.91 Ì Ì Ì Ì Ì Ì Ì% Ì Ì Ì Ì Ì 7.67 Ì Ì 7.67 4.30 6.31 6.58 6.87 5.87 Ì Ì Ì Ì Ì Ì 5.74 6.04% Note: Information related to asset-backed securities included above is presented based upon weighted average maturities anticipating future prepayments. Average yields are presented on a fully-taxable equivalent basis. Yields on available-for-sale securities are computed based on historical cost balances. At December 31 (Dollars in Millions) U.S. Treasuries and agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asset-backed securities Collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Obligations of states and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other securities and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 Amortized Cost $ 439 15,178 8,878 24,056 1,148 950 Percent of Total Amortized Cost 1.7% $ 1,600 Percent of Total 9.1% 57.1 33.4 90.5 4.3 3.5 6,264 5,572 11,836 2,586 1,472 35.8 31.9 67.7 14.8 8.4 Total investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,593 100.0% $17,494 100.0% U.S. Bancorp 27 Table 12 Deposits The composition of deposits was as follows: December 31 (Dollars in Millions) 2001 2000 1999 1998 1997 Noninterest-bearing deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest-bearing deposits Savings accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest checking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Time certiÑcates of deposit less than $100,000ÏÏÏÏÏÏÏÏÏÏÏÏ Time deposits greater than $100,000 Domestic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 31,212 $ 26,633 $ 26,350 $ 27,479 $ 24,062 4,637 15,251 24,835 44,723 20,724 7,286 1,274 4,516 13,982 23,899 42,397 25,780 11,221 3,504 5,445 13,141 22,751 41,337 25,394 9,348 988 6,352 13,385 22,086 41,823 27,935 6,261 848 6,414 12,212 18,672 37,298 29,548 6,622 793 Total depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $105,219 $109,535 $103,417 $104,346 $ 98,323 Percent of total deposits Noninterest-bearing deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest-bearing deposits Savings accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest checking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Time certiÑcates of deposit less than $100,000ÏÏÏÏÏÏÏÏÏÏÏÏ Time deposits greater than $100,000 Domestic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 29.7% 2000 24.3% 1999 25.5% 1998 26.3% 1997 24.5% 4.4 14.5 23.6 42.5 19.7 6.9 1.2 4.1 12.8 21.8 38.7 23.5 10.3 3.2 5.3 12.7 22.0 40.0 24.5 9.0 1.0 6.1 12.8 21.2 40.1 26.8 6.0 .8 6.5 12.4 19.0 37.9 30.1 6.7 .8 Total depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100.0% 100.0% 100.0% 100.0% 100.0% The maturity of time deposits greater than $100,000 was as follows: December 31 (Dollars in Millions) Three months or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Over three months through six months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Over six months through twelve months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Over twelve months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $4,060 1,903 1,200 1,397 $8,560 impact of prepayments in the mortgage servicing rights portfolio. The Company purchased $32.3 billion and sold $19.2 billion of investment securities during the realignment process and generated $329.1 million in securities gains in the declining interest rate environment. The weighted-average yield of the available-for-sale portfolio was 5.58 percent at December 31, 2001, compared with 7.23 percent at December 31, 2000. The average maturity of the available-for-sale portfolio dropped to 5.4 years at December 31, 2001, down from 9.5 years at December 31, 2000. The relative mix of the type of investment securities maintained in the portfolio is provided in Table 11. The change in investment portfolio mix reÖected sales of tax-exempt municipal securities which were replaced by collateralized mortgage obligations. At December 31, 2001, the investment portfolio included a $15 million net unrealized gain, compared with a net unrealized gain of $148 million at December 31, 2000. Deposits Total deposits were $105.2 billion at December 31, 2001, down $4.3 billion (3.9 percent) from $109.5 billion at year-end 2000. The decline since December 31, 2000, was primarily due to the required sale of 14 branches related to the merger of Firstar and USBM as well as management's funding decisions to reduce higher cost time deposits greater than $100,000. Noninterest-bearing deposits were $31.2 billion at December 31, 2001, compared with $26.6 billion at December 31, 2000. Average noninterest-bearing deposits increased to $25.1 billion in 2001 compared with $23.8 billion in 2000. The increase in noninterest-bearing deposits was primarily attributable to business demand accounts that maintain compensating balances with the Company and to bank acquisitions. Core interest-bearing deposits, including savings accounts, interest checking and money market accounts, increased $2.3 billion (5.5 percent) from a year ago. Average core interest- bearing deposits increased $2.6 billion (6.4 percent) during 28 U.S. Bancorp 2001. The downturn in equity capital markets in 2001 and the current interest rate environment have prompted many customers to increase their liquidity in accessible deposits. Time certiÑcates of deposit less than $100,000 declined $5.1 billion (19.6 percent) during the year. Large denomination deposits, both domestic and foreign, decreased $6.2 billion (41.9 percent). These deposits are largely viewed as purchased funds and are managed to levels deemed appropriate given alternative funding sources. Average time certiÑcates of deposit less than $100,000 declined $2.5 billion (9.8 percent) and average large denomination deposits were essentially Öat compared with 2000. The decline in average time certiÑcates of deposit less than $100,000 reÖected the net impact of bank acquisitions and branch divestitures and management's pricing decisions to change the mix of funding toward lower rate wholesale funding sources. Table 12 provides a summary of total deposits by type of deposit. Borrowings The Company utilizes both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $14.7 billion at December 31, 2001, up $2.8 billion (24.0 percent) from $11.8 billion at year-end 2000. Short- term funding is managed to levels deemed appropriate given alternative funding sources. Long-term debt was $25.7 billion at December 31, 2001, up from $21.9 billion at December 31, 2000. The increase in long-term funding reÖects favorable funding costs during the declining rate environment relative to rate reductions for shorter-term borrowings or large denomination deposits. During 2001, the Company issued $1.1 billion of senior contingent convertible debt as well as $1.5 billion of ""Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Junior Subordinated Debentures of the Parent Company'' commonly referred to as ""Trust Preferred Securities''. The Company's subsidiary U.S. Bank National Association issued $1.5 billion of Ñxed-rate subordinated notes. In addition, the Company's bank subsidiaries obtained $5.3 billion of long-term Federal Home Loan Bank advances in 2001. Refer to ""Liquidity Risk Management'' on pages 38 through 40 for discussion of liquidity management of the Company. CORPORATE RISK PROFILE Overview Managing risks is an essential part of successfully operating a Ñnancial services company. The most prominent risk exposures are credit, interest rate, market and liquidity. The Company also has exposure related to changes in residual valuations and ongoing operational activities. Credit risk is the risk of not collecting interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Rate movements can aÅect the repricing of assets and liabilities diÅerently, as well as their market value. Market risk arises from Öuctuations in interest rates, foreign exchange rates, and equity prices that may result in changes in the values of Ñnancial instruments, such as trading account and available- for-sale securities that are accounted for on a mark-to- market basis. Liquidity risk is the possible inability to fund obligations to depositors, investors and borrowers. Residual risk is the potential reduction in the ""end-of-term'' value of leased assets or the residual cash Öows related to asset securitization and other oÅ-balance sheet structures. Operational risk represents the possibility that transactions are processed erroneously and that material errors are not detected by the systems of internal accounting controls. Credit Risk Management The Company's strategy for credit risk management includes stringent, centralized credit policies and uniform underwriting criteria for all loans, including specialized lending categories such as mortgage banking, energy, commercial real estate and real estate construction, leveraged Ñnancing and consumer credit. The strategy also emphasizes diversiÑcation on a geographic, industry and customer level, regular credit examinations, and quarterly management reviews of large loans and loans experiencing deterioration of credit quality. The Company strives to identify potential problem loans early, take any necessary charge-oÅs promptly, and maintain adequate reserve levels. Commercial banking operations rely on a strong credit culture that combines prudent credit policies and individual lender accountability. In addition, the commercial lenders generally focus on middle market companies within their regions or niche national markets. The Company utilizes a credit risk rating system in order to measure the credit quality of individual commercial loan transactions and regularly forecasts potential changes in risk ratings and nonperforming status. The risk rating system is intended to identify and measure the credit quality of lending relationships. In the Company's retail banking operations, standard credit scoring systems are used to assess consumer credit risks and to price consumer products accordingly. The Company also engages in non-lending activities that may give rise to credit risk, including interest rate swap contracts for customers or balance sheet hedging purposes, foreign exchange transactions, and the processing of credit card transactions for merchants. These activities are subject to the similar credit review, analysis and approval processes as those applied to commercial loans. U.S. Bancorp 29 In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-speciÑc concentrations), trends in loan performance, and macroeconomic factors. Generally, the domestic economy has experienced slower growth since late 2000. Accordingly, the Company began to re-evaluate underwriting activities to tighten credit availability to certain types of lending, industries and customers. Additionally, in connection with the merger of Firstar and USBM, the Company has continued to integrate underwriting standards throughout the organization. Core loan growth for the Company was 4.3 percent in 2001 with the majority of this growth in retail lending. During 2001, corporate earnings growth rates continued to weaken and credit quality indicators among certain industry sectors have continued to deteriorate. Large corporate and middle market commercial businesses announced or continued to implement restructuring activities in an eÅort to improve operating margins. The stagnant economic growth is evidenced by the Federal Reserve Board's (""FRB'') recent actions during late 2000 and 2001 to stimulate economic growth through a series of interest rate reductions. In response to declining economic conditions, company-speciÑc portfolio trends, and the Firstar/USBM merger, the Company undertook an extensive review of its commercial and consumer loan portfolios in early 2001. As a result of this review, the Company initiated several actions during the Ñrst six months of 2001 including aligning the risk management practices and charge-oÅ policies of the companies and restructuring and disposing of certain portfolios that did not align with the credit risk proÑle of the combined company. Credit portfolio restructuring activities included a speciÑc segment of the Company's healthcare portfolio, selling certain consumer loan portfolios of USBM, renegotiating a credit card co- branding relationship and discontinuing an unsecured small business product that did not align with the product oÅerings of the combined company. The Company also implemented accelerated loan workout strategies for certain commercial credits. By the end of the second quarter of 2001, economic stimulus by the FRB as well as management's actions appeared to have reduced the rate of credit quality deterioration. However, world events during the third quarter of 2001 had a profound impact on consumer conÑdence and related spending, governmental priorities and business activities. As a result of these events, the Company expected the economic slowdown to accelerate or be more prolonged than originally estimated by management. Since September 11, 2001, the FRB has reduced the discount rate four times in an eÅort to stabilize the Ñnancial markets and economic growth. Accordingly, the Company conducted an additional review of its credit portfolios and recognized the need to address the impact that these events are expected to have on its credit portfolios. In response to this evaluation, the Company increased the provision for credit losses approximately $1,025.0 million in the third quarter of 2001 beyond expected levels. Credit DiversiÑcation Tables 7, 9 and 10 provide information with respect to the overall diversiÑcation of the credit portfolio and changes in mix during 2001. Certain industry segments, including transportation, manufacturing, and technology sectors have experienced economic stress in 2001. At December 31, 2001, the transportation sector represented 5.5 percent of the total commercial loan portfolio. It has been impacted by reduced airline travel, slower economic activity and higher fuel costs that adversely impacted trucking businesses. At year-end 2001, the Company's transportation portfolio consisted of airline and airfreight businesses (28.8 percent of the sector), trucking businesses (53.2 percent) and railroad and shipping. Capital goods represented 13.5 percent of the total commercial portfolio at December 31, 2001. Included in this sector were approximately 29.2 percent of loans to diversiÑed manufacturing businesses while engineering and construction equipment and machinery businesses were 30.7 percent and 22.8 percent, respectively, of the capital goods portfolio. Manufacturing production levels and inventory reductions caused some deterioration in these portfolios during late 2000 and 2001. During 2001, the technology sector was adversely impacted by lower capital investments by businesses over the past twelve to eighteen months. At December 31, 2001, the technology industry represented only 2.4 percent of the commercial loan portfolio. Since mid-2000, the agriculture and paper and forestry products sectors have been stressed. However, these sectors have improved relative to a year ago. At December 31, 2001, the Company's agricultural portfolio was diversiÑed with 36.9 percent of agricultural loans to livestock producers, 27.3 percent to crop producers, 20.3 percent to food processors and 15.5 percent to wholesalers of agricultural products. Volatility in crop prices continues to adversely aÅect the cash Öows of crop producers. Food processors and wholesalers have been less negatively aÅected by commodity pricing and a rebound in livestock prices in 2001 has improved the credit exposure within this sector. At December 31, 2001, loans to paper and forestry products businesses represented 2.2 percent of the commercial loan portfolio. The industry continues to be adversely impacted by foreign supplies and over-capacity within the industry; however, workout strategies continue to reduce the credit exposure to this industry. 30 U.S. Bancorp Analysis of Net Charge-OÅs Net charge-oÅs increased $721.1 million to $1,546.5 million in 2001, compared with $825.4 million in 2000 and $672.6 million in 1999. The ratio of total net charge-oÅs to average loans was 1.31 percent in 2001, compared with .70 percent in 2000 and .61 percent in 1999. The increase in 2001 net charge- oÅs was due to deterioration in economic conditions aÅecting the commercial loan portfolio, actions taken by the Company during 2001, and an increase in credit card net charge-oÅs. Also included in 2001 net charge-oÅs were $90.0 million of write-oÅs to conform risk management practices, align charge-oÅ policies and expedite the transition out of a speciÑc segment of the healthcare portfolio not meeting the risk proÑle of the Company. Commercial and commercial real estate loan net charge-oÅs for 2001 were $884.6 million, compared with $289.2 million in 2000 and $179.3 million in 1999. Approximately $313.2 million of the increase in charge-oÅs reÖected several factors including: a large cattle fraud, recent collateral deterioration speciÑc to transportation equipment caused by the impact of higher fuel prices and the economy, further deterioration in the manufacturing, communications and technology sectors and speciÑc management decisions to accelerate its workout strategy for certain borrowers. Commercial and commercial real estate net charge-oÅs for 2001 also included $255.0 million in merger and restructuring-related charge-oÅs and charge-oÅs associated with the accelerated loan workout strategy announced in the Ñrst quarter of 2001. The increase in commercial loan net charge-oÅs in 2000 included higher losses on a growing portfolio of small business products, growth in the corporate card portfolio, credit losses related to acquired leasing businesses and lower levels of recoveries compared with 1999. Retail loan net charge-oÅs in 2001 were $649.3 million, compared with $523.8 million in 2000 and $478.5 million in 1999. The ratio of retail loan net charge-oÅs to average loans in 2001 was 1.85 percent, up from 1.60 percent in 2000 and 1.57 percent in 1999. The increase in retail loan net charge-oÅs in 2001 was primarily due to higher bankruptcies and consumer delinquencies reÖecting the continuing downturn in economic conditions. Table 13 Net Charge-oÅs as a Percentage of Average Loans Outstanding Year Ended December 31 Commercial 2001 2000 1999 1998 1997 Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lease Ñnancing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.62% 1.95 Total commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.66 Commercial real estate Commercial mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total commercial real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail Credit card ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail leasing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .21 .17 .20 .18 4.80 .65 1.40 1.85 .56% .46 .55 .03 .11 .05 .13 4.18 .41 1.23 1.60 .41% .24 .40 .02 .03 .02 .12 4.00 .28 1.19 1.57 *% * .31 * * (.04) .08 4.02 * * 1.51 *% * .50 * * (.05) .06 4.57 * * 1.65 Total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.31% .70% .61% .53% .63% *Information not available Analysis of Nonperforming Assets Nonperforming assets include nonaccrual loans, restructured loans, other real estate and other nonperforming assets owned by the Company. Interest payments are typically applied against the principal balance and not recorded as income. At December 31, 2001, nonperforming assets totaled $1,120.0 million, compared with $867.0 million at year-end 2000 and $588.5 million at year-end 1999. The $253.0 million increase in nonperforming assets from December 31, 2000 reÖects an increase of $190.0 million of nonperforming commercial and commercial real estate loans, a $22.2 million increase in nonperforming residential mortgages and a $23.8 million increase in nonperforming retail loans. The increase in nonperforming commercial loans was primarily due to: merger and restructuring-related and risk management actions taken during the year; loans being written down to secondary market valuations and placed on nonperforming status; and continuing stress in sectors of the economy. The increase was partially oÅset by the disposition of nonperforming loans identiÑed as part of the Company's accelerated workout programs and commercial charge-oÅs taken during 2001. Certain industry sectors, including agriculture, have stabilized or improved from a year ago. The increase in nonperforming residential mortgages and retail loans generally reÖects changes in portfolio delinquencies and the national trends in U.S. Bancorp 31 unemployment and personal bankruptcies during 2001. The ratio of nonperforming assets to loans plus other real estate was .98 percent at December 31, 2001, compared with .71 percent at year-end 2000 and .52 percent at year-end 1999. Given the continued economic stress in various industry sectors, the Company may experience higher levels of nonperforming assets during the next several quarters. Accruing loans 90 days or more past due totaled $462.9 million at December 31, 2001, compared with $385.2 million at December 31, 2000, and $248.6 million at December 31, 1999. These loans are not included in nonperforming assets and continue to accrue interest because they are secured by collateral and/or are in the process of collection and are reasonably expected to result Table 14 Nonperforming Assets(a) (Dollars in Millions) Commercial 2001 2000 1999 1998 1997 At December 31, Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lease Ñnancing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total commercialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 526.6 180.8 707.4 Commercial real estate Commercial mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction and development ÏÏÏÏÏÏÏÏÏÏÏ Total commercial real estate ÏÏÏÏÏÏÏÏÏÏ Residential mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail Credit card ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail leasing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total retailÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 131.3 35.9 167.2 79.1 Ì 6.5 41.1 47.6 Total nonperforming loans ÏÏÏÏÏÏÏÏÏ 1,001.3 Other real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total nonperforming assetsÏÏÏÏÏÏÏÏ Accruing loans 90 days or more past due(b) ÏÏ Nonperforming loans to total loansÏÏÏÏÏÏÏÏÏÏÏ Nonperforming assets to total loans plus other real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest lost on nonperforming loans ÏÏÏÏÏ 43.8 74.9 $1,120.0 $ 462.9 .88% .98 63.0 $ Delinquent Loan Ratios(c) $470.4 70.5 540.9 105.5 38.2 143.7 56.9 8.8 Ì 15.0 23.8 765.3 61.1 40.6 $867.0 $385.2 .63% .71 $ 50.8 $219.0 31.5 250.5 138.2 31.6 169.8 72.8 5.0 .4 21.1 26.5 519.6 40.0 28.9 $588.5 $248.6 .46% .52 $ 29.5 $230.4 17.7 248.1 86.9 28.4 115.3 98.7 2.6 .5 30.4 33.5 495.6 35.1 16.9 $547.6 $252.9 .46% .51 $ 21.3 $263.9 9.8 273.7 94.9 19.5 114.4 95.0 * .5 17.1 17.6 500.7 57.0 17.4 $575.1 $213.7 .51% .58 $ 32.1 90 days or more past due 2001 2000 1999 1998 1997 At December 31, Commercial Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lease Ñnancing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total commercialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial real estate Commercial mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction and development ÏÏÏÏÏÏÏÏÏÏÏ Total commercial real estate ÏÏÏÏÏÏÏÏÏÏ Residential mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail Credit card ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail leasing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total retailÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.44% 3.53 1.71 .73 .56 .68 2.44 2.18 .24 .84 .98 1.11% 1.24 1.13 .61 .57 .60 1.49 1.85 .20 .64 .79 .57% .82 .59 .82 .53 .74 1.11 1.33 .14 .47 .59 .69% .57 .68 .59 .60 .59 1.26 1.07 .13 .47 .55 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.28% .94% .68% .70% (a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due. (b) These loans are not included in nonperforming assets and continue to accrue interest because they are secured by collateral and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. (c) Ratios include nonperforming loans and are expressed as a percentage of ending loan balances. * Information not available *% * .84 * * .67 .89 * * * .50 .72% 32 U.S. Bancorp Table 15 Summary of Allowance for Credit Losses (Dollars in Millions) 2001 2000 1999 1998 1997 Balance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,786.9 $1,710.3 $1,705.7 $1,665.8 $1,600.1 Charge-oÅs Commercial Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lease ÑnancingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial real estate Commercial mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total commercial real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail Credit card ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail leasing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 779.0 144.4 923.4 49.5 12.6 62.1 15.8 294.1 34.2 441.8 770.1 319.8 27.9 347.7 15.8 10.3 26.1 13.7 235.8 14.8 379.5 630.1 Total charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,771.4 1,017.6 Recoveries Commercial Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lease ÑnancingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial real estate Commercial mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total commercial real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail Credit card ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail leasing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net Charge-oÅs Commercial Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lease ÑnancingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial real estate Commercial mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total commercial real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail Credit card ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail leasing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60.6 30.4 91.0 9.1 .8 9.9 3.2 23.4 4.5 92.9 120.8 224.9 718.4 114.0 832.4 40.4 11.8 52.2 12.6 270.7 29.7 348.9 649.3 Total net charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,546.5 Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Losses from loan sales/transfersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions and other changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,528.8 (329.3) 17.4 64.0 7.2 71.2 10.8 2.6 13.4 1.3 27.5 2.0 76.8 106.3 192.2 255.8 20.7 276.5 5.0 7.7 12.7 12.4 208.3 12.8 302.7 523.8 825.4 828.0 Ì 74.0 250.1 12.4 262.5 19.1 2.6 21.7 16.2 220.2 6.2 376.0 602.4 902.8 84.8 4.0 88.8 15.1 1.0 16.1 1.4 34.6 1.1 88.2 123.9 230.2 165.3 8.4 173.7 4.0 1.6 5.6 14.8 185.6 5.1 287.8 478.5 672.6 646.0 Ì 31.2 * * * * 202.3 232.8 * * 23.6 14.4 223.9 * * 533.4 773.7 * * 81.9 * * 31.0 3.0 36.9 * * 112.6 228.5 * * * * 27.3 11.1 258.3 * * 522.4 793.6 * * 59.3 * * 37.7 2.5 38.3 * * 93.1 192.6 * * 120.4 173.5 * * (7.4) 11.4 187.0 * * 420.8 545.2 491.3 Ì 93.8 * * (10.4) 8.6 220.0 * * 429.3 601.0 639.9 Ì 26.8 Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,457.3 $1,786.9 $1,710.3 $1,705.7 $1,665.8 Allowance as a percentage of: Period-end loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nonperforming loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nonperforming assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.15% 245 219 159 1.46% 233 206 216 1.51% 329 291 254 1.59% 344 312 313 1.68% 333 290 277 *Information not available U.S. Bancorp 33 in repayment or restoration to current status. Retail loans 30 days to 89 days or more past due were 3.11 percent of the total retail portfolio at December 31, 2001, compared with 2.82 percent of the total retail portfolio at December 31, 2000. Retail loans 90 days or more past due totaled .98 percent of the total retail loan portfolio at December 31, 2001, compared with .79 percent of the total retail loan portfolio at December 31, 2000, and .59 percent at December 31, 1999. The increase in retail loan delinquencies was primarily related to the credit card, home equity and revolving credit line portfolios and reÖects the economic slowdown and unemployment trends during 2001. Analysis and Determination of Allowance for Credit Losses The allowance for credit losses provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the allowance each quarter to determine that it is adequate to cover inherent losses. The evaluation of each element and the overall allowance is based on a continuing assessment of problem loans and related oÅ-balance sheet items, recent loss experience, and other factors, including regulatory guidance and economic conditions. Management has determined that the allowance for credit losses is adequate. At December 31, 2001, the allowance was $2.5 billion (2.15 percent of loans). This compares with an allowance of $1.8 billion (1.46 percent of loans), at year-end 2000, and $1.7 billion (1.51 percent of loans), at December 31, 1999. The ratio of the allowance for credit losses to nonperforming loans was 245 percent at December 31, 2001, compared with 233 percent at year-end 2000 and 329 percent at year-end 1999. The ratio of the allowance for credit losses to net charge-oÅs was 159 percent at December 31, 2001, compared with 216 percent at year-end 2000 and 254 percent at year-end 1999. The Company considers historical charge-oÅ levels in addition to existing conditions, among other factors, when establishing the allowance for credit losses. Several factors impacted the allowance for credit losses during 2001, including merger and restructuring-related credit actions and management's extensive review of the commercial loan portfolio in light of current economic conditions. The level of the allowance was also impacted by risk rating changes by regulators of shared national credits agented by other banks, Company-speciÑc portfolio trends discussed previously, and the transfer of the unsecured small business product portfolio to loans held for sale. The increase in the allowance for credit losses reÖects the impact of changes in the economy since December 31, 2000, and related deterioration in certain sectors of the Company's credit portfolio. It also reÖects management's recognition that the current economic slowdown has accelerated and may be more prolonged as a result of world events occurring in the third quarter of 2001. Management determines the amount of allowance that is required for certain loan categories based on relative risk characteristics of the loan portfolio. Table 16 shows the amount of the allowance for credit losses by loan category. During 2001, the Company, in connection with the merger of Firstar and USBM, conformed its methodology for determining speciÑc allowances for the elements of the loan portfolio. While both predecessor companies utilized credit risk rating processes, migration analysis and historical loss experience to determine each element of its allowance for credit losses, Firstar speciÑcally determined its commercial allowance based on its net loss experience, while USBM utilized its gross loss experience. Although diversity exists in practice, the Company has adopted a net loss experience methodology in determining the allowance for commercial credit losses. Adopting the net loss experience methodology is based, in part, on regulatory guidelines promulgated with respect to evaluating the allowance for credit losses. In addition to adopting a net loss experience method, the Company enhanced its commercial migration methods for higher quality commercial loan categories to better diÅerentiate historical loss factors within those categories. Also, given the current business cycle, historical loss factors utilized in determining the allowance for commercial loans were weighted to reÖect the adverse impact of recent losses. Table 16 shows the determination of each element of the allowance for credit losses on a consistent basis for 2001 and 2000. Due to the Company's inability to gather historical loss data on a combined basis for 1997 through 1999, the methodologies and amounts assigned to each element of the loan portfolio for these years have not been conformed. The allowance recorded for commercial loans is based on a quarterly review of individual credit relationships. The Company's regular risk rating process is an integral component of the methodology utilized in determining the allowance for credit losses. An analysis of the migration of commercial and commercial real estate loans and actual loss experience throughout the business cycle is also conducted quarterly to assess reserves established for credits with similar risk characteristics. An allowance is established for pools of commercial and commercial real estate loans based on the risk ratings assigned. The amount is supported by the results of the migration analysis that considers historical loss experience by risk rating, as well as current and historical economic conditions and industry risk factors. The Company separately analyzes the carrying value of impaired loans to determine whether the carrying value is less than or equal to the appraised collateral value or the present value of expected cash Öows. Based on this analysis, an allowance for credit losses may be speciÑcally established 34 U.S. Bancorp Table 16 Elements of the Allowance for Credit Losses(a) December 31 (Dollars in Millions) 2001 2000 1999 1998 1997 2001 2000 1999 1998 1997 Allowance Amount Allowance as a Percent of Total Loans Commercial Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lease Ñnancing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,068.1 $ 418.8 $ 408.3 $ 343.7 $ 370.5 16.4 107.5 21.5 20.2 17.7 2.64% 1.84 .90% .29 .97% .53 .91% .65 1.10% .61 Total commercial ÏÏÏÏÏÏÏÏÏÏ 1,175.6 436.5 428.5 365.2 386.9 2.54 Commercial real estate Commercial mortgages ÏÏÏÏÏÏÏÏ Construction and development ÏÏ Total commercial real estateÏÏ Residential mortgages ÏÏÏÏÏÏ Retail Credit card ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail leasing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 176.6 76.4 253.0 16.1 295.2 38.7 377.2 42.7 17.7 60.4 9.6 110.4 22.5 105.2 25.9 105.6 27.7 132.9 131.1 133.3 18.6 27.2 36.9 265.6 27.2 360.0 320.8 18.6 389.2 304.3 6.5 365.6 217.4 4.9 257.9 Total retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 711.1 652.8 728.6 676.4 480.2 Total allocated allowanceÏÏÏ Unallocated portion ÏÏÏÏÏÏÏÏ 2,155.8 301.5 1,159.3 627.6 1,308.6 401.7 1,199.9 505.8 1,037.3 628.5 .94 1.16 1.00 .28 5.01 .79 1.44 1.92 1.89 .26 .83 .22 .25 .23 .12 3.95 .65 1.47 1.85 .95 .51 .93 .59 .35 .53 .16 6.41 .88 1.64 2.36 1.16 .35 .89 1.06 .63 .50 .60 .19 6.27 .40 1.55 2.25 1.12 .47 .67 .68 .67 .23 4.35 .45 1.23 1.78 1.05 .63 Total allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,457.3 $1,786.9 $1,710.3 $1,705.7 $1,665.8 2.15% 1.46% 1.51% 1.59% 1.68% (a) During 2001, the Company changed its methodology for determining the speciÑc allowance for elements of the loan portfolio. Table 16 has been restated for 2000. Due to the Company's inability to gather historical loss data on a combined basis for 1997 through 1999, the methodologies and amounts assigned to each element of the loan portfolio for these years have not been conformed. Utilizing the prior methods the total assigned allowance for 2000 was $1,397.3 million and the unallocated portion was $389.6 million. Refer to paragraph four in the section captioned ""Analysis and Determination of Allowance for Credit Losses'' on page 34. for impaired loans. The allowance established for commercial and commercial real estate loan portfolios, including impaired commercial and commercial real estate loans, increased $931.7 million to $1,428.6 million in 2001. The change reÖected higher levels of nonperforming loans, increased loss severity reÖected in the historical migration, increasing sector risk in certain industries and deterioration in credit risk ratings from a year ago. The allowance recorded for retail portfolios is based on an analysis of product mix, credit scoring and risk composition of the portfolio, loss and bankruptcy experiences, economic conditions and historical and expected delinquency and charge-oÅ statistics for each homogenous category or group of loans. Based on this information and analysis, an allowance is established approximating a rolling twelve-month estimate of net charge-oÅs. The allowance for retail loans increased $58.3 million to $711.1 million in 2001. The increase primarily reÖected the continuing downturn in economic conditions. Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer's Ñnancial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-speciÑc conditions aÅecting the identiÑcation and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. For each of these factors, the estimated inherent loss is recorded as an unallocated allowance. The Company estimates a range of inherent losses related to the existence of these exposures and for the risk in concentrations to speciÑc borrowers, Ñnancings of highly leveraged transactions, products or industries. The estimates are based upon the Company's evaluation of imprecision risk associated with the commercial and retail allowance levels and the estimated impact of the current economic environment on portfolio segments or concentrations. The unallocated allowance decreased to $301.5 million at December 31, 2001, from $627.6 million at December 31, 2000. The change in unallocated allowance reÖects deterioration in credit quality during 2001. Although the Company determines the amount of each element of the allowance separately and this process is an important credit management tool, the entire allowance for credit losses is available for the entire loan portfolio. The actual amount of losses incurred can vary signiÑcantly from the recorded amounts. The Company's methodology includes several factors intended to minimize the diÅerences in recorded and actual losses. These factors allow the Company to adjust its estimate of losses based on the most recent information available. Refer to Note 1 of the Notes to Consolidated U.S. Bancorp 35 Financial Statements for accounting policies related to the allowance for credit losses. Residual Risk Management The Company manages its risk to changes in the value of lease residual assets through disciplined residual setting and valuation at the inception of a lease, diversiÑcation of its vehicles, a focus on longer term vehicle leases, eÅective end-of-term marketing of oÅ-leased vehicles, regular asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. To reduce the Ñnancial impact of potential changes in vehicle residuals, the Company maintains residual value risk insurance. Also, equipment lease originations are subject to the same stringent underwriting standards referred to in the segment captioned ""Credit Risk Management''. Included in the retail leasing portfolio was approximately $2.8 billion of retail leasing residuals at December 31, 2001, compared with $2.4 billion at December 31, 2000. The Company monitors concentrations of leases by manufacturer, vehicle ""make'' and vehicle type. At year-end 2001, no vehicle-type concentration exceeded Ñve percent of the aggregate portfolio. Because retail residual valuations tend to be less volatile for longer-term leases, relative to the estimated residual at inception of the lease, management actively manages lease origination production to achieve a longer-term portfolio. At December 31, 2001, the weighted-average term of the portfolio was 51 months. Since 1998, the used vehicle market has experienced a decline in used car prices. Several factors have contributed to this deÖationary cycle. Aggressive leasing programs by automobile manufacturers and competitors within the banking industry included a marketing focus on monthly lease payments, enhanced residuals at lease inception, shorter-term leases and low mileage leases. These practices have created a cyclical oversupply of certain oÅ-lease vehicles. Recently, automobile manufacturers and others have retreated from these marketing programs or begun to exit the leasing business. Another factor impacting the used vehicle market has been the trend in new vehicle prices that decreased in the late 1990's. This trend has been driven by surplus automobile manufacturing capacity and related production and highly competitive Internet sales programs. Recessionary factors are expected to moderate new car production during the next several quarters. Also, many Internet marketers failed or transformed into distribution channels of dealers rather than direct competitors. These recent trends are expected to abate the deÖationary pricing pressures of the past few years. In response to factors impacting used vehicle prices, the Company recognized a retail lease impairment of $40.0 million in 2001. Given the current economic environment, it is diÇcult to assess the timing and degree of changes in residual values that may impact Ñnancial results over the next several quarters. At December 31, 2001, the commercial leasing portfolio had $984.6 million of residuals. At year-end 2001, lease residuals related to railcars were 16.2 percent. Trucks and other transportation equipment represented 30.2 percent of the aggregate portfolio while aircraft and manufacturing were 14.9 percent and 12.7 percent, respectively. No other signiÑcant concentrations of more than 10 percent existed at December 31, 2001. During 2001, reduced airline travel and higher fuel costs adversely impacted aircraft and transportation equipment lease residual values. Although impairment of equipment lease residuals was not signiÑcant in 2001, continuing economic stress in certain industries may further impact used equipment values into next year. Interest Rate Risk Management In the banking industry, a major risk exposure is changing interest rates. To minimize the volatility of net interest income and exposure to economic losses, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Policy Committee (""ALPC'') and approved by the Board of Directors. ALPC has the responsibility for approving and ensuring compliance with asset/liability management policies, including interest rate risk exposure, oÅ-balance sheet activity and the investment portfolio. The Company uses three methods for measuring and analyzing consolidated interest rate risk: Net Interest Income Simulation Analysis, Market Value of Equity Modeling and Repricing Mismatch Analysis. Net Interest Income Simulation Analysis One of the primary tools used to measure interest rate risk and the eÅect of interest rate changes on net interest income and net interest margin is simulation analysis. The monthly analysis incorporates substantially all of the Company's assets and liabilities and oÅ-balance sheet instruments, together with forecasted changes in the balance sheet and assumptions that reÖect the current interest rate environment. Through these simulations, management estimates the impact on net interest income of a 300 basis point upward or downward gradual change of market interest rates over a one year period. The simulations also estimate the eÅect of immediate and sustained parallel shifts in the yield curve of 50 basis points as well as the eÅect of immediate and sustained Öattening or steepening of the yield curve. These simulations include assumptions about how the balance sheet is likely to change with changes in loan and deposit growth. Assumptions are made to project rates for new loans and deposits based on historical analysis, management's outlook and repricing strategies. Loan prepayment and other options risks are developed 36 U.S. Bancorp Table 17 Derivative Positions Asset and Liability Management Positions December 31, 2001 (Dollars in Millions) Receive Ñxed/pay Öoating swaps Notional amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted-average Maturing 2002 2003 2004 2005 2006 Thereafter Total Weighted- Average Remaining Maturity in Years Fair Value $3,295 $1,625 $3,223 $1,861 $875 $5,240 $16,119 $329.6 6.30 Receive rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pay rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.57% 2.00 6.04% 1.97 5.06% 2.10 6.05% 2.14 5.73% 2.11 6.68% 2.07 5.74% 2.06 Pay Ñxed/receive Öoating swaps Notional amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted-average Receive rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pay rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basis swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Future and forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Customer Intermediated Positions December 31, 2001 (Dollars in Millions) Receive Ñxed/pay Öoating swaps $ 500 $ 962 $ 500 $ Ì $ Ì $ Ì $ 1,962 $ (2.1) 1.74 1.79% 2.08 $1,000 4,087 Ì 1.90% 4.24 1.87% 3.98 Ì% Ì $ Ì $ Ì $ Ì Ì Ì Ì Ì Ì Ì Ì% Ì $ Ì Ì 45 Ì% Ì 1.86% 3.62 $ Ì $ 1,000 4,087 45 Ì Ì Maturing 2002 2003 2004 2005 2006 Thereafter Total $ .2 71.7 Ì 0.69 Ì 4.9 Weighted- Average Remaining Maturity In Years Fair Value Notional amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 218 $ 408 $ 386 $ 276 $424 $ 425 $ 2,137 $ 63.5 3.83 Pay Ñxed/receive Öoating swaps Notional amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basis swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign exchange contracts 217 Ì 514 Purchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SellÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,810 1,801 409 Ì 615 26 26 386 2 78 Ì Ì 276 Ì Ì Ì Ì 424 Ì Ì Ì Ì 425 Ì 4 Ì Ì 2,137 2 1,211 1,836 1,827 (53.4) Ì Ì 60.0 (58.0) 3.83 2.67 1.29 .25 .25 from industry estimates of prepayment speeds. Because the results of these simulations can be signiÑcantly inÖuenced by assumptions utilized, management evaluates the sensitivity of the simulation's results to changes in key assumptions. in a 200 basis point parallel rate shock to 15 percent of the base case. Given the low level of rates currently the down 200 basis point scenario cannot be computed. ALPC reviews other down rate scenarios to evaluate the impact of falling rates. The results from the simulation are reviewed by ALPC The valuation analysis is dependent upon certain key monthly and are used to guide hedging strategies. ALPC policy guidelines limit the estimated change in net interest income to 5.0 percent of forecasted net interest income over the succeeding 12 months. In simulations as of December 31, 2001, the interest rate risk position of the Company was relatively neutral as the impact of a downward movement in rates or an upward movement in rates of 300 basis points over a twelve month period resulted in less than 1.0 percent change in net interest income. At December 31, 2001, the Company was well within policy guidelines. Market Value of Equity Modeling The Company also utilizes the market value of equity as a measurement tool in managing interest rate sensitivity. The market value of equity measures the degree to which the market values of the Company's assets and liabilities and oÅ-balance sheet instruments will change given a change in interest rates. ALPC guidelines limit the change in market value of equity assumptions about the nature of indeterminate maturity of assets and liabilities. Management estimates the average life and rate characteristics of asset and liability accounts based upon historical analysis and management's expectation of rate behavior. The results of the valuation analysis as of December 31, 2001, were well within policy guidelines. Repricing Mismatch Analysis The Company also evaluates its interest rate sensitivity position to maintain a balance between the amounts of interest-bearing assets and interest-bearing liabilities which are expected to mature or reprice at any point in time. While a traditional repricing mismatch analysis (""gap analysis'') provides a snapshot of interest rate risk, it does not take into consideration that assets and liabilities with similar repricing characteristics may not reprice at the same time or to the same degree. Also, it does not necessarily predict the impact of changes in general levels of interest rates on net interest income. U.S. Bancorp 37 Use of Derivatives to Manage Market and Interest Rate Risk In the ordinary course of business, the Company enters into derivative transactions to manage its market and prepayment risks and to accommodate the business requirements of its customers. By their nature, derivative instruments are subject to market risk. The Company does not utilize derivative instruments for speculative purposes. To manage its interest rate risk, the Company may enter into interest rate swap agreements and, to a lesser degree, basis swaps, and interest rate options such as caps and Öoors. Interest rate swaps involve the exchange of Ñxed- and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. Interest rate caps protect against rising interest rates while interest rate Öoors protect against falling interest rates. In connection with its mortgage banking business, the Company may enter into forward commitments, futures and options to hedge interest rate risk of Ñxed-rate mortgage loans held for sale and unfunded commitments. All interest rate derivatives that qualify for hedge accounting are recorded at fair value as other assets or liabilities on the balance sheet and designated as either ""fair value'' or ""cash Öow'' hedges. The Company performs an assessment, both at the inception of the hedge and quarterly thereafter, to determine whether these derivatives are highly eÅective in oÅsetting changes in the value of the hedged items. Hedge ineÅectiveness for both cash Öow and fair value hedges is immediately recorded in noninterest income. The Company also enters into derivative contracts to accommodate the business requirements of its customers. Customer intermediated transactions may include interest rate derivatives and foreign exchange forward contracts and options. Foreign exchange-based forward contracts provide for the delayed delivery of a purchase or sale of foreign currency. Generally, the Company enters into oÅsetting derivative positions to mitigate its market risk associated with customer-based contracts. Intermediated interest rate swaps, foreign exchange contracts and all other derivative contracts that do not qualify for hedge accounting are recorded at fair value and resulting gains or losses are recorded in trading account proÑts and commissions. Derivative instruments are subject to credit risk associated with counterparties to the derivative contracts. Credit risk associated with derivatives is measured based on the replacement cost should the counterparties with contracts in a gain position to the Company fail to perform under the terms of the contracts. The Company manages this risk through diversiÑcation of its derivative positions among dealers, primarily commercial banks, broker-dealers and corporations, with established relationships and requiring collateral to support credit exposures in excess of established guidelines. To minimize the risk, the Company enters into legally enforceable master netting agreements, which permit the close out and netting of transactions with the same counterparty upon the occurrence of certain events. Also, a portion of the derivative activity involves exchange-traded instruments. Because exchange-traded instruments conform to standard terms and are subject to policies set by the exchange involved, including counterparty approval, margin requirements and security deposit requirements, the credit risk is substantively reduced. Table 17 summarizes information on derivative positions as of December 31, 2001. Market Risk Management In addition to interest rate risk and market risk associated with derivatives, the Company is exposed to other forms of market risk as a consequence of conducting normal business activities. Business activities that contribute to market risk include, among other things, market making, underwriting, proprietary trading and foreign exchange positions. Value at Risk (""VaR'') is a key measure of market risk for the Company. VaR represents the maximum amount that the Company has placed at risk of loss, with a ninety-nine percent degree of conÑdence, in the course of its risk taking activities. Its purpose is to describe the amount of earnings at risk due to potential losses from adverse market movements. VaR modeling on trading activities is subject to certain limitations. Additionally, it should be recognized that there are assumptions and estimates associated with VaR modeling and actual results could diÅer from these assumptions and estimates. The Company mitigates these uncertainties through regular monitoring of trading activities by management and other risk management practices including stop-loss limits and position limits. A stress-test model is used to provide management with a perspective on market events that a VaR model does not capture. In each case, the historical worst performance of each asset class is observed and applied to current trading positions. ALPC establishes market risk limits subject to approval by the Company's Board of Directors. The Company's VaR limit was $40.0 million at December 31, 2001. The market risk inherent in the Company's customer-based derivative trading, mortgage banking pipeline, broker-dealer activities, including equities, Ñxed income, high yield securities and foreign exchange, as estimated by the VaR analysis, was $10.9 million at December 31, 2001. Liquidity Risk Management ALPC establishes policies, as well as analyzes and manages liquidity, to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-eÅective manner. The most important factor in the preservation of liquidity is 38 U.S. Bancorp maintaining public conÑdence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, public conÑdence is generated through proÑtable operations, sound credit quality and a strong capital position. The Company's performance in these areas has enabled it to develop a large and reliable base of core funding within its market areas and in domestic and global capital markets. Liquidity management is viewed from a long-term and short-term perspective, as well as from an asset and liability perspective. Management monitors liquidity through a regular review of maturity proÑles, yield and rate behaviors, and loan and deposit forecasts to minimize funding risk. The Company maintains strategic liquidity and contingency plans that are subject to the availability of asset liquidity in the balance sheet. ALPC periodically reviews the Company's ability to meet funding deÑciencies due to adverse business events. These funding needs are then matched with speciÑc asset-based sources to ensure suÇcient funds are available. Also, strategic liquidity policies require diversiÑcation of wholesale funding sources to avoid concentrations in any one market source. Subsidiary banks are members of various Federal Home Loan Banks that provide a source of funding through FHLB advances. The Company maintains a Grand Cayman oÇce for issuing eurodollar certiÑcates of deposit. The Company also establishes relationships with dealers to issue national market retail and institutional savings certiÑcates and short- and medium-term bank notes. Also, the Company's subsidiary banks have signiÑcant correspondent banking networks and corporate accounts. Accordingly, it has access to national fed funds, funding through repurchase agreements and sources of more stable regionally based certiÑcates of deposit. Additionally, the Company previously created asset-backed securitizations to fund the noninterest-bearing corporate card loan portfolio and indirect automobile loans. The corporate card securitization held $403 million in average assets in 2001 and is scheduled to be liquidated in February 2002. The indirect automobile securitization held $655 million of average assets in 2001. The Company provided credit enhancements in the form of subordination and reserve accounts at the inception of the transactions. The Company's risk, primarily for losses in the underlying assets, is considered in determining the fair value of the Company's retained interests in these securitizations. The Company recognized income from residual interests and servicing fees for these securitizations of $15.5 million in 2001. Refer to Note 8 of the Notes to Consolidated Financial Statements for further information on these oÅ- balance sheet structures. With respect to real estate and certain equipment, the Company enters into capital or operating leases to meet its business requirements. Certain operating lease arrangements involve third party lessors that acquire these business assets through leveraged Ñnancing structures commonly referred to as ""synthetic leases''. At December 31, 2001, synthetic lease structures held real estate assets of $372.7 million and equipment of $41.6 million. The Company provides guarantees to the lender in the event of default by the leveraged Ñnancing structures or in the event that the Company does not exercise its option to purchase the property at the end of the lease term and the fair value of the assets is less than the purchase price. The Company's minimum lease obligations for capital and operating arrangements, including those related to synthetic leases, are disclosed in Note 22 of the Notes to Consolidated Financial Statements. Asset securitization and conduits represent another Credit, liquidity, operational and legal structural risks source of funding the Company's growth through oÅ- balance sheet structures. The Company has two oÅ-balance sheet conduits that hold high-grade assets. The conduits, which are funded by issuing commercial paper, held average assets of $14.8 billion including short-term participations in commercial loans, commercial paper and investment securities. The Company provides liquidity facilities to both conduits and credit enhancement to the loan conduit that may be triggered by certain events. Based on the current performance of each structure the Company does not anticipate these triggers will occur in the foreseeable future. Included in noninterest income was $132.7 million of revenue related to these conduits in 2001 including fees for servicing activities and liquidity facilities and credit enhancements. In November 2001, the Company established a $738 million securitization structure related to an unsecured small business credit product that was being discontinued. exist due to the nature and complexity of asset securitizations and other oÅ-balance sheet structures. ALPC regularly monitors the performance of each oÅ-balance sheet structure in an eÅort to minimize these risks and ensure compliance with the requirements of the structures. The Company utilizes its credit risk management systems to evaluate credit quality of underlying assets and regularly forecasts cash Öows to evaluate any potential impairment of retained interests. Also, regulatory guidelines require consideration of asset securitizations in the determination of risk-based capital ratios. The Company's ability to raise negotiated funding at competitive prices is influenced by rating agencies' views of the Company's credit quality, liquidity, capital and earnings. The debt ratings noted in Table 18 reflect the rating agencies' recognition of the strong, consistent financial performance of the Company and quality of the balance sheet. U.S. Bancorp 39 Table 18 Debt Ratings At December 31, 2001 U.S. Bancorp Moody's Standard & Poors Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Senior debt and medium-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subordinated debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A1 A2 A3 P-1 U.S. Bank National Association Short-term time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bank notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subordinated debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ P-1 Aa3 Aa3/P-1 A1 A A¿ BBB° A-1 A-1 A° A°/A-1 A Fitch F1 A° A A F1 F1° AA¿ A°/F1° A The parent company's routine funding requirements consist primarily of operating expenses, dividends to shareholders, debt service and funds used for acquisitions. The parent company obtains funding to meet its obligations from dividends collected from its subsidiaries and the issuance of debt securities. Subsidiary management fees fund operating expenses, while shareholder dividends and debt service are satisÑed primarily through dividends from its subsidiaries. At December 31, 2001, parent company long-term debt outstanding was $6.1 billion, compared with $6.6 billion at December 31, 2000. In 2001, the parent company issued $1.1 billion of senior contingent convertible debt, oÅset by $1.6 billion of maturities and other repayments of long- term debt. Total parent company debt maturing in 2002 is $1.5 billion. These debt obligations are expected to be met through medium-term note issuances and dividends from subsidiaries, as well as from the approximately $3.2 billion of parent company cash and cash equivalents at December 31, 2001. Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. The amount of dividends available to the parent company from its banking subsidiaries was $1.2 billion at December 31, 2001. For further information, see Note 23 of the Notes to Consolidated Financial Statements. CAPITAL MANAGEMENT The Company is committed to managing capital for maximum shareholder beneÑt and maintaining strong protection for depositors and creditors. Total shareholders' equity was $16.5 billion at December 31, 2001, compared with $15.2 billion at December 31, 2000. The increase was primarily the result of corporate earnings and the issuance of stock in connection with the NOVA acquisition, oÅset by dividend payments, merger and restructuring-related items and share repurchases. On February 27, 2001, the Company increased its dividend rate per common share 15.4 percent from $.1625 per quarter to $.1875 per quarter. Excluding merger and restructuring-related charges, the dividend payout ratio for 2001 increased to 57.0 percent compared with payout ratios of 40.1 percent in 2000 and 31.7 percent in 1999. Management has established Ñnancial objectives which provide a framework to monitor future capital needs. The Company's dividend policy is inÖuenced by the belief that most shareholders are interested in long-term performance as well as current dividend yields. The current dividend payout level is considered reasonable given the Company's present cash Öow position, level of earnings and the strength of its subsidiary banks' capital ratios. Future dividends will be determined based on results of operations, growth expectations, Ñnancial condition, regulatory constraints and other factors deemed relevant by the Board of Directors. On July 17, 2001, the Company's Board of Directors authorized the repurchase of up to 56.4 million shares of the Company's common stock in connection with the July 24, 2001, acquisition of NOVA. During 2001, the Company repurchased 19.7 million shares of common stock in both public and private transactions in connection with this authorization. The Company had forward contracts to purchase 26.7 million shares within this authorization. These contracts were settled in January 2002. On December 18, 2001, the Board of Directors approved an authorization to repurchase an additional 100 million shares of common stock through 2003. On February 16, 2000, the Board of Directors of USBM authorized the repurchase of up to $2.5 billion of its common stock over a two year period ending March 31, 2002. On April 11, 2000, Firstar's Board of Directors approved a common stock repurchase program of 100 million shares. The stock repurchase programs of both Firstar and USBM were rescinded on October 4, 2000, and January 17, 2001, respectively, in connection with the planned merger of the formerly separate companies. For a complete analysis of activities impacting shareholders' equity 40 U.S. Bancorp Table 19 Regulatory Capital Ratios At December 31 (Dollars in Millions) U.S. Bancorp Tangible common equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ As a percent of tangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tier 1 capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ As a percent of risk-weighted assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ As a percent of adjusted quarterly average assets (leverage ratio) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total risk-based capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ As a percent of risk-weighted assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bank Subsidiaries(a) U.S. Bank National Association 2001 2000 $ 9,374 $10,045 5.7% 6.3% $12,488 $11,602 7.7% 7.7% $19,148 11.7% 7.2% 7.4% $17,038 10.6% Tier 1 capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total risk-based capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Leverage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ U.S. Bank National Association ND Tier 1 capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total risk-based capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Leverage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ U.S. Bank National Association MT Tier 1 capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total risk-based capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Leverage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.5% 11.8 7.7 18.1% 23.1 17.9 19.4% 20.5 14.0 7.3% 11.2 7.9 10.3% 15.6 10.2 14.9% 17.6 12.0 Bank Regulatory Capital Requirements Minimum Well- Capitalized Tier 1 capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total risk-based capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Leverage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.0% 8.0 4.0 6.0% 10.0 5.0 (a) These balances and ratios were prepared in accordance with regulatory accounting principles as disclosed in the subsidiaries' regulatory reports. and capital management programs, refer to Note 15 of the Notes to Consolidated Financial Statements. 7.7 percent compared with 7.4 percent in the fourth quarter of a year ago. Banking regulators deÑne minimum capital requirements for banks and Ñnancial services holding companies. Additionally, credit rating agencies evaluate capital adequacy including tangible common equity as a percentage of tangible assets. The Company manages various capital ratios to maintain appropriate capital levels in accordance with Board-approved capital guidelines. At December 31, 2001, tangible common equity was $9.4 billion (5.7 percent of tangible assets), compared with 6.3 percent at year-end 2000. The decline in the tangible common equity ratio was primarily due to the acquisition of NOVA during the third quarter of 2001. As of December 31, 2001, tier 1 and total risk-based capital ratios were 7.7 percent and 11.7 percent, respectively, well above the minimum regulatory requirements of 4.0 percent for tier 1 and 8.0 percent for total risk-based capital. This compared to tier 1 and total risk-based capital ratios of 7.2 percent and 10.6 percent at December 31, 2000. The improvement in the total risk-based capital ratio during 2001 primarily reÖected changes in the mix of investment securities in addition to the issuance of Trust Preferred Securities. Regulatory authorities have also established a minimum ""leverage'' ratio of 4.0 percent, which is deÑned as tier 1 equity to average quarterly assets. For the fourth quarter of 2001, the Company's leverage ratio improved to With respect to each of its banking subsidiaries, the Company intends to maintain suÇcient capital to be ""well capitalized'' as deÑned by the regulatory agencies. The ""well capitalized'' category requires tier 1 and total risk-based capital ratios of at least 6.0 percent and 10.0 percent, respectively, and a minimum leverage ratio of 5.0 percent. All banking subsidiaries are considered ""well capitalized'' at December 31, 2001. Table 19 provides a summary of tier 1 and total risk- based capital ratios as of December 31, 2001 and 2000, as deÑned by the regulatory agencies. FOURTH QUARTER SUMMARY In the fourth quarter of 2001, the Company had net income of $695.4 million ($.36 per diluted share), compared with $768.7 million ($.40 per diluted share) in the fourth quarter of 2000. The Company reported operating earnings (net income excluding merger and restructuring-related items) of $785.2 million ($.40 per diluted share) in the fourth quarter of 2001, compared with operating earnings of $824.2 million ($.43 per diluted share) in the fourth quarter of 2000. Fourth quarter net interest income on a taxable-equivalent basis increased $122.6 million to $1,684.8 million, compared with the fourth quarter of U.S. Bancorp 41 2000, primarily reÖecting increased earning assets driven by increases in the investment portfolio, core retail loan growth and acquisitions, partially oÅset by a $4.3 billion reduction in loans related to transfers of short-term, high credit quality, low margin commercial loans to the loan conduit, a $2.8 billion decline in residential mortgage loans, and the sale of indirect automobile and high LTV home equity loans in the Ñrst quarter of 2001. The net interest margin on a taxable-equivalent basis increased in the fourth quarter of 2001 to 4.60 percent, compared with 4.33 percent in the fourth quarter of 2000, reÖecting funding beneÑts during the declining rate environment, a more favorable funding mix and improving loan spreads, partially oÅset by lower yields on the investment portfolio. Table 20 Fourth Quarter Summary (Dollars in Millions, Except Per Share Data) Condensed Income Statement The provision for credit losses increased to $265.8 million in the fourth quarter of 2001, compared with $229.5 million in the fourth quarter of 2000. The increase was the result of higher charge-oÅs from a year ago due to deterioration in economic conditions and credit quality in the loan portfolio. Noninterest income increased $58.7 million from the same quarter a year ago, to $1,323.6 million. Credit card fee revenue declined quarter over quarter by $18.6 million (8.8 percent) reÖecting lower corporate card transaction volumes. Merchant and ATM processing revenue increased $116.0 million principally due to the acquisition of NOVA. Deposit service charges, cash management fees, commercial product revenue and mortgage banking revenue improved in the fourth quarter of 2001 from a year ago. The Three Months Ended December 31, 2001 2000 Interest income (taxable-equivalent basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,529.3 844.5 $3,179.7 1,617.5 Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities gains, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Noninterest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total net revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Noninterest expense(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxes and merger and restructuring-related itemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,684.8 22.0 1,301.6 3,008.4 1,503.9 265.8 1,238.7 9.9 443.6 1,562.2 7.0 1,257.9 2,827.1 1,347.8 229.5 1,249.8 20.7 404.9 Operating earnings(a)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related items (after-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 785.2 (89.8) 824.2 (55.5) Net income in accordance with GAAPÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 695.4 $ 768.7 Per Common Share Earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends declared per share(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .36 .36 .1875 $ .41 .40 .1625 Financial Ratios Return on average assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Return on average equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest margin (taxable-equivalent basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÇciency ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial Ratios Excluding Merger and Restructuring-Related Items(a) Return on average assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Return on average equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÇciency ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Banking eÇciency ratio(c) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.64% 16.5 4.60 55.1 1.85% 18.6 50.4 46.6 1.89% 20.7 4.33 50.8 2.02% 22.2 47.8 41.9 (a) The Company analyzes its performance on a net income basis in accordance with accounting principles generally accepted in the United States, as well as on an operating basis before merger and restructuring-related items referred to as ""operating earnings.'' Operating earnings are presented as supplemental information to enhance the readers' understanding of, and highlight trends in, the Company's Ñnancial results excluding the impact of merger and restructuring-related items of speciÑc business acquisitions and restructuring activities. Operating earnings should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. Merger and restructuring-related items excluded from net income to derive operating earnings may be signiÑcant and may not be comparable to other companies. (b) Dividends per share have not been restated for the 2001 merger of Firstar and USBM. (c) Without investment banking and brokerage activity. 42 U.S. Bancorp improvements reÖected core business growth, product enhancements, loan conduit activities and strong mortgage originations. Capital markets-related revenue declined $31.6 million (12.0 percent) reÖecting softness in equity capital markets since late 2000. Other income declined $99.6 million from the same quarter a year ago primarily due to a $10.0 million retail lease residual impairment recognized in the fourth quarter of 2001 and a decline in the level of equity investment earnings. Fourth quarter noninterest expense totaled $1,644.5 million in the fourth quarter of 2001 compared with $1,431.9 million in the fourth quarter of 2000. Excluding merger-related charges, noninterest expense totaled $1,503.9 million, an increase of $156.1 million (11.6 percent) from the fourth quarter of 2000. Approximately $100 million of the increase was the result of acquisitions. In addition to the impact of acquisitions, noninterest expenses were higher due to recognizing a $27.3 million MSR impairment in the fourth quarter of 2001 and increases due to core business growth, oÅset somewhat by a reduction in expenses related to capital markets activities. LINE OF BUSINESS FINANCIAL REVIEW Operating segments are components of the Company about which Ñnancial information is available and is evaluated regularly in deciding how to allocate resources and assess performance. Prior to the merger of Firstar and USBM, the Company operated its business units separately in 2000 and 1999 and the basis of Ñnancial presentation diÅered signiÑcantly. Accordingly, the presentation of comparative business line results for 1999 is not practicable at this time. At the date of the merger of Firstar and USBM, the Company reorganized into the following operating segments: Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management, Payment Services, Capital Markets, and Treasury and Corporate Support. Units providing central support and other corporate activities are reported as part of Treasury and Corporate Support and allocated as appropriate. For detailed descriptions of these operating segments see ""BUSINESS SEGMENTS'' in Note 1 of the Notes to Consolidated Financial Statements. Basis of Financial Presentation Business line results are derived from the Company's business unit proÑtability reporting system by speciÑcally attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or credit for funds provided to all business line assets and liabilities using a matched funding concept. Also, the business unit is allocated the taxable-equivalent beneÑt of tax-exempt products. The provision for credit losses recorded by each operating segment was primarily based on the net charge-oÅs of each line of business. The diÅerence between the provision for credit losses determined in accordance with accounting principles generally accepted in the United States recognized by the Company on a consolidated basis and the provision recorded by the business lines is recorded in Treasury and Corporate Support. Noninterest income and expenses directly managed by each business line, including fees, service charges, salaries and beneÑts, and other direct expenses are accounted for within each segment's Ñnancial results in a manner similar to the consolidated Ñnancial statements. Noninterest expenses incurred by centrally managed operations or a business line that directly supports another business line's operations are not charged to the applicable business line. Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or beneÑt to arrive at the consolidated eÅective tax rate included in Treasury and Corporate Support. Merger and restructuring- related items are not identiÑed by or allocated to lines of business. Because capital levels are evaluated and managed centrally, capital is not allocated to the business units. Designations, assignments and allocations may change from time to time as management accounting systems are enhanced or product lines change. During 2001, certain organization and methodology changes were made to reÖect the merger. All results for 2001 and 2000 have been restated to present consistent methodologies for all business lines. Wholesale Banking oÅers lending, depository, treasury management and other Ñnancial services to middle market, large corporate and public sector clients. Wholesale Banking contributed $1,364.4 million of the Company's pre-tax income in 2001, compared with $1,667.3 million in 2000, a decrease of $302.9 million (18.2 percent). The decline was primarily driven by an increase in the provision for credit losses and certain asset write-downs taken by the business line. The line of business generated operating income of $1,956.8 million in 2001 and $1,827.8 million in 2000, a 7.1 percent increase. Total net revenue grew by $175.9 million (8.0 percent) in 2001. Net interest income on a taxable-equivalent basis increased 4.7 percent for the year primarily due to core deposit growth, as well as the impact of banking and equipment Ñnance leasing acquisitions. The increase is oÅset somewhat by the transfer of short-term, high credit quality, low margin commercial loans to the loan conduit and the impact of declining rates on the funding beneÑt of deposits. Noninterest income increased 19.4 percent in 2001 reÖecting revenue related to the leasing acquisitions, core growth in syndication and cash management-related fees and growth in securitization fee U.S. Bancorp 43 income related to the loan conduit. Net fee income growth included a $6.0 million impairment of commercial leasing residuals and lower earnings of approximately $33.4 million from relationship-based equity investments managed by the line of business. OÅsetting the net growth in revenue was an increase in noninterest expenses of $46.9 million (12.9 percent), primarily due to bank and lease acquisitions, planned growth in targeted markets and certain asset write-downs. Included in expenses during the year were asset write-downs of commercial leasing partnerships of $38.4 million and repossessed tractor/trailer and other related property of $14.0 million. Cost savings from business integration activities during 2001 substantively oÅset the core and acquisition-related expense growth. Additionally, the provision for credit losses increased $431.9 million during 2001. The increase reÖected increasing net charge-oÅs due to the deterioration in credit quality reÖected by an increase in nonperforming commercial loans. Refer to ""Corporate Risk ProÑle'' on pages 29 through 36 for further information on factors impacting the credit quality of the loan portfolios. Consumer Banking delivers products and services to the broad consumer market and small businesses through banking oÇces, telemarketing, on-line services, direct mail and automated teller machines (""ATMs''). It encompasses community banking, metropolitan banking, small business banking, consumer lending, mortgage banking and investment product sales. Consumer Banking contributed $1,866.4 million of the Company's pre-tax income in 2001 compared with $2,039.4 million in 2000, a decrease of 8.5 percent. The decline was driven by the impact of declining rates on the funding beneÑt of deposits, an increase in the provision for credit losses, banking acquisitions and certain asset write-downs taken by the Company. The line of business generated operating income of $2,287.7 million in 2001, a decline of 4.2 percent from 2000. Total net revenue grew by 1.3 percent during 2001, or $53.9 million over 2000. Fee-based revenue growth was strong, increasing by 19.0 percent over 2000, while net interest income declined 4.7 percent. The decline in net interest income reÖected the impact of declining interest rates on the funding beneÑt of consumer deposits. It also reÖects the sale of approximately $1.3 billion of high LTV home equity and indirect automobile loans in the Ñrst quarter of 2001, and the divestiture of branches with $771.0 million of deposits during the second quarter of 2001 in connection with the merger of Firstar and USBM. Table 21 Line of Business Financial Performance Year Ended December 31 (Dollars in Millions) Condensed Income Statement Wholesale Banking Consumer Banking 2001 Percent 2000 Change 2001 Percent 2000 Change Net interest income (taxable-equivalent basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,774.4 $1,695.0 497.7 Noninterest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 594.2 4.7% $2,895.1 $3,039.3 1,044.5 1,242.6 19.4 Total net revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Noninterest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other intangible amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Goodwill amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,368.6 397.9 1.4 12.5 2,192.7 355.6 1.3 8.0 8.0 11.9 7.7 56.3 4,137.7 1,685.3 150.4 14.3 4,083.8 1,628.7 62.3 4.4 Total noninterest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 411.8 364.9 12.9 1,850.0 1,695.4 Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,956.8 592.4 1,827.8 160.5 7.1 * 2,287.7 421.3 2,388.4 349.0 Income before income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes and taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,364.4 496.5 1,667.3 606.8 (18.2) (18.2) 1,866.4 679.2 2,039.4 742.1 (4.7%) 19.0 1.3 3.5 * * 9.1 (4.2) 20.7 (8.5) (8.5) Operating earnings, before merger and restructuring-related itemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 867.9 $1,060.5 (18.2) $1,187.2 $1,297.3 (8.5) Merger and restructuring-related items (after-tax)(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average Balance Sheet Data Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 54,036 $ 55,106 60,296 Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,434 Noninterest-bearing deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,938 Interest-bearing deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,174 10,687 6,536 (.2) (1.9) $ 43,017 $ 42,306 47,943 49,919 11,935 11,999 62,266 61,358 13.3 32.4 1.7 4.1 .5 (1.5) Total depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 17,223 $ 14,372 19.8 $ 73,357 $ 74,201 (1.1) (a) Merger and restructuring-related items are not allocated to the business lines. * Not meaningful. 44 U.S. Bancorp The decline was partially oÅset by a funding beneÑt of deposits related to the acquisition of 41 branches in Tennessee. Growth in fee-based revenue was primarily attributed to an increase in retail deposit and cash management fees, mortgage banking originations, the alignment and redesign of products and features in connection with the merger of Firstar and USBM, and fee revenue related to the Tennessee branch acquisition. Fee income growth for 2001 was tempered somewhat by the recognition of an impairment of retail leasing residuals of $40.0 million during the third and fourth quarters. Consumer Banking results reflect an increase in noninterest expense of $154.6 million (9.1 percent) primarily related to impairments of MSRs of $60.8 million and the Tennessee branch acquisition. Additionally, the provision for credit losses increased $72.3 million (20.7 percent) during the year. The increase reflects deterioration in asset quality, higher consumer bankruptcies and economic trends impacting the business unit's loan and retail leasing portfolios. Private Client, Trust and Asset Management provides mutual fund processing services, trust, private banking and Ñnancial advisory services through four businesses, including: the Private Client Group, Corporate Trust Services, Institutional Trust and Custody, and Fund Services. The business segment also oÅers investment management services to several client segments including mutual funds, institutional customers, and private asset management. Private Client, Trust and Asset Management contributed $641.3 million of the Company's pre-tax income in 2001 compared with $649.2 million in 2000, a 1.2 percent decline. Growth in net interest income during 2001 compared with 2000, was driven by core loan and deposit growth partially oÅset by the impact of declining rates on the funding beneÑt of deposits. Noninterest income declined 3.5 percent during 2001 compared with a year ago primarily due to trust and investment management fees being adversely aÅected by the current capital markets conditions. Noninterest expense decreased 2.3 percent ($11.1 million) in 2001. Cost savings related to integration activities primarily drove the decline in noninterest expense. Payment Services includes consumer and business credit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. Payment Services contributed $724.3 million of the Company's pre-tax income in 2001 compared with $708.6 million in 2000, a 2.2 percent increase. The business unit's Ñnancial results were, in part, impacted by an increase in the provision for credit losses and the NOVA acquisition Private Client, Trust and Asset Management Payment Services Capital Markets Treasury and Corporate Support Consolidated Company 2001 Percent 2000 Change 2001 Percent 2000 Change 2001 Percent 2000 Change 2001 Percent 2000 Change 2001 Percent 2000 Change $ 244.4 $ 223.6 908.1 876.3 9.3% $ 459.6 $ 428.6 1,289.0 1,080.6 (3.5) 1,120.7 1,131.7 459.4 20.7 .4 448.2 20.8 .4 (1.0) (2.4) .5 Ì 1,748.6 1,509.2 412.8 23.8 11.4 525.2 55.4 11.9 7.2% $ 17.8 $ 831.2 1,097.6 (24.3) 24.9 (28.5)% $1,073.4 $ 723.6 254.7 463.9 48.3% $ 6,464.7 $ 6,135.0 4,883.2 5,297.2 82.1 5.4% 8.5 849.0 1,122.5 (24.4) 738.2 907.4 (18.6) Ì .1 .1 .7 (85.7) Ì 1,537.3 978.3 1,334.5 1,212.1 49.1 210.1 50.4 211.9 57.1 10.1 2.6 .9 11,761.9 11,018.2 4,976.0 157.3 235.0 5,129.3 278.4 251.1 469.4 480.5 (2.3) 592.5 448.0 32.3 738.3 908.2 (18.7) 1,596.8 1,471.3 8.5 5,658.8 5,368.3 651.3 10.0 641.3 233.4 651.2 2.0 649.2 236.2 Ì 1,156.1 1,061.2 352.6 431.8 * 8.9 22.5 (1.2) (1.2) 724.3 263.6 708.6 257.9 110.7 17.6 93.1 33.9 214.3 (48.3) Ì * (59.5) (493.0) (87.9) (36.1) 673.5 * 214.3 (56.6) 78.0 (56.5) (733.0) (456.9) 60.4 (300.9) (206.0) 46.1 6,103.1 2,146.6 3,956.5 1,405.7 5,649.9 828.0 4,821.9 (17.9) 1,715.0 (18.0) 6.7 3.1 77.0 6.9 5.4 8.0 * $ 407.9 $ 413.0 (1.2) $ 460.7 $ 450.7 $ 4,370 $ 3,794 5,130 2,119 4,722 5,424 2,134 4,916 15.2 5.7 .7 4.1 $ 9,972 $ 9,531 10,652 12,142 168 Ì 188 (10.6) Ì Ì $ 59.2 $ 136.3 (56.6) $ (432.1)$ (250.9) 72.2 2,550.8 3,106.9 (17.9) (844.3) (231.3) $ 1,706.5 $ 2,875.6 $ 483 $ 3,478 174 Ì 263 3,394 154 Ì 83.7 2.5 13.0 Ì $ 6,299 $ 7,317 (13.9) 34,807 31,066 (53) (10) 7,037 7,680 12.0 * (8.4) $ 118,177 $ 118,317 158,481 23,820 79,606 165,944 25,109 79,847 (.1) 4.7 5.4 .3 19.3 15.9 27.2 * 4.4 2.2 2.2 2.2 4.6 14.0 $ 7,050 $ 6,841 3.1 $ 168 $ 188 (10.6) $ 174 $ 154 13.0 $ 6,984 $ 7,670 (8.9) $ 104,956 $ 103,426 1.5 U.S. Bancorp 45 completed during the third quarter of 2001. The line of business generated operating income of $1,156.1 million in 2001, an 8.9 percent increase compared with 2000. Total net revenue growth was 15.9 percent, or $239.4 million, compared with 2000 including the impact of the NOVA acquisition of $134.3 million. Excluding the NOVA acquisitions, total net revenue growth was approximately 7.0 percent. Total net revenue growth was partially oÅset by increased in noninterest expense of 32.3 percent, primarily driven by the NOVA acquisition. Excluding the impact of the NOVA acquisition, noninterest expenses for the business line were essentially Öat relative to a year ago. Additionally, the provision for credit losses increased $79.2 million (22.5 percent) in 2001. The increase in provision reÖects deterioration in delinquencies, higher bankruptcies and credit losses in the credit card portfolio and the economic slowdown impacting consumers. Capital Markets engages in equity and fixed income trading activities, offers investment banking and underwriting services for corporate and public sector customers and provides financial advisory services and securities, mutual funds, annuities and insurance products to consumers and regionally based businesses through a network of brokerage offices. Capital Markets contributed $93.1 million of the Company's pre-tax income in 2001, compared with $214.3 million in 2000, a decrease of 56.6 percent. The unfavorable variance in pre-tax income from 2000 was due to significant decreases in fees related to trading, investment product fees and commissions and investment banking revenues reflecting the recent adverse capital markets conditions. In response to significant changes in the securities markets including increased volatility, changes in equity valuations, a slowdown in the market for new and secondary issuances of equity and the increasingly competitive environment for the industry, U.S. Bancorp Piper Jaffray restructured its operations during 2001. Additionally, in June 2001, the Company decided to discontinue its U.S. Bancorp Libra operations, a business unit that specialized in underwriting and trading high-yield debt and mezzanine securities. These restructuring activities are expected to improve operating efficiency of the business unit by removing excess capacity from the product distribution system and brokerage operations. Treasury and Corporate Support includes the Company's investment and residential mortgage portfolios, funding, capital management and asset securitization activities, interest rate risk management, the net eÅect of transfer pricing related to loan and deposit balances, and the change in residual allocations associated with the provision for loan losses. It also includes business activities managed on a corporate basis, including income and expense of enterprise- wide operations and administrative support functions. Treasury and Corporate Support recorded a pre-tax loss of $733.0 million in 2001, compared to a loss of $456.9 million in 2000. The incremental loss was driven by an increase in the provision for credit losses, lower earnings from equity investments and non-recurring gains from the disposal of oÇce buildings in 2000. During 2001, total net revenue was $1,537.3 million compared with $978.3 million a year ago. The $559.0 million increase was primarily due to an increase in average investment securities and the residual beneÑt of declining interest rates given the Company's interest rate risk management position. Also included in 2001 were approximately $289.8 million of securities gains compared with $8.1 million in 2000, oÅset somewhat by lower earnings from equity investments of $78.0 million and gains from the disposal of oÇce buildings in 2000. Noninterest expenses were $1,596.8 million in 2001 compared with $1,471.3 million for the same period of 2000. The increase was primarily related to core business operations and higher costs related to increased aÅordable housing projects. Provision for credit losses for this business unit represents the residual aggregate of the credit losses allocated to the reportable business units (based on net charge-oÅs for the accounting period) and the Company's recorded provision determined in accordance with generally accepted accounting principles in the United States. Provision for credit losses for the year ended December 31, 2001, was $673.5 million compared with a net recovery of $36.1 million in 2000. The change in the provision reÖects the Company's decision in the third quarter of 2001 to increase the allowance for credit losses in light of recent events, declining economic conditions and deterioration in the credit quality of the loan portfolio from a year ago. Refer to ""Corporate Risk ProÑle'' for further information on provision for credit losses, nonperforming assets and factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses. ACCOUNTING CHANGES Accounting for Derivative Instruments and Hedging Activities Statement of Financial Accounting Standards No. 133 (""SFAS 133''), ""Accounting for Derivative Instruments and Hedging Activities,'' as amended, establishes accounting and reporting standards for all derivative instruments and criteria for designation and effectiveness of hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The changes in the fair value of the derivatives are recognized currently in earnings unless specific hedge accounting criteria are met. If the derivative qualifies as a hedge, the accounting treatment varies based on the type of risk being hedged. On 46 U.S. Bancorp January 1, 2001, the Company adopted SFAS 133. Transition adjustments related to adoption resulted in an after-tax loss of approximately $4.1 million recorded in net income and an after-tax increase of $5.2 million to other comprehensive income. The transition adjustments related to adoption were not material to the Company's financial statements, and as such, were not separately reported in the consolidated statement of income. Accounting for Business Combinations and Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (""SFAS 141''), ""Business Combinations'' and Statement of Financial Accounting Standard No. 142 (""SFAS 142''), ""Goodwill and Other Intangible Assets''. SFAS 141 mandates the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes speciÑc criteria for the recognition of intangible assets separately from goodwill. SFAS 142 addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The Company is required to adopt SFAS 142 on January 1, 2002. The most signiÑcant changes made by SFAS 142 are that goodwill and indeÑnite lived intangible assets will no longer be amortized and will be tested for impairment at least annually, thereafter. Any impairment charges from the initial impairment test at the time of adoption would be recognized as a ""cumulative eÅect of change in accounting principles'' in the income statement. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the amortization provisions of SFAS 142 are eÅective upon adoption of SFAS 142. The Company will apply the amortization provisions of SFAS 142 during the first quarter of 2002. Management anticipates that applying the provisions of SFAS 141 to recent acquisitions and the provisions of SFAS 142 to purchase acquisitions completed prior to July 1, 2001, will increase after-tax income for the year ending December 31, 2002, by approximately $200 to $210 million, or $.10 per diluted share. This considers the application of SFAS 142's definition of a business and the impact of reclassifying certain assets from goodwill to intangibles and changes in estimated useful lives of certain intangible assets. The Company has not yet fully determined the impact on earnings of impairments related to goodwill and indefinite lived intangible assets under the new guidelines required by SFAS 142. Any material impairment charge resulting from these transitional accounting rules will be reflected as a ""cumulative effect of a change in accounting principles'' in the first quarter of 2002. Because banking regulations exclude 100 percent of goodwill from the determination of capital adequacy, the impact of any impairment on the Company's capital adequacy will not be significant. U.S. Bancorp 47 Report of Independent Accountants To the Shareholders and Board of Directors of U.S. Bancorp: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, shareholders' equity and cash Öows present fairly, in all material respects, the Ñnancial position of U.S. Bancorp and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash Öows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These Ñnancial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these Ñnancial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements, assessing the accounting principles used and signiÑcant estimates made by management, and evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Minneapolis, Minnesota January 15, 2002 Responsibility for Financial Statements of U.S. Bancorp Responsibility for the Ñnancial statements and other information presented throughout the Annual Report on Form 10-K rests with the management of U.S. Bancorp. The Company believes that the consolidated Ñnancial statements have been prepared in conformity with accounting principles generally accepted in the United States and present fairly the substance of transactions based on the circumstances and management's best estimates and judgment. All Ñnancial information throughout the Annual Report on Form 10-K is consistent with that in the Ñnancial statements. In meeting its responsibilities for the reliability of the financial statements, the Company depends on its system of internal controls. The system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with the appropriate corporate authorization and recorded properly to permit the preparation of the financial statements. To test compliance, the Company carries out an extensive audit program. This program includes a review for compliance with written policies and procedures and a comprehensive review of the adequacy and effectiveness of the internal control systems. Although control procedures are designed and tested, it must be recognized that there are limits inherent in all systems of internal accounting control and, as such, errors and irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. The Company believes that its system of internal controls provides reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions. The Board of Directors of the Company has an Audit Committee composed of directors who are not oÇcers or employees of U.S. Bancorp. The committee meets periodically with management, the internal auditors and the independent accountants to consider audit results and to discuss internal accounting control, auditing and Ñnancial reporting matters. The Company's independent accountants, PricewaterhouseCoopers LLP, have been engaged to render an independent professional opinion on the Ñnancial statements and to assist in carrying out certain aspects of the audit program described above. Their opinion on the Ñnancial statements is based on procedures conducted in accordance with auditing standards generally accepted in the United States and forms the basis for their report as to the fair presentation, in the Ñnancial statements, of the Company's Ñnancial position, operating results and cash Öows. Jerry A. Grundhofer President and Chief Executive OÇcer David M. MoÅett Vice Chairman and Chief Financial OÇcer 48 U.S. Bancorp Consolidated Balance Sheet At December 31 (Dollars in Millions) Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trading account securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment securities Held-to-maturity (fair value $306 and $257, respectively) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ RetailÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less allowance for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Premises and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Customers' liability on acceptances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other intangible assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 $ 9,120 625 982 $ 8,475 657 753 299 26,309 2,820 46,330 25,373 5,746 36,956 114,405 2,457 111,948 1,741 178 5,488 1,924 9,956 252 17,390 764 52,817 26,443 7,753 35,352 122,365 1,787 120,578 1,836 183 4,312 997 8,724 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $171,390 $164,921 Liabilities and Shareholders' Equity Deposits Noninterest-bearingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest-bearing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Time certiÑcates of deposit greater than $100,000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acceptances outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 31,212 65,447 8,560 105,219 14,670 25,716 2,826 178 6,320 $ 26,633 68,177 14,725 109,535 11,833 21,876 1,400 183 4,926 Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 154,929 149,753 Shareholders' equity Common stock, par value $0.01 a share authorized: 2001 Ì 4,000,000,000 shares; 2000 Ì 2,000,000,000 shares issued: 2001 Ì 1,972,777,763 shares; 2000 Ì 1,943,541,593 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital surplus ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less cost of common stock in treasury: 2001 Ì 21,068,251 shares; 2000 Ì 41,458,159 sharesÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 4,906 11,918 (478) 95 19 4,276 11,658 (880) 95 Total shareholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,461 15,168 Total liabilities and shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $171,390 $164,921 See Notes to Consolidated Financial Statements. U.S. Bancorp 49 Consolidated Statement of Income Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data) 2001 2000 1999 Interest Income Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment securities Taxable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-taxable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,455.4 146.9 $10,562.5 102.1 $ 9,122.7 103.9 1,206.1 89.5 26.6 57.5 101.6 1,008.3 140.6 53.9 53.7 151.4 1,047.1 150.1 44.9 45.0 113.0 Total interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,083.6 12,072.5 10,626.7 Interest Expense Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest income after provision for credit lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Noninterest Income Credit card fee revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merchant and ATM processing revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trust and investment management feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deposit service charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash management feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage banking revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trading account proÑts and commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment products fees and commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment banking revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial product revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities gains, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,828.1 534.1 1,162.7 149.9 4,674.8 6,408.8 2,528.8 3,880.0 774.3 428.8 894.4 660.6 347.3 234.0 221.6 460.1 258.2 385.9 329.1 62.2 302.9 3,618.8 781.7 1,510.4 112.0 6,022.9 6,049.6 828.0 5,221.6 761.8 230.3 926.2 551.1 292.4 189.9 258.4 466.6 360.3 304.4 8.1 Ì 533.7 2,970.0 582.4 1,126.9 111.0 4,790.3 5,836.4 646.0 5,190.4 648.2 189.6 887.1 497.2 280.6 190.4 222.4 450.8 246.6 215.7 13.2 Ì 403.1 Total noninterest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,359.4 4,883.2 4,244.9 Noninterest Expense Salaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net occupancy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Furniture and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Communication ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Postage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ GoodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total noninterest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Applicable income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,347.1 366.2 417.9 305.5 181.4 179.8 251.1 278.4 946.4 1,331.4 6,605.2 2,634.2 927.7 2,427.1 399.8 396.9 308.2 138.8 174.5 235.0 157.3 348.7 1,130.7 5,717.0 4,387.8 1,512.2 2,355.3 410.1 371.8 307.9 123.4 170.7 175.8 154.0 532.8 1,059.5 5,661.3 3,774.0 1,392.2 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,706.5 $ 2,875.6 $ 2,381.8 Earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average common shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average diluted common sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ $ .89 .88 1,927.9 1,939.5 $ $ 1.51 1.50 1,906.0 1,918.5 $ $ 1.25 1.23 1,907.8 1,930.0 See Notes to Consolidated Financial Statements. 50 U.S. Bancorp Consolidated Statement of Shareholders' Equity (Dollars in Millions) Balance December 31, 1998 ÏÏÏÏÏÏÏÏÏÏÏ Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized loss on securities available for sale ÏÏÏ ReclassiÑcation adjustment for losses realized in net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏ Cash dividends declared on common stock ÏÏÏÏ Issuance of common stock and treasury shares ÏÏ Purchase of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retirement of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shares reserved to meet deferred compensation obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of restricted stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common Shares Outstanding Common Stock Capital Surplus Retained Earnings Other Treasury Comprehensive Income Stock Total Shareholders' Equity 1,903,461,698 $19.3 $4,338.7 $ 8,758.4 2,381.8 $ (755.4) $ 212.9 (743.9) 163.9 210.5 69,705,239 (44,636,116) (21,643) .2 213.8 (.1) (343.8) 2.1 47.8 (1,090.8) 1,377.0 (1,187.9) 344.0 (2.0) $12,573.9 2,381.8 (743.9) 163.9 210.5 2,012.3 (1,090.8) 1,591.0 (1,187.9) .1 .1 47.8 Balance December 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏ 1,928,509,178 $19.4 $4,258.6 $10,049.4 $ (224.3) $(156.6) $13,946.5 Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized gain on securities available for sale ÏÏÏ Foreign currency translation adjustment ÏÏÏÏÏÏÏ ReclassiÑcation adjustment for gains realized in net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏ Cash dividends declared on common stock ÏÏÏÏ Issuance of common stock and treasury shares ÏÏ Purchase of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shares reserved to meet deferred compensation obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of restricted stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,875.6 32,652,574 (58,633,923) (444,395) (1,267.0) 534.9 (1,182.2) (8.5) (35.0) 8.5 43.5 436.0 (.5) (41.6) (141.8) 2,875.6 436.0 (.5) (41.6) (141.8) 3,127.7 (1,267.0) 499.9 (1,182.2) Ì 43.5 Balance December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏ 1,902,083,434 $19.4 $4,275.6 $11,658.0 $ (880.1) $ 95.5 $15,168.4 Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized gain on securities available for sale ÏÏÏ Unrealized gain on derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign currency translation adjustment ÏÏÏÏÏÏÏ Realized gain on derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ReclassiÑcation adjustment for gains realized in net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏ Cash dividends declared on common stock ÏÏÏÏ Issuance of common stock and treasury shares ÏÏ Purchase of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retirement of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shares reserved to meet deferred compensation obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of restricted stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,706.5 69,502,689 (19,743,672) (132,939) .7 1,383.7 (.4) (823.2) 3.0 67.1 (1,446.5) 49.3 (467.9) 823.6 (3.0) 194.5 106.0 (4.0) 42.4 (333.1) (5.9) 1,706.5 194.5 106.0 (4.0) 42.4 (333.1) (5.9) 1,706.4 (1,446.5) 1,433.7 (467.9) Ì Ì 67.1 Balance December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏ 1,951,709,512 $19.7 $4,906.2 $11,918.0 $ (478.1) $ 95.4 $16,461.2 See Notes to Consolidated Financial Statements. U.S. Bancorp 51 Consolidated Statement of Cash Flows Year Ended December 31 (Dollars in Millions) 2001 2000 1999 Operating Activities Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to reconcile net income to net cash provided by operating activities $ 1,706.5 $ 2,875.6 $ 2,381.8 Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortization of premises and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of goodwill and other intangiblesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net (increase) decrease in trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Gain) loss on sale of securities and other assets, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage loans originated for sale in the secondary market ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from sales of mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets and liabilities, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,528.8 284.0 529.5 (184.0) (229.1) (428.7) (15,500.2) 13,483.0 (7.9) 828.0 262.6 392.3 357.1 (135.6) (47.3) (5,563.3) 5,475.0 (1.8) 646.0 270.6 329.8 252.9 65.6 149.9 (6,117.1) 7,229.3 (242.2) Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,181.9 4,442.6 4,966.6 Investing Activities Securities Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,240.2 4,572.2 (32,278.6) Loans Sales and securitization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net increase in loans outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from sales of premises and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchases of premises and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Divestitures of branches ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,387.9 (87.5) (1,126.5) 166.3 (299.2) (741.4) (340.0) (143.9) 10,194.0 2,127.7 (12,161.3) 6,655.8 (688.4) (13,511.0) 212.9 (382.8) 904.4 (78.2) (289.1) 6,819.7 5,290.7 (9,135.8) 5,013.7 (254.6) (9,880.0) 64.2 (289.0) 241.9 (469.0) (961.3) Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,650.5) (7,016.0) (3,559.5) Financing Activities Net change in Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Principal payments on long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from long-term debt issuanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repurchase of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by (used in) Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Change in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,258.1) 5,244.3 (10,539.6) 11,702.3 1,500.0 136.4 (467.9) (1,235.1) 2,082.3 613.7 9,131.6 3,403.7 702.1 (5,277.5) 5,862.7 Ì 210.0 (1,182.2) (1,271.3) (3,034.9) 544.9 (5,706.1) 8,067.5 Ì 275.5 (1,187.9) (1,029.7) 2,447.5 (2,070.7) (125.9) 9,257.5 (663.6) 9,921.1 Cash and cash equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,745.3 $ 9,131.6 $ 9,257.5 See Notes to Consolidated Financial Statements. 52 U.S. Bancorp Notes to Consolidated Financial Statements Note 1 SigniÑcant Accounting Policies U.S. Bancorp and its subsidiaries (the ""Company'') compose the organization created by the acquisition by Firstar Corporation (""Firstar'') of the former U.S. Bancorp (""USBM''). The new Company retained the U.S. Bancorp name. The Company is a multi-state Ñnancial services holding company headquartered in Minneapolis, Minnesota. The Company provides a full range of Ñnancial services including lending and depository services through banking oÇces principally in 24 states. The Company also engages in credit card, merchant, and ATM processing, mortgage banking, insurance, trust and investment management, brokerage, leasing and investment banking activities principally in domestic markets. Basis of Presentation The consolidated Ñnancial statements include the accounts of the Company and its subsidiaries. The consolidation eliminates all signiÑcant intercompany accounts and transactions. Certain items in prior periods have been reclassiÑed to conform to the current presentation. Uses of Estimates The preparation of Ñnancial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that aÅect the amounts reported in the Ñnancial statements and accompanying notes. Actual experience could diÅer from those estimates. BUSINESS SEGMENTS Within the Company, Ñnancial performance is measured by major lines of business based on the products and services provided to customers through its distribution channels. The Company has six reportable operating segments: Wholesale Banking oÅers lending, depository, treasury management and other Ñnancial services to middle market, large corporate and public sector clients. Consumer Banking delivers products and services to the broad consumer market and small businesses through banking oÇces, telemarketing, on-line services, direct mail and automated teller machines (""ATMs''). It encompasses community banking, metropolitan banking, small business banking, consumer lending, mortgage banking, and investment product sales. Private Client, Trust and Asset Management provides mutual fund processing services, trust, private banking and Ñnancial advisory services through four businesses including: the Private Client Group, Corporate Trust Services, Institutional Trust and Custody and Fund Services. The business segment also oÅers investment management services to several client segments including mutual funds, institutional customers, and private asset management. Payment Services includes consumer and business credit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. Capital Markets engages in equity and Ñxed income trading activities, oÅers investment banking and underwriting services for corporate and public sector customers and provides Ñnancial advisory services and securities, mutual funds, annuities and insurance products to consumers and regionally based businesses through a network of brokerage oÇces. Treasury and Corporate Support includes the Company's investment and residential mortgage portfolios, funding, capital management and asset securitization activities, interest rate risk management, the net eÅect of transfer pricing related to loan and deposit balances, and the change in residual allocations associated with the provision for loan losses. It also includes business activities managed on a corporate basis, including income and expense of enterprise-wide operations and administrative support functions. Segment Results Accounting policies for the lines of business are the same as those used in preparation of the consolidated Ñnancial statements with respect to activities speciÑcally attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and beneÑts, expenses and other Ñnancial elements to each line of business. For details of these methodologies and segment results, see ""Basis for Financial Presentation'' on page 43 and Table 21 ""Line of Business Financial Performance'' included in Management's Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements. SECURITIES Trading Account Securities Debt and equity securities held for resale are classiÑed as trading account securities and reported at fair value. Realized and unrealized gains or losses are determined on a trade date basis and reported in noninterest income. Available-for-sale Securities These securities are not trading account securities but may be sold before maturity in response to changes in the Company's interest rate risk U.S. Bancorp 53 proÑle or demand for collateralized deposits by public entities. Available-for-sale securities are carried at fair value with unrealized net gains or losses reported within other comprehensive income in shareholders' equity. When sold, the amortized cost of the speciÑc securities is used to compute the gain or loss. Held-to-maturity Securities Debt securities for which the Company has the positive intent and ability to hold to maturity are reported at historical cost adjusted for amortization of premiums and accretion of discounts. LOANS Loans are reported net of unearned income. Interest income is accrued on the unpaid principal balances as earned. Loan and commitment fees are deferred and recognized over the life of the loan and/or commitment period as yield adjustments. Allowance for Credit Losses Management determines the adequacy of the allowance for credit losses based on evaluations of the loan portfolio, recent loss experience, and other pertinent factors, including economic conditions. This evaluation is inherently subjective as it requires estimates, including amounts of future cash collections expected on nonaccrual loans, that may be susceptible to signiÑcant change. The allowance for credit losses relating to impaired loans is based on the loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash Öows using the loan's eÅective interest rate. The Company determines the amount of the allowance required for certain sectors based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on quarterly reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of product mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogenous category or group of loans. The allowance is increased through provisions charged to operating earnings and reduced by net charge-oÅs. Nonaccrual Loans Generally commercial loans (including impaired loans) are placed on nonaccrual status when the collection of interest or principal has become 90 days past due or is otherwise considered doubtful. When a loan is placed on nonaccrual status, unpaid interest is reversed. Future interest payments are generally applied against principal. Revolving consumer lines and credit cards are charged oÅ by 180 days past due and closed-end consumer loans other than loans secured by 1-4 family properties are charged oÅ at 120 days past due and are, therefore, not placed on nonaccrual status. Impaired Loans A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Leases The Company engages in both direct and leveraged lease Ñnancing. The net investment in direct Ñnancing leases is the sum of all minimum lease payments and estimated residual values, less unearned income. Unearned income is added to interest income over the terms of the leases to produce a level yield. The investment in leveraged leases is the sum of all lease payments (less nonrecourse debt payments) plus estimated residual values, less unearned income. Income from leveraged leases is recognized over the term of the leases based on the unrecovered equity investment. Loans Held for Sale Loans held for sale (""LHFS'') represent mortgage loan originations intended to be sold in the secondary market and other loans that management has an active plan to sell. LHFS are carried at the lower of cost or market value as determined on an aggregate basis by type of loan. In the event management decides to sell loans receivable, the loans are transferred at the lower of cost or fair value. Any credit-related loss at the time of transfer is recorded as a reduction in the allowance for credit losses. Subsequent decreases in fair value are recognized in noninterest income. Other Real Estate Other real estate (""ORE''), which is included in other assets, is property acquired through foreclosure or other proceedings. ORE is carried at the lower of cost or fair value, less estimated selling costs. The property is evaluated regularly and any decreases in the carrying amount are included in noninterest expense. DERIVATIVE FINANCIAL INSTRUMENTS In the ordinary course of business, the Company enters into derivative transactions to manage its market and prepayment risks and to accommodate the business requirements of its customers. All derivative instruments are recorded as either assets or liabilities at fair value. Subsequent changes in a derivative's fair value are recognized currently in earnings unless speciÑc hedge accounting criteria are met. All derivative instruments that qualify for speciÑc hedge accounting are recorded at fair value and classiÑed either as a hedge of the fair value of a recognized asset or liability (""fair value'' hedge) or as a hedge of the variability of cash Öows to be received or paid related to a recognized asset or liability or a forecasted transaction (""cash Öow'' hedge). 54 U.S. Bancorp Changes in the fair value of a derivative that is highly eÅective and designated as a fair value hedge and the oÅsetting changes in the fair value of the hedged item are recorded in income. Changes in the fair value of a derivative that is highly eÅective and designated as a cash Öow hedge are recognized in other comprehensive income until income from the cash Öows of the hedged item are recognized. The Company performs an assessment, both at the inception of the hedge and on a quarterly basis thereafter, to determine whether these derivatives are highly eÅective in oÅsetting changes in the value of the hedged items. Any change in fair value resulting from hedge ineÅectiveness is immediately recorded in noninterest income. If a derivative designated as a hedge is terminated or ceases to be highly eÅective, the gain or loss is amortized to earnings over the remaining life of the hedged asset or liability (fair value hedge) or over the same period(s) that the forecasted hedged transactions impact earnings (cash Öow hedge). If the hedged item is disposed of, or the forecasted transaction is no longer probable, the derivative is recorded at fair value with any resulting gain or loss included in the gain or loss from the disposition of the hedged item or, in the case of a forecasted transaction that is no longer probable, included in earnings immediately. OTHER SIGNIFICANT POLICIES Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and depreciated primarily on a straight-line basis over the estimated life of the assets. Capital leases, less accumulated amortization, are included in premises and equipment. The lease obligations are included in long-term debt. Capitalized leases are amortized on a straight-line basis over the lease term and the amortization is included in depreciation expense. Mortgage Servicing Rights Mortgage servicing rights associated with loans originated and sold, where servicing is retained, are capitalized and included in other intangible assets in the consolidated balance sheet. The value of these capitalized servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenue and recorded in noninterest expense as amortization of intangible assets. The carrying value of these rights is periodically reviewed for impairment based on fair value. For purposes of measuring impairment, the servicing rights are stratiÑed based on the underlying loan type and note rate and compared to a valuation prepared based on a discounted cash Öow methodology, utilizing current prepayment speeds and discount rates. Impairment is recognized through a valuation allowance for each impaired stratum and recorded as amortization of intangible assets. Intangible Assets For all purchase acquisitions completed prior to July 1, 2001, the price paid over the net fair value of the acquired businesses (""goodwill'') is amortized over periods ranging up to 25 years. For purchase acquisitions completed subsequent to June 30, 2001, goodwill is not amortized. Other intangible assets are amortized over their estimated useful lives, which range from seven to Ñfteen years, using straight-line and accelerated methods. The recoverability of goodwill and other intangible assets is evaluated if events or circumstances indicate a possible inability to realize the carrying amount. The evaluation includes assessing the estimated fair value of the intangible asset based on market prices for similar assets, where available, and the present value of the estimated future cash Öows associated with the intangible asset. Income Taxes Deferred taxes are recorded to reÖect the tax consequences on future years of diÅerences between the tax bases of assets and liabilities and the Ñnancial reporting amounts at each year-end. Statement of Cash Flows For purposes of reporting cash Öows, cash and cash equivalents include cash and money market investments, deÑned as interest-bearing amounts due from banks, federal funds sold and securities purchased under agreements to resell. Stock-based Compensation The Company grants stock options for a Ñxed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, ""Accounting for Stock Issued to Employees,'' (""APB 25'') and accordingly recognizes no compensation expense for the stock option grants. Per Share Calculations Earnings per share is calculated by dividing net income (less preferred stock dividends) by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by adjusting income and outstanding shares, assuming conversion of all potentially dilutive securities, using the treasury stock method. All per share amounts have been restated for stock splits. U.S. Bancorp 55 Note 2 Accounting Changes Accounting for Derivative Instruments and Hedging Activities Statement of Financial Accounting Standards No. 133 (""SFAS 133''), ""Accounting for Derivative Instruments and Hedging Activities,'' as amended, establishes accounting and reporting standards for all derivative instruments and criteria for designation and eÅectiveness of hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The changes in the fair value of the derivatives are recognized currently in earnings unless speciÑc hedge accounting criteria are met. If the derivative qualiÑes as a hedge, the accounting treatment varies based on the type of risk being hedged. On January 1, 2001, the Company adopted SFAS 133. Transition adjustments related to adoption resulted in an after-tax loss of approximately $4.1 million recorded in net income and an after-tax increase of $5.2 million recorded in other comprehensive income. The transition adjustments related to adoption were not material to the Company's Ñnancial statements, and as such, were not separately reported in the consolidated statement of income. Accounting for Business Combinations and Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (""SFAS 141''), ""Business Combinations'' and Statement of Financial Accounting Standard No. 142 (""SFAS 142''), ""Goodwill and Other Intangible Assets.'' SFAS 141 mandates the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes speciÑc criteria for the recognition of intangible assets separately from goodwill. SFAS 142 addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The Company is required to adopt SFAS 142 on January 1, 2002. The most signiÑcant changes made by SFAS 142 are that goodwill and indeÑnite lived intangible assets will no longer be amortized and will be tested for impairment at least annually, thereafter. Any impairment charges from the initial impairment test at the date of adoption would be recognized as a ""cumulative eÅect of change in accounting principles'' in the income statement. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the amortization provisions of SFAS 142 are eÅective upon adoption of SFAS 142. The Company will apply the amortization provisions of SFAS 142 during the Ñrst quarter of 2002. Management anticipates that applying the provisions of SFAS 141 to recent acquisitions and the provisions of SFAS 142 to purchase acquisitions completed prior to July 1, 2001, will increase after-tax income for the year ending December 31, 2002, by approximately $200 to $210 million, or $.10 per diluted share. This considers the application of SFAS 142's deÑnition of a business and the impact of reclassifying certain assets from goodwill to intangibles and changes in estimated useful lives of certain intangible assets. The Company has not yet fully determined the impact on earnings of impairments related to goodwill and indeÑnite lived intangible assets under the new guidelines required by SFAS 142. Any material impairment charge resulting from these transitional accounting rules will be reÖected as a ""cumulative eÅect of a change in accounting principles'' in the Ñrst quarter of 2002. Because banking regulations exclude 100 percent of goodwill from the determination of capital adequacy, the impact of any impairment on the Company's capital adequacy will not be signiÑcant. 56 U.S. Bancorp Note 3 Business Combinations On February 27, 2001, Firstar and USBM merged in a pooling-of-interests transaction and accordingly all Ñnancial information has been restated to include the historical information of both companies. Each share of Firstar stock was exchanged for one share of the Company's common stock while each share of USBM stock was exchanged for 1.265 shares of the Company's common stock. The new Company retained the U.S. Bancorp name. On September 20, 1999, Firstar and Mercantile Bancorporation, Inc., (""Mercantile'') merged in a pooling- of-interests transaction and accordingly all Ñnancial information has been restated to include the historical information of both companies. Each share of Mercantile stock was exchanged for 2.091 shares of Firstar common stock. On July 24, 2001, the Company acquired NOVA Corporation (""NOVA''), a merchant processor, in a stock and cash transaction valued at approximately $2.1 billion. The transaction, representing total assets acquired of $2.9 billion and total liabilities assumed of $773 million, was accounted for as a purchase. Included in total assets are merchant contracts and other intangibles of $650 million and the excess of the purchase price over the fair value of identiÑable net assets (""goodwill'') of $1.6 billion. In addition to these mergers, the Company has completed several strategic acquisitions to enhance its presence in certain growth markets and businesses. The following table summarizes acquisitions by the Company and its acquirees completed since January 1, 1999, treating Firstar as the original acquiring company: (Dollars and Shares in Millions) Date Assets Deposits PaciÑc Century BankÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NOVA CorporationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ U.S. BancorpÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ First Union branchesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Scripps Financial CorporationÏÏÏÏÏÏÏÏÏÏ Lyon Financial Services, Inc.ÏÏÏÏÏÏÏÏÏÏÏ Oliver-Allen CorporationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Peninsula BankÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Western Bancorp ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mercantile Bancorporation ÏÏÏÏÏÏÏÏÏÏÏÏ Voyager Fleet Systems, Inc. ÏÏÏÏÏÏÏÏÏÏÏ Bank of Commerce ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mellon Network Services' Electronic Funds Transfer Processing Unit ÏÏÏÏÏ Libra Investments, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ September 2001 July 2001 February 2001 December 2000 October 2000 September 2000 April 2000 January 2000 November 1999 September 1999 September 1999 July 1999 June 1999 January 1999 $ 570 949 86,602 450 650 1,289 280 491 2,508 35,520 43 638 Ì 33 $ 712 Ì 51,335 1,779 618 Ì Ì 452 2,105 24,334 Ì 529 Ì Ì Goodwill and Other Intangibles Cash Paid/ (Received) Shares Issued Accounting Method $ 138 1,932 Ì 347 113 124 34 71 773 Ì 25 269 78 4 $ (40) 842 Ì (1,123) Ì 307 Ì Ì Ì Ì 27 Ì 170 Ì 56.9 952.4 Ì Purchase Purchase Pooling Ì Purchase 9.4 Purchase Ì Purchase Purchase 3.6 Purchase 5.1 Purchase 35.1 Pooling 331.8 Ì Purchase Purchase 11.8 Ì Purchase Purchase 1.3 Separate results of operations as originally reported on a condensed basis of Firstar and USBM, for the period prior to the merger, were as follows: (Dollars in Millions) Net interest income Firstar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ USBM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income Firstar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ USBM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets at year end Firstar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ USBM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Year Ended December 31 2000 1999 $ $ $ $ 2,699 3,471 6,170 1,284 1,592 2,876 $ 77,585 87,336 $164,921 $ $ $ $ 2,643 3,261 5,904 875 1,507 2,382 $ 72,788 81,530 $154,318 On January 18, 2002, the Company announced a deÑnitive agreement to acquire The Leader Mortgage Company, LLC (""Leader''), a wholly owned subsidiary of First DeÑance Financial Corporation, in a cash transaction. Leader specializes in acquiring servicing of loans originated for state and local housing authorities. Leader had $506 million in assets at December 31, 2001. In 2001, it had $2.1 billion in mortgage production and an $8.6 billion servicing portfolio at December 31, 2001. The transaction is expected to close in the second quarter of 2002. U.S. Bancorp 57 Note 4 Merger and Restructuring-related Items The Company recorded in pre-tax earnings merger and restructuring-related items of $1,266.4 million, $348.7 million and $540.3 million in 2001, 2000, and 1999, respectively. In 2001, merger-related items were primarily incurred in connection with the merger of Firstar and USBM, the NOVA acquisition and the Company's various other acquisitions noted below and in Note 3 Ì Business Combinations. In response to signiÑcant changes in the securities markets during 2001, including increased volatility, declines in equity valuations and the increasingly competitive environment for the industry, the Company also incurred a charge to restructure its subsidiary, U.S. Bancorp PiperJaÅray, Inc. (""Piper Restructuring''). The components of the merger and restructuring-related items are shown below: (Dollars in Millions) 2001 USBM Piper NOVA Restructuring Mercantile Firstar(a) Other(b) Total Severance and employee-relatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 268.2 208.1 Systems conversions and integration ÏÏÏÏÏÏÏÏÏÏÏÏÏ 130.4 Asset write-downs and lease terminations ÏÏÏÏÏÏÏÏ 76.0 Charitable contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 457.6 Balance sheet restructurings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (62.2) Branch sale gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20.0 Branch consolidationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69.1 Other merger-related charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,167.2 Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 382.2 Noninterest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Noninterest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (62.2) 847.2 Merger-related items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance sheet recognition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,167.2 Ì Merger-related items Ì 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,167.2 $23.3 1.6 34.7 Ì Ì Ì Ì 24.2 $83.8 $ Ì Ì 1.6 1.6 82.2 $83.8 $28.8 Ì 11.9 Ì Ì Ì Ì 10.0 $50.7 $ Ì Ì 50.7 50.7 Ì $ 13.2 7.3 (.3) Ì Ì Ì Ì 2.5 $ 22.7 $ Ì Ì 22.7 22.7 Ì $ 1.3 .7 .4 Ì Ì Ì Ì .8 $ 3.2 $ Ì Ì 3.2 3.2 Ì $ 3.3 18.0 5.6 Ì Ì Ì Ì 1.5 $ 338.1 235.7 182.7 76.0 457.6 (62.2) 20.0 108.1 $ 28.4 $1,356.0 $ Ì Ì 21.0 21.0 7.4 $ 382.2 (62.2) 946.4 1,266.4 89.6 $50.7 $ 22.7 $ 3.2 $ 28.4 $1,356.0 2000 Severance and employee-relatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Systems conversions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asset write-downs and lease terminations ÏÏÏÏÏÏÏÏ Charitable contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other merger-related charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1999 Severance and employee-relatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Systems conversions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asset write-downs and lease terminations ÏÏÏÏÏÏÏÏ Charitable contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities losses to restructure portfolio ÏÏÏÏÏÏÏÏÏÏ Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other merger-related charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 43.0 115.2 42.7 Ì 26.1 $227.0 $131.0 19.5 .2 35.0 177.7 7.5 46.1 $417.0 $16.3 19.0 4.6 Ì 12.7 $52.6 $10.6 78.9 4.4 Ì Ì Ì 2.0 $95.9 $ .1 59.3 Ì 2.5 7.2 $ 59.4 193.5 47.3 2.5 46.0 $ 69.1 $ 348.7 $ 8.0 34.1 1.6 Ì Ì Ì (16.3) $ 149.6 132.5 6.2 35.0 177.7 7.5 31.8 $ 27.4 $ 540.3 (a) Represents the 1998 acquisition of the former Firstar Corporation by Star Banc. Star Banc was renamed Firstar Corporation. (b) In 2001, ""Other'' includes merger and restructuring-related items pertaining to the First Union branch acquisition and the PaciÑc Century Bank acquisition. The Company determines merger and restructuring- related charges and related accruals based on its integration strategy and formulated plans. These plans are established as of the acquisition date and regularly evaluated during the integration process. Severance and employee-related charges include the cost of severance, other beneÑts and outplacement costs associated with the termination of employees primarily in branch oÇces and centralized corporate support and data processing functions. The severance amounts are determined based on the Company's existing severance pay programs and are paid out over a beneÑt period of up to two years from the time of termination. The total number of employees included in severance amounts were approximately 2,820 for USBM, 2,400 for Mercantile, 2,000 for Firstar, 160 for NOVA, 300 for the Piper Restructuring and 520 for all other acquisitions. Severance and employee- related costs are included in the determination of goodwill for groups of acquired employees identiÑed at closing to be severed. Severance and employee-related costs are recorded 58 U.S. Bancorp as incurred for groups of employees not speciÑcally identiÑed at the time of closing or acquired in business combinations accounted for as ""poolings''. Systems conversion and integration costs are recorded as incurred and are associated with the preparation and mailing of numerous customer communications for the acquisitions and conversion of customer accounts, printing and distribution of training materials and policy and procedure manuals, outside consulting fees, and other expenses related to systems conversions and the integration of acquired branches and operations. Asset writedowns and lease terminations represent lease termination costs and impairment of assets for redundant oÇce space, branches that will be vacated and equipment disposed of as part of the integration plan. These costs are recognized in the accounting period that contract terminations occur or the asset becomes impaired and is abandoned. In connection with certain mergers, the Company has made charitable contributions to reaÇrm a commitment to its market or as part of speciÑc conditions necessary to achieve regulatory approval. These contributions were funded up front and represent costs that would not have been incurred had the merger not occurred. Charitable contributions are charged to merger and restructuring expenses or considered in determining the acquisition cost at the applicable closing date. Balance sheet restructurings primarily represent gains or losses incurred by the Company related to the disposal of certain businesses, products, or customer and business relationships that no longer align with the long-term strategy of the Company. It may also include charges to realign risk management practices related to certain credit portfolios. In connection with the merger of Firstar and USBM, balance sheet restructuring charges of $457.6 million were comprised of a $201.3 million provision associated with the Company's integration of certain small business products and management's decision to discontinue an unsecured small business product of USBM; $90.0 million of charge-offs to align risk management practices, align charge-off policies and to expedite the Company's transition out of a specific segment of the healthcare industry; and $76.6 million of losses related to the sales of two higher credit risk retail loan portfolios of USBM. Also, the amount included $89.7 million related to the Company's decision to discontinue a high-yield investment banking business, to restructure a co-branding credit card relationship of USBM, and for the planned disposition of certain equity investments that no longer align with the long- term strategy of the Company. The alignment of risk management practices included a write-down of several large commercial loans originally held separately by both Firstar and USBM, primarily to allow the Company to exit or reduce these credits to conform with the credit exposure policy of the combined entity. Other merger-related expenses of $108.1 million primarily included $69.1 million and $24.2 million of investment banking fees, legal fees and stock registration fees associated with the merger of Firstar and USBM and the acquisition of NOVA Corporation, respectively. Also, it included $10.0 million of goodwill impairment related to the Piper Restructuring and $4.8 million of other costs. The following table presents a summary of activity with respect to the merger and restructuring-related accruals: (Dollars in Millions) Balance at December 31, 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision charged to operating expenseÏÏÏÏ Additions related to purchase acquisitions ÏÏ Cash outlaysÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Noncash write-downs and other ÏÏÏÏÏÏÏÏÏÏÏ Securities losses to restructure portfolio ÏÏÏ Transfer of tax liability(b)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance at December 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision charged to operating expenseÏÏÏÏ Additions related to purchase acquisition ÏÏÏ Cash outlaysÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Noncash write-downs and other ÏÏÏÏÏÏÏÏÏÏÏ Balance at December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision charged to operating expenseÏÏÏÏ Additions related to purchase acquisitions ÏÏ Cash outlaysÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Noncash write-downs and other ÏÏÏÏÏÏÏÏÏÏÏ USBM Piper NOVA Restructuring Mercantile Firstar Other(a) Total $ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 1,167.2 Ì (532.5) (510.4) $ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 1.6 82.2 (32.4) (3.0) $ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 50.7 Ì (22.3) (10.3) $ Ì 417.0 Ì (182.8) (35.3) (177.7) Ì 21.2 227.0 Ì (197.9) (50.3) Ì 22.7 Ì (23.8) 1.1 $ 125.2 95.9 Ì (176.5) (44.6) Ì Ì Ì 52.6 Ì (52.6) Ì Ì 3.2 Ì (3.2) Ì $ 227.3 27.4 70.2 (148.5) (60.6) Ì (33.8) 82.0 69.1 46.0 (117.1) (30.2) 49.8 21.0 7.4 (50.6) (13.0) $ 352.5 540.3 70.2 (507.8) (140.5) (177.7) (33.8) 103.2 348.7 46.0 (367.6) (80.5) 49.8 1,266.4 89.6 (664.8) (535.6) Balance at December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 124.3 $ 48.4 $ 18.1 $ Ì $ Ì $ 14.6 $ 205.4 (a) ""Other'' includes the 1997 acquisition of the former U.S. Bancorp of Portland, Oregon by First Bank System, Inc. (""FBS''). FBS was renamed U.S. Bancorp. ""Other'' also includes the 1998 acquisition of Piper Jaffray, Inc., the 1999 acquisitions of Libra Investments, Inc., Bank of Commerce, and Western Bancorp, and the 2000 acquisitions of Peninsula Bank, Oliver-Allen Corporation, Lyon Financial Services, Inc., Scripps Financial Corporation and 41 branches acquired from First Union. Refer to Note 3 for further information. (b) The liability relates to certain severance-related items. U.S. Bancorp 59 The adequacy of the accrued liabilities is reviewed regularly taking into consideration actual and projected payments. Adjustments are made to increase or decrease these accruals as needed. Reversals of expenses can reÖect a lower utilization of beneÑts by aÅected staÅ, changes in initial assumptions as a result of subsequent mergers and alterations of business plans. The following table presents a summary of activity with respect to the merger of Firstar and USBM: (Dollars in Millions) Balance at December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision charged to operating expense ÏÏ Cash outlays ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-cash write-downs and other ÏÏÏÏÏÏÏÏÏ Severance and Employee- related $ Ì 268.2 (175.6) (4.3) Balance at December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 88.3 $ Investment Banker Fees $ Ì 66.2 (65.7) .3 .8 Lease Cancellation and Related Balance Sheet WriteoÅs Restructurings Systems Conversions and Integration $ Ì 48.7 (5.2) (10.4) $ Ì 457.6 Ì $ Ì 208.1 (208.1) (455.5) Ì Other(a) Total $ Ì 118.4 (77.9) (40.5) $ Ì 1,167.2 (532.5) (510.4) $ 33.1 $ 2.1 $ Ì $ Ì $ 124.3 (a) Other accruable merger and restructuring-related items included charitable contributions of $76.0 million, a branch sale gain of ($62.2) million, $20.0 million to consolidate and rationalize the branch network, capitalized software impairments of $81.7 million, and other charges of $2.9 million. The components of the merger and restructuring-related accruals for all acquisitions were as follows: December 31 (Dollars in Millions) Severance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other employee-related costs ÏÏÏÏÏÏÏÏ Lease termination and facility costs ÏÏÏ Contracts and system write-oÅs ÏÏÏÏÏÏ OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $106.3 4.7 64.3 18.3 11.8 $205.4 2000 $13.8 6.8 8.4 7.4 13.4 $49.8 The merger and restructuring-related accrual by signiÑcant acquisition or business restructuring was as follows: December 31 (Dollars in Millions) USBM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NOVA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Piper JaÅray Companies, Inc. ÏÏÏÏÏÏÏÏ PaciÑc Century Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lyon Financial Services, Inc. ÏÏÏÏÏÏÏÏÏ Western BancorpÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Scripps Financial Corporation ÏÏÏÏÏÏÏÏ Bank of Commerce ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Peninsula Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $124.3 48.4 20.8 3.1 1.0 Ì Ì Ì Ì 7.8 $205.4 2000 $ Ì Ì 15.0 Ì 2.7 5.1 4.6 4.1 3.0 15.3 $49.8 In connection with the merger of Firstar and USBM, management estimates the Company will incur pre-tax merger-related charges of approximately $271.1 million in 2002. These are currently estimated to include $14.0 million in employee-related costs, $170.9 million for conversions of systems and consolidation of operations, $57.8 million in occupancy and equipment charges (elimination of duplicate facilities and write-oÅ of equipment) and $28.4 million in other merger-related costs (including legal fees, balance sheet restructuring charges and other costs). With respect to the NOVA acquisition, the Company expects to incur approximately $68.3 million of merger- related charges through 2003. The Piper Restructuring was substantially completed by December 31, 2001. In addition, the Company anticipates an additional $15.1 million of merger-related expenses in 2002 as a result of other acquisitions. Note 5 Restrictions on Cash and Due from Banks Bank subsidiaries are required to maintain minimum average reserve balances with the Federal Reserve Bank. The amount of those reserve balances was approximately $916 million at December 31, 2001. 60 U.S. Bancorp Investment Securities Note 6 The detail of the amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available- for-sale securities at December 31 was as follows: (Dollars in Millions) Held-to-maturity Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Obligations of state and political 2001 Gross Unrealized Holding Gains Gross Unrealized Holding Losses Amortized Cost 2000 Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value Fair Value Amortized Cost $ 28 $ Ì $ Ì $ 28 $ 36 $ Ì $ Ì $ 36 subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 271 Total held-to-maturity securitiesÏÏÏÏÏÏÏ $ 299 $ 9 9 (2) 278 216 $ (2) $ 306 $ 252 $ 5 5 Ì 221 $ Ì $ 257 Available-for-sale U.S. Treasuries and agenciesÏÏÏÏÏÏÏÏÏ Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Obligations of state and political subdivisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 439 24,028 $ 10 114 $ Ì $ (114) 449 24,028 $ 1,600 11,800 877 950 16 35 (2) (44) 891 941 2,370 1,472 $ 27 128 41 21 $ (3) (35) $ 1,624 11,893 (2) (29) 2,409 1,464 Total available-for-sale securities ÏÏ $26,294 $175 $(160) $26,309 $17,242 $217 $(69) $17,390 Securities carried at $18.1 billion at December 31, 2001, and $13.3 billion at December 31, 2000, were pledged to secure public, private and trust deposits and for other purposes required by law. Securities sold under agreements to repurchase were collateralized by securities and securities purchased under agreements to resell with an amortized cost of $3.0 billion and $1.0 billion at December 31, 2001, and 2000, respectively. The following table provides information as to the amount of gross gains and losses realized through the sales of available- for-sale investment securities. (Dollars in Millions) Gross realized gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross realized losses(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net realized gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax (beneÑt) on realized gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $333.1 (4.0) $329.1 $115.2 2000 $ 23.1 (15.0) $ $ 8.1 2.8 1999 $ 31.1 (195.6) $(164.5) $ (57.9) (a) Included in the gross realized losses for 1999 is $177.7 million related to the Mercantile balance sheet restructuring. These losses were included in merger and restructuring- related expense. For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale securities outstanding as of December 31, 2001, see Table 11 included in Management's Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements. U.S. Bancorp 61 Note 7 Loans and Allowance for Credit Losses The composition of the loan portfolio at December 31 was as follows: (Dollars in Millions) Commercial 2001 2000 Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lease Ñnancing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 40,472 5,858 $ 47,041 5,776 Total commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46,330 52,817 Commercial real estate Commercial mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction and developmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total commercial real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail Credit cardÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail leasing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other retail Home equity and second mortgage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Revolving credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Installment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Automobile ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ StudentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total other retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,765 6,608 25,373 5,746 5,889 4,906 14,318 2,673 2,292 5,660 1,218 26,161 36,956 19,466 6,977 26,443 7,753 6,012 4,153 13,600 2,750 2,186 5,609 1,042 25,187 35,352 Total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $114,405 $122,365 Loans are presented net of unearned interest which amounted to $1.6 billion and $1.7 billion at December 31, 2001 and 2000, respectively. The Company had loans of $28.0 billion at December 31, 2001, and $7.8 billion at December 31, 2000, pledged at the Federal Home Loan Bank. Loans of $7.2 billion at December 31, 2001, and $3.6 billion at December 31, 2000, were pledged at the Federal Reserve Bank. The Company primarily lends to borrowers in the 24 states where it has banking oÇces. Collateral for commercial loans may include marketable securities, accounts receivable, inventory and equipment. For detail of the Company's commercial portfolio by industry type and geography as of December 31, 2001, and 2000, see Table 9 included in Management's Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements. For detail of the Company's commercial real estate portfolio by property type and geography as of December 31, 2001, and 2000, see Table 10 included in Management's Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements. Such loans are collateralized by the related property. The following table lists information related to nonperforming loans as of December 31: (Dollars in Millions) Loans on nonaccrual status ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Renegotiated loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $1,001.3 Ì Total nonperforming loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,001.3 Interest income that would have been recognized at original contractual terms ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount recognized as interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 109.2 46.2 Forgone revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 63.0 2000 $765.3 Ì $765.3 $ 72.2 21.4 $ 50.8 62 U.S. Bancorp Activity in the allowance for credit losses was as follows: (Dollars in Millions) Balance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Add 2001 2000 1999 $1,786.9 $1,710.3 $1,705.7 Provision charged to operating expense(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,528.8 828.0 Deduct Loans charged oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less recoveries of loans charged oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loans charged oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Losses from loan sales/transfersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions and other changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,771.4 224.9 1,546.5 (329.3) 17.4 1,017.6 192.2 825.4 Ì 74.0 646.0 902.8 230.2 672.6 Ì 31.2 Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,457.3 $1,786.9 $1,710.3 (a) In 2001, $382.2 million of the provision for credit losses was incurred in connection with the merger of Firstar and USBM. A portion of the allowance for credit losses is allocated to loans deemed impaired. All impaired loans are included in non- performing assets. A summary of these loans and their related allowance for loan losses is as follows: (Dollars in Millions) Impaired Loans Valuation allowance required ÏÏÏÏÏÏÏÏÏ No valuation allowance required ÏÏÏÏÏÏ Total impaired loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average balance of impaired loans during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest income recognized on impaired loans during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 1999 Recorded Investment Valuation Allowance Recorded Investment Valuation Allowance Recorded Investment Valuation Allowance $125 Ì $125 $694 Ì $694 $780 25.0 $487 127 $614 $526 7.8 $57 Ì $57 $257 132 $389 $408 3.3 $8 Ì $8 Commitments to lend additional funds to customers whose loans were classiÑed as nonaccrual or renegotiated at December 31, 2001, totaled $82.5 million. During 2001 there were no loans that were restructured at market interest rates and returned to a fully performing status. Note 8 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities Receivable Sales When the Company sells receivables, it may retain interest- only strips, servicing rights, a cash reserve account, and/or other interests in the receivables. The gain or loss on sale of the receivables depends in part on the previous carrying amount of the Ñnancial assets involved in the transfer, and is allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer. Market prices are used to determine retained interest fair values when readily available. However, quotes are generally not available for retained interests, so the Company generally estimates fair value based on the present value of future expected cash Öows using management's best estimates of the key assumptionsÌcredit losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. Retained interests are valued at inception and updated quarterly using a discounted cash Öow methodology. On November 16, 2001, the Company sold $737.8 million of unsecured small business receivables. The transaction generated a loss on sale of $64.7 million. The Company retained interest-only strips, a cash collateral reserve, and subordinated securities. Key assumptions used in measuring retained interests at the date of securitization are consistent with those presented in the table below captioned ""Residual Economic Assumptions and Adverse Changes.'' These products are similar in nature to revolving credit card receivables. Each month new advances on these accounts are sold. The proceeds from these sales are netted against the cash collected for the month. The net cash collected is distributed accordingly to pay down the outstanding securities. The Company receives a fee to continue to service the receivables. Since the Company receives adequate compensation relative to current market servicing prices, no servicing asset or liability regarding this securitization is recognized. During 2001 and 2000, the Company administered a loan conduit which holds short-term participations in commercial loans originated by the Company. These loans totaled $5.9 billion at December 31, 2001 and included net sales of originated loans to the loan conduit of U.S. Bancorp 63 approximately $3.7 billion during 2001. The Company received fee revenue of $57.6 million and $18.0 million from the loan conduit in 2001 and 2000, respectively. Under a credit enhancement agreement with the conduit, the Company would be required to make payments to the conduit in speciÑed amounts if the conduit experiences payment defaults on its loans. No credit enhancements were needed during 2001 or 2000. In addition, the Company maintains a reserve to reÖect its obligation to provide credit enhancements to the conduit. For the years ended December 31, 2001 and 2000, the Company sold $147.5 million and $255.7 million of the U.S. government guaranteed portions of loans originated under Small Business Administration (SBA) programs, recognizing a pre-tax gain on sale of $6.3 million and $10.6 million, respectively. The SBA covers losses occurring on these guaranteed portions. Although the Company retains no credit recourse relating to these sales, it does continue to own a portion of the non-guaranteed elements of the loans. The Company continues to service the loans and is required under the SBA programs to retain speciÑed yield amounts. A portion of the yield is recognized as servicing fee income as it occurs and the remainder is capitalized as a servicing asset, and included in the gain on sale calculation. Servicing Asset Position (Dollars in Millions) Servicing assets at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Servicing assets recognized during the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Servicing assets at end of year ÏÏÏ 2001 SBA Loans 2000 SBA Loans $6.9 2.8 (2.2) $7.5 $ 4.3 4.0 (1.4) $ 6.9 No valuation allowances were required during 2001 or 2000 on servicing assets. Servicing assets are reported in aggregate but measured on a transaction speciÑc basis. Market values were determined using discounted cash Öows, utilizing the assumptions noted in the table below. Key economic assumptions used in valuing servicing assets at the date of sale resulting from sales completed during 2001 and 2000 were as follows: (Dollars in Millions) Fair value of assets recognized Prepayment speed(b) ÏÏÏÏÏÏÏÏÏ Weighted-average life (years)ÏÏ Expected credit losses ÏÏÏÏÏÏÏÏÏ Discount rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Variable returns to transferees 2001 SBA Loans(a) 2000 SBA Loans(a) $9.1 21 CPR 3.7 NA 12% NA $7.9 21 CPR 3.9 NA 12% NA (a) All were adjustable rate loans based on the Wall Street Journal prime rate. (b) The Company used a prepayment vector based on loan seasoning for valuation. The given speed was the eÅective prepayment speed that yields the same weighted- average life calculated using the prepayment vector. The Company also established a securitization trust which held credit card receivables originated by the Company. This trust was terminated in December 2000. At termination, $509 million of credit card receivables were transferred from the trust to the Company in exchange for the seller's certiÑcates held by the Company. In 2000, $665 million of proceeds from collections of credit card receivables were reinvested in the trust. The Company received $18.0 million in servicing fee revenue from the trust in 2000 and recorded a $2.2 million gain upon the termination of the trust. 64 U.S. Bancorp Residual Economic Assumptions and Adverse Changes The Company has retained interests on the following asset sales: $1.8 billion sale of indirect automobile loans on September 24, 1999; $420 million sale of corporate and purchasing card receivables on February 27, 1997; $737.8 million sale of unsecured small business receivables on November 16, 2001; and sales of SBA loans since 1988. At December 31, 2001, key economic assumptions and the sensitivity of the current fair value of residual cash Öows to immediate 10 percent and 20 percent adverse changes in those assumptions were as follows: At December 31, 2001 (Dollars in Millions) Carrying amount/fair value of retained interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted-average life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepayment speed assumption (annual)(c)(d)(e) ÏÏÏÏÏÏÏÏÏÏ Impact on fair value of 10% adverse change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Impact on fair value of 20% adverse change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected credit losses (annual) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Impact on fair value of 10% adverse change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Impact on fair value of 20% adverse change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residual cash Öows discount rate (annual)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Impact on fair value of 10% adverse change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Impact on fair value of 20% adverse change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest rates on variable and adjustable contracts ÏÏÏÏÏÏÏÏÏÏÏ Impact on fair value of 10% adverse change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Impact on fair value of 20% adverse change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Indirect Automobile Loans $23.1 0.7 SBA Loans(a) $ 3.2 3.7 1.5 ABS 21 CPR $(0.7) (1.5) 2.8% $(0.7) (1.4) 12.0% $(0.2) (0.4) NA NA NA $(0.2) (0.4) Ì% $ Ì Ì 12.0% $(0.1) (0.2) NA NA NA Corporate Card Receivables(b) Unsecured Small Business Receivables $4.3 0.1 Ì $ Ì Ì Ì% $ Ì Ì Ì% $ Ì Ì NA NA NA $232.7 0.8 6.0% $ (3.1) (4.7) 13.5% $ (8.7) (16.8) 11.0% $ (2.6) (5.2) 10.5% $ (6.7) (12.9) (a) Credit losses are covered by the appropriate SBA loan program and are not included in retained interests. Principal reductions caused by defaults are included in the prepayment assumption. (b) Residual interest is eÅectively a single period receivable that is paid and renewed each month during the revolving period. Therefore, no assumptions are used in its estimate. Losses are recognized in the period they occur. (c) The Company uses prepayment vectors based on loan seasoning for valuation. The given speed is the eÅective prepayment speed that yields the same weighted-average life calculated using the prepayment vector. (d) ABS • absolute prepayment rate and is the auto industry's standard measure of prepayment speed. CPR • constant prepayment rate. (e) Monthly repayment rate on small business lines of credit. These sensitivities are hypothetical and should be used with caution. As the Ñgures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, in this table the eÅect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. The table below summarizes certain cash Öows received from and paid to conduit or structured entities for the loan sales described above: Year Ended December 31 (Dollars in Millions) Proceeds from new sales(a)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from existing securitizations(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Reinvestment in existing securitizations(b)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Servicing and other fees receivedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other cash Öows received on retained interests(c) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchases of delinquent or foreclosed assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 $70,209.4 6,969.9 (6,547.8) $37,911.6 8,042.7 (7,972.9) 73.9 29.9 Ì 52.9 34.2 Ì (a) Gross proceeds from commercial loan sales were $69.5 billion for 2001. The net cash Öows for these sales were $3.7 billion. For 2000, gross commercial loan sale proceeds were $37.6 billion, with net cash Öows of ($30.3) million. (b) The corporate card and unsecured small business receivables securitizations are revolving transactions where proceeds are reinvested until their legal terminations. The indirect automobile and SBA loan sales are amortizing transactions where the cash Öow is used to pay oÅ investors. (c) This amount represents total cash Öows received from retained interests by the transferor other than servicing fees. Other cash Öows include, for example, all cash Öows from interest-only strips and cash above the minimum required level in cash collateral accounts. U.S. Bancorp 65 Quantitative information relating to loan sales and managed assets was as follows: At December 31 Year Ended December 31 Total Principal Balance Principal Amount 90 Days or More Past Due Average Balance Net Credit Losses Asset Type (Dollars in Millions) 2001 2000 2001 2000 2001 2000 2001 2000 Commercial Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lease Ñnancing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $47,867 5,858 $ 49,982 5,776 $ 590 207 $ 525 72 $ 49,672 5,852 $ 48,403 4,512 $ 724 114 Total commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53,725 55,758 Commercial real estate Commercial mortgages ÏÏÏÏÏÏÏÏÏÏÏÏ Construction and developmentÏÏÏÏÏÏ Total commercial real estate ÏÏÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏ Retail 18,765 6,608 19,466 6,977 25,373 26,443 5,746 7,753 Credit cardÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail leasing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other retailÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,889 4,906 26,593 6,012 4,153 26,100 Total retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,388 36,265 797 136 37 173 140 128 12 224 364 597 118 40 158 116 111 8 165 285 55,524 52,915 838 19,004 7,077 19,158 6,882 26,081 26,040 6,868 9,578 5,645 4,553 25,613 5,490 3,139 25,729 35,811 34,358 40 12 52 13 271 30 360 661 $259 21 280 5 8 13 12 238 13 319 570 Total managed loans ÏÏÏÏÏÏÏÏ $122,232 $126,219 $1,474 $1,155 $124,284 $122,891 $1,564 $875 Less: Loans sold or securitized ÏÏÏÏÏÏÏÏÏÏ 7,827 3,854 Total loans heldÏÏÏÏÏÏÏÏÏÏÏÏÏ $114,405 $122,365 6,107 4,574 $118,177 $118,317 Sold or securitized assets Commercial loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Indirect automobile loans(a) ÏÏÏÏÏÏÏ Guaranteed SBA loans(b) ÏÏÏÏÏÏÏÏÏ Corporate card receivables(b) ÏÏÏÏÏ Credit card receivables ÏÏÏÏÏÏÏÏÏÏÏÏ Unsecured small business $5,868 432 582 214 Ì $ 2,003 913 518 420 Ì $ Ì 4 2 1 Ì $ Ì 3 Ì 1 Ì $ 4,298 655 629 403 Ì $ 2,073 1,213 360 420 508 $ Ì 11 Ì 3 Ì $ Ì 16 Ì 3 30 receivables(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 731 Ì 4 Total securitized assetsÏÏÏÏÏÏÏÏÏ $7,827 $ 3,854 $ 11 $ Ì 4 122 Ì 3 Ì $ 6,107 $ 4,574 $ 17 $ 49 (a) Reported in ""other retail'' loans. (b) Reported in ""commercial'' loans. Note 9 Premises and Equipment Premises and equipment at December 31 consisted of the following: (Dollars in Millions) Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Buildings and improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Furniture, Ñxtures and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capitalized building and equipment leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less accumulated depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $ 274 1,854 2,012 173 8 4,321 2,580 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,741 2000 $ 276 1,786 1,888 171 48 4,169 2,333 $1,836 66 U.S. Bancorp Note 10 Mortgage Servicing Rights Changes in capitalized mortgage servicing rights are summarized as follows: Year Ended December 31, (Dollars in Millions) Balance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rights purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rights capitalizedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rights sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ImpairmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $ 229 25 315 (45) (103) (61) Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 360 2000 $ 213 16 137 (35) (101) (1) $ 229 The fair value of capitalized mortgage servicing rights was $360 million at December 31, 2001, and $245 million at December 31, 2000. At December 31, 2001, the reduction in the current fair value of mortgage servicing rights to immediate 25 and 50 basis point adverse interest rate changes would be approximately $32 million and $63 million, respectively. The Company has purchased principal-only securities that act as a partial economic hedge to this possible adverse interest rate change. The Company serviced $22.0 billion and $17.0 billion of mortgage loans for other investors as of December 31, 2001 and 2000, respectively. Note 11 Intangible Assets The following is a summary of intangible assets as of December 31, which are included in the consolidated balance sheet: (Dollars in Millions) Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Core deposit beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merchant processing contractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage servicing rightsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other identiÑed intangiblesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $5,488 530 680 360 354 $7,412 2000 $4,312 374 17 229 377 $5,309 Note 12 Short-Term Borrowings The following table is a summary of short-term borrowings for the last three years: (Dollars in Millions) At year-end 2001 2000 1999 Amount Rate Amount Rate Amount Rate Federal funds purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities sold under agreements to repurchase ÏÏÏÏÏÏÏÏ Commercial paperÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Treasury, tax and loan notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,146 3,001 452 4,038 6,033 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14,670 Average for the year Federal funds purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities sold under agreements to repurchase ÏÏÏÏÏÏÏÏ Commercial paperÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Treasury, tax and loan notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,997 2,657 390 1,321 3,615 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,980 Maximum month-end balance Federal funds purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities sold under agreements to repurchase ÏÏÏÏÏÏÏÏ Commercial paperÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Treasury, tax and loan notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,829 3,001 590 6,618 7,149 1.1% 1.1 1.9 1.3 2.5 1.8% 5.0% 2.9 3.9 3.5 4.0 4.1% $ 2,849 3,347 223 776 4,638 $11,833 $ 5,690 3,028 215 912 2,741 $12,586 $ 7,807 3,415 300 3,578 4,920 5.8% 4.6 6.4 5.2 6.1 5.6% 6.2% 4.8 6.3 6.1 7.7 6.2% $ 5,489 3,174 170 619 1,106 $10,558 $ 5,898 3,128 370 577 1,734 $11,707 $ 7,080 3,278 397 1,435 4,945 4.7% 3.8 4.7 5.0 5.6 4.6% 5.0% 4.0 5.1 4.5 6.9 5.0% U.S. Bancorp 67 Note 13 Long-Term Debt Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following: (Dollars in Millions) U.S. Bancorp (Parent Company) Fixed-rate subordinated notes 2001 2000 7.625% due 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.125% due 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.00% due 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.625% due 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.25% due 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.00% due 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.625% due 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.75% due 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.875% due 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.30% due 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.50% due 2026 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Senior contingent convertible debt 1.50% due 2021 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capitalized lease obligations, mortgage indebtedness and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subsidiaries Fixed-rate subordinated notes 6.00% due 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.375% due 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.375% due 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.55% due 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.35% due 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.30% due 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.875% due 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.625% due 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.50% due 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.30% due 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.70% due 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.125% due 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.80% due 2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.375% due 2011 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Federal Home Loan Bank advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bank notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Euro medium-term notes due 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capitalized lease obligations, mortgage indebtedness and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 150 150 150 100 32 73 121 191 250 200 200 1,100 3,215 142 6,074 79 75 150 100 100 100 125 100 300 300 400 500 300 1,500 7,196 7,550 400 367 $ 150 150 150 100 32 125 150 300 250 200 200 Ì 4,634 122 6,563 100 75 150 100 100 100 125 100 300 300 400 500 300 Ì 2,753 9,300 400 210 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25,716 $21,876 In August 2001, the Company issued $1.1 billion of senior contingent convertible debt due August 6, 2021. The interest rate is 1.50% per annum. The debt would be convertible into the Company's stock only if the Company's stock price increases to the contractual strike price. The convertible strike price decreases over the term of the bond. The notes are callable in August 2003 and putable in August 2002 and on speciÑed dates thereafter. In July 2001, the Company's subsidiary U.S. Bank National Association issued $1.5 billion of Ñxed-rate subordinated notes due August 1, 2011. The interest rate is 6.375% per annum. Medium-term notes (""MTNs'') outstanding at December 31, 2001, mature from January 2002 through December 2004. The MTNs bear Ñxed or Öoating interest rates ranging from 2.01 percent to 7.50 percent. The weighted-average interest rate of MTNs at December 31, 2001, was 3.85 percent. Federal Home Loan Bank (""FHLB'') advances outstanding at December 31, 2001, mature from February 2002 through October 2026. The advances bear Ñxed or Öoating interest rates ranging from 0.50 percent to 8.25 percent. The Company has an arrangement with the FHLB whereby based on collateral available (residential and commercial mortgages), the Company could have borrowed an additional $10.6 billion at December 31, 2001. The weighted-average interest rate of FHLB advances at December 31, 2001, was 3.36 percent. Bank notes outstanding at December 31, 2001, mature from January 2002 through November 2005. The Bank notes bear Ñxed or Öoating interest rates ranging from 1.79 percent to 6.30 percent. The weighted-average interest 68 U.S. Bancorp rate of Bank notes at December 31, 2001, was 2.69 percent. Euro medium-term notes outstanding at December 31, 2001, bear Öoating rate interest at three-month LIBOR plus .15 percent. The interest rate at December 31, 2001, was 2.58 percent. Maturities of long-term debt outstanding at December 31, 2001, were: (Dollars in Millions) Consolidated 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,789 3,970 5,529 3,533 242 5,653 $25,716 Parent Company $1,465 1,545 916 336 3 1,809 $6,074 Note 14 Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Junior Subordinated Debentures of the Parent Company The Company has issued $2.9 billion of company- obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company (""Trust Preferred Securities'') through nine separate issuances by nine wholly owned subsidiary grantor trusts (""Trusts''). The Trust Preferred Securities accrue and pay distributions periodically at speciÑed rates as provided in the indentures. The Trusts used the net proceeds from the oÅerings to purchase a like amount of junior subordinated deferrable interest debentures (the ""Debentures'') of the Company. The Debentures are the sole assets of the Trusts and are eliminated, along with the related income statement eÅects, in the consolidated Ñnancial statements. The Company's obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trusts. The guarantee covers the distributions and payments on liquidation or redemption of the Trust Preferred Securities, but only to the extent of funds held by the Trusts. The Trust Preferred Securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem retail Debentures in whole or in part on or after speciÑc dates, at a redemption price speciÑed in the indentures plus any accrued but unpaid interest to the redemption date. The Company has the right to redeem institutional Debentures in whole, (but not in part), on or after speciÑc dates, at a redemption price speciÑed in the indentures plus any accrued but unpaid interest to the redemption date. The Trust Preferred Securities are redeemable in whole or in part in 2003, 2006 and 2007 in the amounts of $350 million, $2,250 million and $300 million, respectively. The Trust Preferred Securities qualify as tier I capital of the Company for regulatory capital purposes. The Company used the proceeds from the sales of the Debentures for general corporate purposes. The following table is a summary of the Trust Preferred Securities as of December 31, 2001: Issuance Trust (Dollars in Millions) Retail USB Capital V ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ USB Capital IV ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ USB Capital III ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ USB Capital II ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Institutional Star Capital I ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mercantile Capital Trust IÏÏÏÏÏÏÏ USB Capital I ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Firstar Capital Trust I ÏÏÏÏÏÏÏÏÏÏ FBS Capital I ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Issuance Date 12/2001 11/2001 05/2001 03/1998 06/1997 02/1997 12/1996 12/1996 11/1996 Trust Preferred Securities Amount $300 500 700 350 150 150 300 150 300 (a) The variable rate Trust Preferred Securities re-price quarterly. (b) Earliest date of redemption. Debentures Amount Rate Type(a) Rate at 12/31/01 Maturity Date Redemption Date(b) $309 515 722 361 155 155 309 155 309 Fixed Fixed Fixed Fixed Variable Variable Fixed Fixed Fixed 7.25% 7.35% 7.75% 7.20% 2.64% 3.08% 8.27% 8.32% 8.09% 12/2031 11/2031 05/2031 04/2028 06/2027 02/2027 12/2026 12/2026 11/2026 12/07/2006 11/01/2006 05/04/2006 04/01/2003 06/15/2007 02/01/2007 12/15/2006 12/15/2006 11/15/2006 U.S. Bancorp 69 Note 15 Shareholders' Equity At December 31, 2001 and 2000, the Company had authority to issue 4 billion and 2 billion shares of common stock, respectively, and 10 million shares of preferred stock. The Company had 1,951.7 million and 1,902.1 million shares of common stock outstanding at December 31, 2001 and 2000, respectively. At December 31, 2001, the Company had 279.1 million shares of common stock reserved for future issuances. These shares are primarily reserved for stock option plans, dividend reinvestment plans and deferred compensation plans. In connection with the merger of Firstar and USBM, the number of authorized common shares for U.S. Bancorp was increased from 2 billion to 4 billion eÅective February 27, 2001. Additionally, the par value of the Company's common stock was reduced from $1.25 per share to $.01 per share. The Company has a Preferred Share Purchase Rights Plan intended to preserve the long-term value of the Company by discouraging a hostile takeover of the Company. Under the plan, each share of common stock carries a right to purchase one one-thousandth of a share of preferred stock. The rights become exercisable in certain limited circumstances involving a potential business combination transaction or an acquisition of shares of the Company and are exercisable at a price of $100 per right, subject to adjustment. Following certain other events, each right entitles its holder to purchase for $100 an amount of common stock of the Company, or, in certain circumstances, securities of the acquirer, having a then- current market value of twice the exercise price of the right. The dilutive eÅect of the rights on the acquiring company is intended to encourage it to negotiate with the Company's Board of Directors prior to attempting a takeover. If the Board of Directors believes a proposed acquisition is in the best interests of the Company and its shareholders, the Board may amend the plan or redeem the rights for a nominal amount in order to permit the acquisition to be completed without interference from the plan. Until a right is exercised, the holder of a right has no rights as a shareholder of the Company. The rights expire on February 27, 2011. The Company issued 57.2 million and 18.2 million shares of common stock with an aggregate value of $1.9 billion and $298 million in connection with purchase acquisitions during 2001 and 2000, respectively. On February 16, 2000, USBM's Board of Directors authorized the repurchase of up to $2.5 billion of its common stock over a two-year period ending March 31, 2002. This USBM repurchase program replaced a program that was scheduled to expire on March 31, 2000. On April 11, 2000, Firstar's Board of Directors approved a common stock repurchase program of 100 million shares. The stock repurchase programs of Firstar and USBM were rescinded on October 4, 2000, and January 17, 2001, respectively, in connection with the planned merger of the formerly separate companies. On July 17, 2001, the Company's Board of Directors authorized the repurchase of up to 56.4 million shares of the Company's common stock to replace shares issued in connection with the July 24, 2001 acquisition of NOVA Corporation. The stock repurchase authorization will expire on July 23, 2003. Under this program the Company has repurchased 19.7 million shares for $467.9 million in 2001. The Company had forward contracts to purchase 26.7 million shares within this authorization. These contracts were settled in January of 2002. On December 18, 2001, the Board of Directors approved an authorization to repurchase an additional 100 million shares of outstanding common stock over the following 24 months. The following table summarizes the Company's common stock repurchased in each of the last three years: (Dollars and Shares in Millions) Shares Value 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19.7 58.6 44.6 $ 467.9 1,182.2 1,187.9 USBM oÅered employees and directors an Employee Stock Purchase Plan (""ESPP'') that permitted all eligible employees with at least one year of service and directors to purchase common stock. In connection with the merger with Firstar, the ESPP was terminated eÅective October 13, 2000. USBM's Dividend Reinvestment Plan providing for automatic reinvestment of dividends and optional cash purchases was suspended on November 9, 2000, following the announcement of the deÑnitive agreement to merge with Firstar. 70 U.S. Bancorp Shareholders' equity is aÅected by transactions and valuations of asset and liability positions that require adjustments to Accumulated Other Comprehensive Income. The reconciliation of transactions aÅecting Accumulated Other Comprehensive Income included in shareholders' equity for the years ended December 31, is as follows: (Dollars in Millions) 2001 Pre-tax Tax-eÅect Net-of-tax Unrealized gain on securities available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized gain on derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Realized gain on derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ReclassiÑcation adjustment for gains realized in net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign currency translation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 194.5 106.0 42.4 (333.1) (4.0) $ (77.6) (40.3) (16.1) 126.6 1.5 $ 116.9 65.7 26.3 (206.5) (2.5) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.8 $ (5.9) $ (.1) 2000 Unrealized gain on securities available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ReclassiÑcation adjustment for gains realized in net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign currency translation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 436.0 $(157.8) $ 278.2 (41.6) (.5) 15.8 .2 (25.8) (.3) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 393.9 $(141.8) $ 252.1 1999 Unrealized loss on securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ReclassiÑcation adjustment for losses realized in net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(743.9) 163.9 $ 268.2 (57.7) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(580.0) $ 210.5 $(475.7) 106.2 $(369.5) Note 16 Earnings Per Share The components of earnings per share were: (Dollars and Shares in Millions, Except Per Share Data) 2001 2000 1999 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,706.5 $2,875.6 $2,381.8 Weighted-average common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net eÅect of the assumed purchase of stock based on the treasury stock 1,927.9 1,906.0 1,907.8 method for options and stock plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.6 12.5 22.2 Dilutive common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,939.5 1,918.5 1,930.0 Earnings per share BasicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ $ .89 .88 $ $ 1.51 1.50 $ $ 1.25 1.23 Note 17 Employee BeneÑts Retirement Plans Pension beneÑts are provided to substantially all employees based on years of service and employees' compensation while employed with the Company. Employees are fully vested after Ñve years of service. The Company's funding policy is to contribute amounts to its plans suÇcient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company determines to be appropriate. The actuarial cost method used to compute the pension liabilities and expense is the projected unit credit method. Prior to their acquisition dates, employees of certain acquired companies were covered by separate, noncontributory pension plans that provided beneÑts based on years of service and compensation. Generally, the Company merges plans of acquired companies into its existing pension plans when it becomes practicable. As a result of the Firstar and USBM merger, the Company maintained two diÅerent qualiÑed pension plans, with three diÅerent pension beneÑt structures during 2001: the former USBM's cash balance pension beneÑt structure, a Ñnal average pay beneÑt structure for the former Firstar organization, and a cash balance pension beneÑt structure related to the Mercantile acquisition. The two pension plans were merged as of January 1, 2002, under a new Ñnal average pay beneÑt structure; however, the beneÑt structure of the new plan does not become eÅective for the Mercantile acquisition until January 1, 2003. Under the new plan's beneÑt structure, a participant's future retirement beneÑts are based on a participant's highest Ñve-year average annual compensation during his or her last 10 years before retirement or termination from the Company. Generally, under the two previous cash balance pension beneÑt structures the participants' earned retirement beneÑts were based on their average compensation over their career. Retirement beneÑts under the former Firstar beneÑt U.S. Bancorp 71 structure were earned based on Ñnal average pay and years of service, similar to the new plan. Plan assets primarily consist of various equity mutual funds, listed stocks and other miscellaneous assets. The Company also maintains several unfunded, non- qualiÑed, supplemental executive retirement programs that provide additional defined pension benefits for senior managers and executive employees. Because all the non- qualified plans are unfunded, the aggregate accumulated benefit obligations exceed the assets. A supplemental executive retirement plan of USBM was frozen for substantially all participants as of September 30, 2001, but with service credit running through December 31, 2001. The assumptions used in computing the present value of the accumulated benefit obligation, the projected benefit obligation and net pension expense are substantially consistent with those assumptions used for the funded qualified plans. The Company anticipates recognizing curtailment gains of approximately $11.7 million in early 2002 in connection with changes to non-qualified pension plans. Post-Retirement Medical Plans In addition to providing pension beneÑts, the Company provides health care and death beneÑts to certain retired employees through several retiree medical programs. As a result of the merger of USBM with Firstar, there were three major retiree medical programs in place during 2001 with various terms and subsidy schedules. EÅective January 1, 2002, the Company adopted one retiree medical program for all future retirees. For certain eligible employees, the provisions of the USBM retiree medical plan and the Mercantile retiree medical plan will remain in place until December 31, 2002. Generally, all employees may become eligible for retiree health care beneÑts by meeting deÑned age and service requirements. The Company may also subsidize the cost of coverage for employees meeting certain age and service requirements. The medical plan contains other cost-sharing features such as deductibles and coinsurance. The estimated cost of these retiree beneÑt payments is accrued during the employees' active service. Information presented in the four tables below reÖects a measurement date of September 30. The following table sets forth the components of net periodic beneÑt cost for the retirement plans: (Dollars in Millions) 2001 2000 1999 2001 2000 1999 Pension Plans Post-Retirement Medical Plans Components of net periodic beneÑt cost Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net amortization and deferral ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Recognized actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net periodic beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Curtailment and settlement (gain) loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net periodic beneÑt cost after curtailment and $ 61.0 118.7 (232.6) (10.7) (1.2) (64.8) Ì $ 65.4 117.3 (201.6) (13.2) .7 (31.4) (17.0) $ 70.1 107.1 (177.5) 1.3 1.9 2.9 (6.2) $ 2.1 17.9 (1.0) .2 (.1) 19.1 Ì $ 2.0 16.3 (.6) .2 (1.4) 16.5 10.3 $ 3.8 16.5 (.5) 2.0 .2 22.0 Ì settlement (gain) loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (64.8) (48.4) $ (3.3) $19.1 $26.8 $22.0 The following table sets forth the weighted average plan assumptions and other data: (Dollars in Millions) Pension plan actuarial computations Discount rate in determining beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected long-term return on plan assets(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rate of increase in future compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Post-retirement medical plan actuarial computations Discount rate in determining beneÑt obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected long-term return on plan assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Health care cost trend rate(a) Prior to age 65 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ After age 65ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÅect of one percent increase in health care cost trend rate 2001 7.5% 11.0 3.5 7.5% 5.0 10.5% 13.0 USBM 2000 1999 2001 7.8% 9.5 5.6 7.8% 5.0 7.7% 7.7 7.5% 9.5 5.6 7.5% 5.0 7.0% 5.5 7.5% 12.2 3.5 7.5% * 10.5% 13.0 Service and interest costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated post-retirement beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.2 13.1 $ 1.0 13.1 $ 1.3 12.4 $ .4 6.0 EÅect of one percent decrease in health care cost trend rate Service and interest costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated post-retirement beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (1.0) (13.6) $ (.9) (11.6) $ (1.0) (10.9) $ (.4) (5.7) Firstar 2000 8.0% 12.2 4.0 8.0% * 7.5% 7.5 $ .4 5.2 $ (.4) (4.6) 1999 6.6% 11.4 4.1 6.8% * 7.7% 7.7 $ .4 4.0 $ (.4) (3.6) * The Firstar plan had no assets as of December 31, 2001, 2000 and 1999. (a) The pre-65 and post-65 rates are assumed to decrease gradually to 5.5% and 6.0% respectively by 2011 and remain at these levels thereafter. (b) In connection with the merger of Firstar and USBM, the asset management practices and investment strategies of the plan were conformed. At December 31, 2001, the investment asset allocation was weighted toward equities and diversiÑed by industry and companies with varying market capitalization levels. 72 U.S. Bancorp The following table summarizes beneÑt obligation and plan asset activity for the retirement plans: (Dollars in Millions) Change in beneÑt obligation Pension Plans Post-Retirement Medical Plans 2001 2000 2001 2000 BeneÑt obligation at beginning of measurement period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Plan participants' contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Plan amendments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑt paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Curtailments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Settlements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,595.4 61.0 118.7 Ì 4.0 47.7 (170.4) Ì Ì $1,580.3 65.4 117.3 Ì Ì .1 (111.7) (4.4) (51.6) $ 244.1 2.1 17.9 10.3 (2.4) 24.9 (31.8) Ì Ì BeneÑt obligation at end of measurement periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,656.4 $1,595.4 $ 265.1 Change in fair value of plan assets Fair value at beginning of measurement period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employer contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Plan participants' contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions/divestitures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Settlements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑt paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,283.2 (531.8) 30.1 Ì Ì Ì (170.4) $1,985.3 443.8 16.3 Ì 1.1 (51.6) (111.7) $ 21.8 1.8 33.3 10.3 Ì Ì (31.8) Fair value at end of measurement period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,611.1 $2,283.2 $ 35.4 $ 225.0 2.0 16.3 6.8 Ì 19.8 (25.8) Ì Ì $ 244.1 $ 13.4 .9 26.5 6.8 Ì Ì (25.8) $ 21.8 Funded status Funded status at end of measurement periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecognized transition (asset) obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecognized prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecognized net (gain) loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth quarter contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (45.3) $ 687.8 $(229.7) $(222.3) Ì (74.8) 473.2 6.7 (1.8) (87.6) (338.6) 3.7 8.1 (9.5) 16.6 5.7 9.0 (7.8) (7.6) 15.9 Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 359.8 $ 263.5 $(208.8) $(212.8) Components of statement of financial position Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued beneÑt liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 531.7 (171.8) $ 433.1 (169.6) $ Ì (208.8) Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 359.8 $ 263.5 $(208.8) $ Ì (212.8) $(212.8) The following table provides information for pension plans with beneÑt obligations in excess of plan assets: (Dollars in Millions) BeneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated beneÑt obligation Fair value of plan assets ÏÏÏÏÏÏ 2001 $227.5 220.6 Ì 2000 $216.5 193.9 Ì matching contribution. Although the matching contribution is initially invested in the Company's common stock, eÅective in 2002 an employee will be allowed to reinvest the matching contributions among various investment alternatives. Total expense was $53.7 million, $53.6 million and $57.3 million in 2001, 2000 and 1999, respectively. Employee Investment Plan The Company has deÑned contribution retirement savings plans which allow qualiÑed employees, at their option, to make contributions up to certain percentages of pre-tax base salary through salary deductions under Section 401(k) of the Internal Revenue Code. Employee contributions are invested, at the employees' direction, among a variety of investment alternatives. Employee contributions are 100 percent matched by the Company, up to the Ñrst four percent of an employee's compensation. The Company's matching contribution vests immediately; however, a participant must be employed on December 31st to receive that year's Note 18 Stock Options and Compensation Plans As part of its employee and director compensation programs, the Company may grant certain stock awards under the provisions of the existing stock option and compensation plans. The Company has stock options outstanding under various plans at December 31, 2001, including plans assumed in acquisitions. The plans provide for grants of options to purchase shares of common stock generally at the stock's fair market value at the date of U.S. Bancorp 73 grant. In addition, the plans provide for grants of shares of common stock which are subject to restriction on transfer and to forfeiture if certain vesting requirements are not met. With respect to stock option and stock compensation plans, the Company has elected to follow APB 25 in accounting for its employee stock incentive and purchase plans. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. On the date exercised, if new shares are issued, the option proceeds equal to the par value of the shares are credited to common stock and additional proceeds are credited to capital surplus. If treasury shares are issued, the option proceeds equal to the average treasury share price are credited to treasury stock and additional proceeds are credited to capital surplus. Option grants are generally exercisable up to ten years from the date of grant and vest over three to Ñve years. Restricted shares vest over three to seven years. Compensation expense for restricted stock is based on the market price of the Company stock at the time of the grant and amortized on a straight-line basis over the vesting period. Compensation expense related to the restricted stock was $71.9 million, $43.4 million and $69.5 million in 2001, 2000 and 1999, respectively. Stock incentive plans of acquired companies are generally terminated at the merger closing dates. Option holders under such plans receive the Company's common stock, or options to buy the Company's stock, based on the conversion terms of the various merger agreements. The historical option information presented below has been restated to reÖect the options originally granted under acquired companies' plans. At December 31, 2001, there were 64.4 million shares (subject to adjustment for forfeitures) available for grant under various plans. The following is a summary of stock options outstanding and exercised under various stock option plans of the Company: 2001 2000 1999 Stock option plans Number outstanding at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Assumed/converted ÏÏÏÏÏÏÏÏÏÏ Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Number outstanding at end of year ÏÏ Exercisable at end of year ÏÏÏÏÏÏÏÏ Restricted share plans Number outstanding at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Assumed/converted ÏÏÏÏÏÏÏÏÏÏ Cancelled/vested ÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock Options 153,396,226 65,144,310 8,669,285 (12,775,067) (12,824,489) 201,610,265 117,534,343 6,377,137 1,021,887 298,988 (5,520,424) Number outstanding at end of year ÏÏ 2,177,588 Weighted-average fair value of shares grantedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted- Average Exercise Price $17.97 27.08 16.58 13.03 25.63 $22.74 $18.00 Weighted- Average Exercise Price $22.80 21.25 16.40 13.44 23.29 $22.58 $22.36 Stock Options 153,163,030 22,633,170 447,341 (10,017,357) (12,829,958) 153,396,226 68,870,745 4,212,954 4,110,440 Ì (1,946,257) 6,377,137 Weighted- Average Exercise Price $22.74 19.64 6.85 11.02 19.91 $22.80 $19.78 Stock Options 107,405,102 75,922,950 1,210,738 (22,332,730) (9,043,030) 153,163,030 70,527,758 6,072,217 1,379,808 Ì (3,239,071) 4,212,954 $ 6.76 $ 6.32 $ 7.20 74 U.S. Bancorp Additional information regarding options outstanding as of December 31, 2001, is as follows: Range of Exercise Prices $1.44 Ì $10.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10.01 Ì $15.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15.01 Ì $20.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20.01 Ì $25.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25.01 Ì $30.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $30.01 Ì $35.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $35.01 Ì $37.20 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Options Outstanding Exercisable Options Weighted- Average Remaining Contractual Life (Years) 2.7 5.3 8.7 8.2 7.0 6.4 6.5 7.6 Shares 7,679,415 8,966,154 51,659,341 65,876,786 60,157,207 6,386,174 885,188 201,610,265 Weighted- Average Exercise Price $ 5.99 11.78 18.63 22.84 28.16 32.51 35.78 Shares 7,649,800 7,366,306 16,774,997 23,274,436 55,353,547 6,230,069 885,188 $22.58 117,534,343 Weighted- Average Exercise Price $ 5.98 11.76 17.59 22.90 28.25 32.51 35.78 $22.36 Pro forma information regarding net income and earnings per share is required under Statement of Financial Accounting Standard No. 123 (""SFAS 123''), ""Accounting and Disclosure of Stock-Based Compensation'' and has been determined as if the Company accounted for its employee stock option plans under the fair value method of SFAS 123. The fair value of options was estimated at the grant date using a Black-Scholes option pricing model. Option valuation models require use of highly subjective assumptions. Because the Company's employee stock options have characteristics signiÑcantly diÅerent from those of traded options, and because changes in the subjective input assumptions can materially aÅect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. The pro forma disclosures include options granted in 2001, 2000, 1999 and 1998 and are not likely to be representative of the pro forma disclosures for future years. The estimated fair value of the options is amortized to expense over the options' respective vesting periods. (Dollars in Millions, Except Per Share Data) Pro forma net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pro forma earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Year Ended December 31 2001(a) 2000 1999 $1,478.9 $2,752.1 $2,240.5 $ .77 .76 $ 1.44 1.43 $ 1.17 1.16 (a) Pro forma earnings per share for 2001 was impacted by changes in control provisions that accelerated the vesting of stock options granted to USBM employees. Weighted-average assumptions in option valuation 2001 2000 1999 2000 1999 Risk-free interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividend yieldsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock volatility factor ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected life of options (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.6% 3.0% .42 4.5 5.4% 2.5% .37 2.5-5.5 5.6% 2.0% .41 2.5-5.5 6.1% 3.0% .37 4.7 5.4% 3.5% .27 6.1 U.S. Bancorp Firstar USBM U.S. Bancorp 75 Note 19 Income Taxes The components of income tax expense were: (Dollars in Millions) Federal 2001 2000 1999 Current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 979.9 (164.5) Federal income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 815.4 State Current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 131.8 (19.5) 112.3 $ 996.1 324.5 1,320.6 159.0 32.6 191.6 $1,036.0 219.5 1,255.5 103.3 33.4 136.7 Total income tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 927.7 $1,512.2 $1,392.2 The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate was as follows: (Dollars in Millions) Tax at statutory rate (35%) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State income tax, at statutory rates, net of federal tax beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax eÅect of: Tax-exempt interest, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of nondeductible goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax creditsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nondeductible merger charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sale of preferred minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $ 922.0 73.0 2000 1999 $1,535.8 124.5 $1,320.9 88.9 (38.9) 88.1 (69.4) 52.5 Ì (99.6) (56.0) 91.6 (62.7) 4.9 (50.0) (75.9) (60.3) 73.1 (41.7) 56.4 Ì (45.1) Applicable income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 927.7 $1,512.2 $1,392.2 Deferred income tax assets and liabilities reÖect the tax eÅect of temporary diÅerences between the carrying amounts of assets and liabilities for Ñnancial reporting purposes and the amounts used for the same items for income tax reporting purposes. SigniÑcant components of the Company's deferred tax assets and liabilities as of December 31 were as follows: (Dollars in Millions) Deferred tax assets 2001 2000 Allowance for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pension and post-retirement beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate and other asset basis diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and federal operating loss carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Federal AMT credits and capital losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued severance, pension and retirement beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Charitable contributionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other deferred tax assets, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,043.9 59.5 32.6 24.4 22.0 2.2 Ì 234.0 Gross deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,418.6 Deferred tax liabilities Leasing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accelerated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other investment basis diÅerences ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other deferred tax liabilities, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,642.5) (117.7) (59.7) (49.2) (32.5) (73.6) (1,975.2) (16.6) $ 637.0 53.5 31.9 25.0 22.0 30.6 .9 196.0 996.9 (1,218.1) (92.7) (52.2) 35.0 (41.1) (124.0) (1,493.1) (16.6) Net deferred tax liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (573.2) $ (512.8) 76 U.S. Bancorp At December 31, 2001, for income tax purposes, the Company had federal net operating loss carryforwards of $1.2 million available, which expire in years 2002 through 2009. A valuation allowance has been established to oÅset deferred tax assets related to state net operating loss carryforwards totaling approximately $437 million, which expire at various times within the next 15 years. Certain events covered by Internal Revenue Code section 593(e), which was not repealed, will trigger a recapture of base year reserves of acquired thrift institutions. The base year reserves of acquired thrift institutions would be recaptured if an entity ceases to qualify as a bank for federal income tax purposes. The base year reserves of thrift institutions also remain subject to income tax penalty provisions that, in general, require recapture upon certain stock redemptions of, and excess distributions to, stockholders. At December 31, 2001, retained earnings included approximately $101.8 million of base year reserves for which no deferred federal income tax liability has been recognized. Note 20 Derivative and Other OÅ-Balance Sheet Instruments In the normal course of business, the Company uses various derivative and other oÅ-balance sheet instruments to manage its interest rate risk and market risks and accommodate the business requirements of its customers. These instruments carry varying degrees of credit, interest rate, and market or liquidity risks. DERIVATIVES The Company requires the recognition of derivative instruments as either assets or liabilities and the measurement of those instruments at fair value. Subsequent changes in the derivatives' fair values are recognized currently in earnings unless speciÑc hedge accounting criteria are met. Fair Value Hedges The Company's interest rate swaps designated as fair value hedges of underlying Ñxed-rate debt and deposit obligations have a fair value of $276.5 million and fair value hedges of Trust Preferred Securities have a fair value of $(43.5) million at December 31, 2001. Each period the changes in fair value of both the hedge instruments and the underlying debt obligations are recorded as gains or losses in trading account proÑts and commissions. All fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The fair value hedge transactions were considered highly eÅective for the year ended December 31, 2001, and the change in fair value of the swaps attributed to hedge ineÅectiveness was not material. The Company enters into forward commitments to sell groups of residential mortgage loans that it originates or purchases as part of its mortgage banking activities. The Company commits to sell the loans at speciÑed prices in a future period, typically within 90 days. The Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market. SpeciÑc forward commitments are designated as a hedge against changes in the fair value of Ñxed-rate mortgage loans held for sale attributed to changes in interest rates. The fair value of these forward commitments was $52.5 million at December 31, 2001. The change in fair value of the forward commitments attributed to hedge ineÅectiveness recorded in noninterest income was $17.9 million for the year ended December 31, 2001. Cash Flow Hedges The Company has interest rate swaps designated as cash Öow hedges linked to the cash Öows of variable rate LIBOR loans and Öoating rate debt. The swaps have a fair value of $106 million at December 31, 2001. The gain will be reclassiÑed from other comprehensive income into earnings during the same period the forecasted transactions occur. The estimated amount of the gain to be reclassiÑed into earnings within the next 12 months is $64.4 million, which includes cash Öow hedges terminated early where the forecasted transaction is still probable. The Company has determined that the occurrence of the hedged forecasted transactions remains probable. The change in fair value of the swaps attributed to hedge ineÅectiveness was not material for the year ended December 31, 2001. Other Derivative Activity The Company acts as an intermediary for interest rate swaps, caps, Öoors and foreign exchange contracts on behalf of its customers. The Company minimizes its market and liquidity risks by taking oÅsetting positions. The Company manages its credit risk, or potential risk of loss from default by counterparties, through credit limit approval and monitoring procedures. Market value changes on intermediated swaps and other derivatives are recognized in income in the period of change. Gains or losses on intermediated transactions were not signiÑcant for the year ended December 31, 2001. In addition, the Company enters into interest rate swaps and other derivative contracts to protect against interest rate risk and credit risk that do not meet the criteria to receive hedge accounting treatment. These derivatives are recorded at fair value on the balance sheet as trading account assets or liabilities and any changes in fair value are recorded in trading proÑts/losses and commissions. The Company also enters into forward commitments to sell groups of residential mortgage loans to protect against changes in the fair value of Ñxed-rate mortgage loan commitments not yet funded. These forward commitment U.S. Bancorp 77 transactions and unfunded loan commitments are recorded on the balance sheet at fair value and changes in fair value are recorded in income. The fair value of the forward commitments and the loan commitments was $19.2 million and $(20.3) million, respectively, at December 31, 2001. Futures and forward contracts are agreements for the delayed delivery of securities or cash settlement money market instruments. The Company enters into futures contracts to reduce market risk on its Ñxed income inventory positions. The Company manages its credit risk on forward contracts, which arises from the potential nonperformance by counterparties, through credit approval and limit procedures. OTHER OFF-BALANCE SHEET INSTRUMENTS Commitments to Extend Credit Commitments to extend credit are legally binding and generally have Ñxed expiration dates or other termination clauses. The contractual amount represents the Company's exposure to credit loss in the event of default by the borrower. The Company manages this credit risk by using the same credit policies it applies to loans. Collateral is obtained to secure commitments based on management's credit assessment of the borrower. The collateral may include marketable securities, receivables, inventory, equipment and real estate. Since the Company expects many of the commitments to expire without being drawn, total commitment amounts do not necessarily represent the Company's future liquidity requirements. In addition, the commitments include consumer credit lines that are cancelable upon notiÑcation to the consumer. Letters of Credit Standby letters of credit are conditional commitments the Company issues to guarantee the performance of a customer to a third party. The guarantees frequently support public and private borrowing arrangements, including commercial paper issuances, bond Ñnancings and other similar transactions. The Company issues commercial letters of credit on behalf of customers to ensure payment or collection in connection with trade transactions. In the event of a customer's nonperformance, the Company's credit loss exposure is the same as in any extension of credit, up to the letter's contractual amount. Management assesses the borrower's credit to determine the necessary collateral, which may include marketable securities, real estate, accounts receivable and inventory. Since the conditions requiring the Company to fund letters of credit may not occur, the Company expects its liquidity requirements to be less than the total outstanding commitments. Notional amounts of commitments to extend credit and letters of credit were as follows: December 31, 2001 (Dollars in Millions) Commitments to extend credit Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate and purchasing cards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consumer credit cards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other consumer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Letters of credit StandbyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expiring Less Than One Year Expiring After One Year $ 14,969 20,083 19,059 6,254 3,691 406 $32,687 2,688 Ì 5,836 4,054 22 Total $47,656 22,771 19,059 12,090 7,745 428 Commitments from Securities Lending The Company participates in securities lending activities by acting as the customer's agent involving the loan or sale of securities. The Company indemniÑes customers for the diÅerence between the market value of the securities lent and the market value of the collateral received. Cash collateralizes these transactions. For further information on derivatives and other oÅ-balance sheet instruments, see Table 17 included in Management's Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements. Note 21 Fair Values of Financial Instruments Due to the nature of its business and its customers' needs, the Company oÅers a large number of Ñnancial instruments, most of which are not actively traded. When market quotes are unavailable, valuation techniques including discounted cash Öow calculations and pricing models or services are used. The Company also uses various aggregation methods and assumptions, such as the discount rate and cash Öow timing and amounts. As a result, the fair value estimates can neither be substantiated by independent market comparisons, nor realized by the immediate sale or settlement of the Ñnancial instrument. Also, the estimates reÖect a point in time and could change signiÑcantly based on changes in economic factors, such as interest rates. Furthermore, the disclosure of certain Ñnancial and nonÑnancial assets and liabilities are not required. Finally, the fair value disclosure is not intended to estimate a market value of the Company as a whole. A summary of the Company's valuation techniques and assumptions follows. 78 U.S. Bancorp Cash and Cash Equivalents The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements was assumed to approximate fair value. Securities Generally, trading account securities and investment securities were valued using available market quotes. In some instances, for securities that are not widely traded, market quotes for comparable securities were used. Loans The loan portfolio consists of both Öoating and Ñxed-rate loans, the fair value of which was estimated using discounted cash Öow analyses and other valuation techniques. To calculate discounted cash Öows, the loans were aggregated into pools of similar types and expected repayment terms. The expected cash Öows of loans considered historical prepayment experiences and estimated credit losses for nonperforming loans and were discounted using current rates oÅered to borrowers of similar credit characteristics. Deposit Liabilities The fair value of demand deposits, savings accounts and certain money market deposits is equal to the amount payable on demand at year-end. The fair value of Ñxed-rate certiÑcates of deposit was estimated by discounting the contractural cash Öow using the discount rates implied by the high-grade corporate bond yield curve. Short-term Borrowings Federal funds purchased, securities sold under agreements to repurchase and other short-term funds borrowed are at Öoating rates or have short-term maturities. Their carrying value is assumed to approximate their fair value. Long-term Debt and Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Junior Subordinated Debentures of the Parent Company Estimated fair value for medium- term notes, Euro medium-term notes, bank notes, Federal Home Loan Bank advances, capital lease obligations and mortgage note obligations was determined using a discounted cash Öow analysis based on current market rates of similar maturity debt securities to discounted cash Öows. Other long-term debt instruments and company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company were valued using available market quotes. Interest Rate Swaps and Options The interest rate swap cash Öows were estimated using a third party pricing model and discounted based on appropriate LIBOR, Eurodollar futures and swap yield curves. Loan Commitments, Letters of Credit and Guarantees The Company's commitments have Öoating rates and do not expose the Company to interest rate risk, with the exception of mortgage commitments. No premium or discount was ascribed to the loan commitments because virtually all funding would be at current market rates. U.S. Bancorp 79 The estimated fair values of the Company's Ñnancial instruments at December 31 are shown in the table below. (Dollars in Millions) Financial Assets 2001 2000 Carrying Amount Fair Value Carrying Amount Fair Value Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trading account securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,745 982 26,608 2,820 111,948 $ 9,745 982 26,615 2,820 112,236 $ 9,132 753 17,642 764 120,578 $ 9,132 753 17,647 764 121,139 Total Ñnancial assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152,103 $152,398 148,869 $149,435 NonÑnancial assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,287 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $171,390 Financial Liabilities Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,052 $164,921 $109,535 11,833 21,876 $109,593 11,833 22,006 $105,219 14,670 25,716 $105,561 14,670 25,801 2,826 2,915 1,400 1,351 Total Ñnancial liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 148,431 $148,947 144,644 $144,783 NonÑnancial liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shareholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,498 16,461 Total liabilities and shareholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $171,390 5,109 15,168 $164,921 Derivative Positions Asset and liability management positions Interest rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Forward commitments to sell residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Customer intermediated positions Interest rate contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign exchange contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 339 72 10 2 $ 339 72 10 2 $ Ì (14) $ 107 (14) 6 4 6 4 Note 22 Commitments and Contingent Liabilities Rental expense for operating leases amounted to $165.2 million in 2001, $219.3 million in 2000 and $193.8 million in 1999. Future minimum payments, net of sublease rentals, under capitalized leases and noncancelable operating leases with initial or remaining terms of one year or more, consisted of the following at December 31, 2001: (Dollars in Millions) 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less amount representing interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Present value of net minimum lease paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating Leases $ 191.5 164.4 137.4 113.6 95.3 508.4 $1,201.6 Capitalized Leases $12.6 9.0 8.1 6.9 6.3 51.2 94.1 38.4 $55.7 Various legal proceedings are currently pending against the Company. Due to their complex nature, it may be years before some matters are resolved. In the opinion of management, the aggregate liability, if any, will not have a material adverse eÅect on the Company's Ñnancial position, liquidity or results of operations. 80 U.S. Bancorp Note 23 U.S. Bancorp (Parent Company) Condensed Balance Sheet December 31 (Dollars in Millions) Assets Deposits with subsidiary banks, principally interest-bearingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investments in Bank aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nonbank aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Advances to Bank aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nonbank aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 $ 3,184 189 $ 1,714 325 17,907 1,291 1,214 928 2,258 15,019 1,059 1,971 1,958 2,179 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,971 $24,225 Liabilities and Shareholders' Equity Short-term funds borrowed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Advances from subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Junior subordinated debentures issued to subsidiary trusts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 452 69 6,074 2,990 925 16,461 Total liabilities and shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,971 $ 224 97 6,563 1,443 730 15,168 $24,225 Condensed Statement of Income Year Ended December 31 (Dollars in Millions) Income 2001 2000 1999 Dividends from subsidiaries (including $1,300.1, $3,010.5 and $1,661.0 from bank subsidiaries) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest from subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Service and management fees from subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,310.2 272.8 221.8 21.0 Total income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,825.8 Expenses Interest on short-term funds borrowed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest on long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest on junior subordinated debentures issued to subsidiary trusts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before income taxes and equity in undistributed income of subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax creditÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income of parent company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity (deÑciency) in undistributed income of subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18.5 318.5 141.7 49.5 322.5 850.7 975.1 (102.4) 1,077.5 629.0 $3,027.8 234.8 246.0 217.0 3,725.6 19.3 441.7 111.3 21.3 225.2 818.8 2,906.8 (34.0) 2,940.8 (65.2) $1,704.3 177.2 229.1 202.0 2,312.6 26.8 296.4 110.3 103.8 307.7 845.0 1,467.6 (36.9) 1,504.5 877.3 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,706.5 $2,875.6 $2,381.8 U.S. Bancorp 81 Condensed Statement of Cash Flows Year Ended December 31 (Dollars in Millions) Operating Activities 2001 2000 1999 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to reconcile net income to net cash provided by operating activities $1,706.5 $2,875.6 $2,381.8 (Equity) deÑciency in undistributed income of subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Gain) loss on sale of securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortization of premises and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (629.0) (8.2) 8.7 71.2 65.2 4.1 51.7 (391.1) (877.3) (7.0) 76.2 (3.2) Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,149.2 2,605.5 1,570.5 Investing Activities Securities Sales and maturitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investments in subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity distributions from subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net decrease (increase) in advances to aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 254.9 (73.5) (1,941.0) 600.0 1,759.6 34.7 Net cash provided by (used in) investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 634.7 Financing Activities Net (decrease) increase in short-term advances from subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net increase (decrease )in short-term funds borrowed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net (decrease) increase in long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from issuance of junior subordinated debentures to subsidiary trusts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repurchase of common stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10.6) 228.9 (512.8) 1,546.4 136.4 (467.9) (1,235.1) 92.2 (59.4) (4.6) Ì (829.0) (113.7) (914.5) (15.6) 53.3 1,183.7 Ì 210.0 (1,182.2) (1,271.3) 128.9 (334.3) (26.0) 145.0 58.1 (421.3) (449.6) 62.6 (11.5) 824.8 Ì 277.6 (1,187.9) (1,029.7) Net cash used in Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (314.7) (1,022.1) (1,064.1) Change in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,469.2 1,714.4 668.9 1,045.5 56.8 988.7 Cash and cash equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,183.6 $1,714.4 $1,045.5 Transfer of funds (dividends, loans or advances) from bank subsidiaries to the Company is restricted. Federal law prohibits loans unless they are secured and generally limits any loan to the Company or individual aÇliate to 10 percent of the bank's equity. In aggregate, loans to the Company and all aÇliates cannot exceed 20 percent of the bank's equity. Dividend payments to the Company by its subsidiary banks are subject to regulatory review and statutory limitations and, in some instances, regulatory approval. The approval of the Comptroller of the Currency is required if total dividends by a national bank in any calendar year exceed the bank's net income for that year combined with its retained net income for the preceding two calendar years or if the bank's retained earnings are less than zero. Furthermore, dividends are restricted by the Comptroller of the Currency's minimum capital constraints for all national banks. Within these guidelines, all bank subsidiaries have the ability to pay dividends without prior regulatory approval. The amount of dividends available to the parent company from the bank subsidiaries at December 31, 2001, was $1,183 million. 82 U.S. Bancorp Note 24 Supplemental Disclosures to the Consolidated Financial Statements Consolidated Statement of Cash Flows Listed below are supplemental disclosures to the Consolidated Statement of Cash Flows: Year Ended December 31 (Dollars in Millions) 2001 2000 1999 Income taxes paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net noncash transfers to foreclosed propertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 658.1 5,092.2 59.9 $ 1,046.5 5,686.3 94.3 $ 901.1 4,697.6 102.9 Acquisitions and divestitures Assets acquiredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Liabilities assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,150.8 (509.0) $ 3,314.6 (3,755.9) $ 4,229.3 (2,610.0) Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 641.8 $ (441.3) $ 1,619.3 Money Market Investments are included with cash and due from banks as part of cash and cash equivalents. Money market investments were comprised of the following at December 31: (Dollars in Millions) Interest-bearing deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Federal funds sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities purchased under agreements to resell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total money market investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $104 123 398 $625 2000 $ 82 203 372 $657 Regulatory Capital The measures used to assess capital include the capital ratios established by bank regulatory agencies, including the speciÑc ratios for the ""well capitalized'' designation. For a description of the regulatory capital requirements and the actual ratios as of December 31, 2001 and 2000, for the Company and its bank subsidiaries, see Table 19 included in Management's Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements. U.S. Bancorp 83 Consolidated Balance Sheet Ì Five-Year Summary December 31 (Dollars in Millions) 2001 2000 1999 1998 1997 Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trading account securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Held-to-maturity securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ RetailÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less allowance for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,120 625 982 299 26,309 2,820 46,330 25,373 5,746 36,956 $ 8,475 657 753 252 17,390 764 52,817 26,443 7,753 35,352 $ 7,324 1,934 617 194 17,255 670 45,856 25,142 11,395 30,836 $ 8,882 1,039 666 233 20,732 1,794 41,068 21,808 13,980 30,102 114,405 2,457 111,948 19,287 122,365 1,787 120,578 16,052 113,229 1,710 111,519 14,805 106,958 1,706 105,252 12,116 $ 7,972 1,411 268 2,942 17,500 743 36,329 19,798 15,892 27,010 99,029 1,666 97,363 9,289 % Change 2000-2001 7.6% (4.9) 30.4 18.7 51.3 * (12.3) (4.0) (25.9) 4.5 (6.5) 37.5 (7.2) 20.2 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $171,390 $164,921 $154,318 $150,714 $137,488 3.9% Liabilities and Shareholders' Equity Deposits Noninterest-bearingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest-bearing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 31,212 74,007 $ 26,633 82,902 $ 26,350 77,067 $ 27,479 76,867 $ 24,062 74,261 17.2% (10.7) Total depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Company-obligated mandatorily redeemable preferred securities ÏÏÏ Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 105,219 14,670 25,716 2,826 6,498 154,929 16,461 109,535 11,833 21,876 1,400 5,109 149,753 15,168 103,417 10,558 21,027 1,400 3,969 140,371 13,947 104,346 10,011 18,679 1,400 3,704 138,140 12,574 98,323 10,385 13,181 1,050 3,147 126,086 11,402 (3.9) 24.0 17.6 * 27.2 3.5 8.5 Total liabilities and shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $171,390 $164,921 $154,318 $150,714 $137,488 3.9% *Not meaningful 84 U.S. Bancorp Consolidated Statement of Income Ì Five-Year Summary Year Ended December 31 (Dollars in Millions) 2001 2000 1999 1998 1997 % Change 2000-2001 Interest Income Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment securities Taxable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-taxable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,455.4 146.9 $10,562.5 102.1 $ 9,122.7 103.9 $ 8,818.3 91.9 $8,419.0 40.0 (10.5)% 43.9 1,206.1 89.5 26.6 57.5 101.6 1,008.3 140.6 53.9 53.7 151.4 1,047.1 150.1 44.9 45.0 113.0 1,179.5 158.2 63.0 25.6 88.2 1,060.7 158.0 63.6 16.8 42.6 Total interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,083.6 12,072.5 10,626.7 10,424.7 9,800.7 Interest Expense Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Company-obligated mandatorily redeemable preferred securities ÏÏÏ 2,828.1 534.1 1,162.7 149.9 3,618.8 781.7 1,510.4 112.0 2,970.0 582.4 1,126.9 111.0 3,234.7 594.7 926.5 103.8 3,084.2 643.3 586.0 76.3 Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,674.8 6,022.9 4,790.3 4,859.7 4,389.8 Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,408.8 2,528.8 6,049.6 828.0 5,836.4 646.0 5,565.0 491.3 5,410.9 639.9 19.6 (36.3) (50.6) 7.1 (32.9) (8.2) (21.8) (31.7) (23.0) 33.8 (22.4) 5.9 ** Net interest income after provision for credit lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,880.0 5,221.6 5,190.4 5,073.7 4,771.0 (25.7) Noninterest Income Credit card fee revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merchant and ATM processing revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trust and investment management feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deposit service charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash management feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage banking revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trading account proÑts and commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment products fees and commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment banking revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial product revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities gains, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 774.3 428.8 894.4 660.6 347.3 234.0 221.6 460.1 258.2 385.9 329.1 62.2 302.9 761.8 230.3 926.2 551.1 292.4 189.9 258.4 466.6 360.3 304.4 8.1 Ì 533.7 648.2 189.6 887.1 497.2 280.6 190.4 222.4 450.8 246.6 215.7 13.2 Ì 403.1 748.0 * 788.3 470.3 242.0 244.6 130.3 306.9 100.4 121.9 29.1 48.1 420.1 611.8 * 686.1 450.6 214.2 137.9 44.8 110.4 Ì 97.9 7.3 Ì 357.6 1.6 86.2 (3.4) 19.9 18.8 23.2 (14.2) (1.4) (28.3) 26.8 ** ** (43.2) Total noninterest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,359.4 4,883.2 4,244.9 3,650.0 2,718.6 9.8 Noninterest Expense Salaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net occupancy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Furniture and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Communication ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Postage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ GoodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,347.1 366.2 417.9 305.5 181.4 179.8 251.1 278.4 946.4 1,331.4 2,427.1 399.8 396.9 308.2 138.8 174.5 235.0 157.3 348.7 1,130.7 2,355.3 410.1 371.8 307.9 123.4 170.7 175.8 154.0 532.8 1,059.5 2,196.7 424.9 356.9 314.1 114.2 155.4 176.0 125.8 593.8 965.6 1,892.0 424.0 335.0 312.3 * 106.6 114.1 93.3 633.0 1,029.4 Total noninterest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,605.2 5,717.0 5,661.3 5,423.4 4,939.7 Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Applicable income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,634.2 927.7 4,387.8 1,512.2 3,774.0 1,392.2 3,300.3 1,167.4 2,549.9 950.6 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,706.5 $ 2,875.6 $ 2,381.8 $ 2,132.9 $1,599.3 (3.3) (8.4) 5.3 (.9) 30.7 3.0 6.9 77.0 ** 17.8 15.5 (40.0) (38.7) (40.7) Net income applicable to common equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,706.5 $ 2,875.6 $ 2,381.8 $ 2,132.8 $1,588.2 (40.7)% *Information not available **Not meaningful U.S. Bancorp 85 Consolidated Daily Average Balance Sheet and Related Year Ended December 31 2001 2000 (Dollars in Millions) Assets Balance Interest Yields and Rates Balance Interest Yields and Rates Money market investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trading account securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taxable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-taxable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 712 771 20,129 1,787 1,911 50,072 26,081 6,868 35,156 $ 26.6 59.3 1,206.1 128.9 146.9 3,642.5 2,011.2 513.7 3,302.7 Total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 118,177 9,470.1 Other earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Allowance for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,678 1,979 101.6 3.74% 7.69 5.99 7.21 7.69 7.31 7.71 7.48 9.39 8.01 6.05 Total earning assets(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 145,165 22,758 11,139.5 7.67 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $165,944 Liabilities and Shareholders' Equity Noninterest-bearing deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest-bearing deposits $ 25,109 Interest checking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Savings accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Time certiÑcates of deposit less than $100,000 ÏÏÏÏÏÏÏÏÏÏ Time deposits greater than $100,000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total interest-bearing deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Company-obligated mandatorily redeemable preferred 13,962 24,932 4,571 23,328 13,054 79,847 12,980 24,608 203.6 711.0 42.5 1,241.4 629.6 2,828.1 534.1 1,162.7 securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,955 149.9 Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 119,390 5,244 16,201 4,674.8 Total liabilities and shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏ $165,944 1.46 2.85 .93 5.32 4.82 3.54 4.11 4.72 7.66 3.92 Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,464.7 $ 6,135.0 Gross interest margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross interest margin without taxable-equivalent increments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percent of Earning Assets Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest margin without taxable-equivalent incrementsÏÏÏÏ 3.75% 3.71% 7.67% 3.22 4.45 4.41% Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent. Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances. (a) Before deducting the allowance for credit losses and excluding the unrealized gain (loss) on available-for-sale securities. 86 U.S. Bancorp $ 931 779 14,567 2,744 1,303 50,062 26,040 9,578 32,637 $ 53.9 57.6 1,008.3 203.1 102.1 4,257.2 2,305.5 723.4 3,295.4 118,317 10,581.5 151.4 5.79% 7.39 6.92 7.40 7.84 8.50 8.85 7.55 10.10 8.94 7.70 12,157.9 8.65 1,965 1,781 140,606 19,656 $158,481 $ 23,820 13,035 22,774 5,027 25,861 12,909 79,606 12,586 22,410 270.4 1,000.0 74.0 1,458.3 816.1 3,618.8 781.7 1,510.4 1,400 112.0 6,022.9 116,002 4,294 14,365 $158,481 2.07 4.39 1.47 5.64 6.32 4.55 6.21 6.74 8.00 5.19 3.46% 3.40% 8.65% 4.29 4.36 4.30% Yields and Rates 1999 1998 Balance Interest Yields and Rates Balance Interest Yields and Rates 2000-2001 % Change Average Balance $ 44.9 47.8 1,047.1 220.6 103.9 3,288.3 1,940.3 953.7 2,963.4 9,145.7 113.0 10,723.0 231.0 842.2 111.9 1,322.6 462.3 2,970.0 582.4 1,126.9 111.0 4,790.3 $ 1,082 630 16,301 2,970 1,450 43,328 23,076 12,680 30,554 109,638 1,686 1,709 133,757 18,119 $150,167 $ 23,556 12,898 22,534 5,961 26,296 8,675 76,364 11,707 20,248 1,400 109,719 3,671 13,221 $150,167 $ 63.0 27.6 1,179.5 238.2 91.9 3,110.4 1,784.1 1,170.5 2,782.5 8,847.5 88.2 10,535.9 230.9 825.1 146.7 1,622.7 409.3 3,234.7 594.7 926.5 103.8 4,859.7 4.15% 7.59 6.42 7.43 7.17 7.59 8.41 7.52 9.70 8.34 6.70 8.02 1.79 3.74 1.88 5.03 5.33 3.89 4.97 5.57 7.93 4.37 $ 1,170 428 17,977 3,137 1,264 38,983 20,458 15,160 27,850 102,451 1,311 1,688 127,738 16,837 $142,887 $ 23,011 12,263 20,337 6,504 29,583 7,242 75,929 11,102 15,732 1,314 104,077 3,416 12,383 $142,887 $ 5,932.7 $ 5,676.2 3.65% 3.57% 8.02% 3.58 4.44 4.36% 5.38% 6.45 6.56 7.59 7.27 7.98 8.72 7.72 9.99 8.64 6.73 8.25 1.88 4.06 2.26 5.49 5.65 4.26 5.36 5.89 7.90 4.67 3.58% 3.49% 8.25% 3.81 4.44 4.36% (23.5)% (1.0) 38.2 (34.9) 46.7 Ì .2 (28.3) 7.7 (.1) (14.6) 11.1 3.2 15.8 4.7 5.4 7.1 9.5 (9.1) (9.8) 1.1 .3 3.1 9.8 39.6 2.9 22.1 12.8 4.7% U.S. Bancorp 87 Quarterly Consolidated Financial Data (Dollars in Millions, Except Per Share Data) Interest Income Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment securities Taxable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-taxableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trading securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter $2,660.9 16.6 $2,437.9 25.9 $2,285.6 53.9 $2,071.0 50.5 $2,472.1 12.0 $2,591.8 35.2 $2,710.7 32.7 $2,787.9 22.2 253.3 31.2 8.9 15.9 32.0 287.8 27.8 7.4 14.1 26.1 321.2 15.9 6.3 11.2 24.3 343.8 14.6 4.0 16.3 19.2 251.0 38.9 13.6 14.3 37.3 255.6 33.5 15.0 12.6 37.0 250.4 34.8 14.5 12.8 37.7 251.3 33.4 10.8 14.0 39.4 Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,018.8 2,827.0 2,718.4 2,519.4 2,839.2 2,980.7 3,093.6 3,159.0 Interest Expense Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Company-obligated mandatorily redeemable 883.7 186.2 365.7 783.0 124.4 315.0 670.0 122.9 276.7 preferred securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27.6 35.4 39.7 Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,463.2 1,257.8 1,109.3 491.4 100.6 205.3 47.2 844.5 813.2 171.1 336.9 875.9 198.7 371.3 954.0 191.2 403.9 975.7 220.7 398.3 28.4 29.3 31.5 22.8 1,349.6 1,475.2 1,580.6 1,617.5 Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for credit lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,555.6 532.4 1,569.2 441.3 1,609.1 1,289.3 1,674.9 265.8 1,489.6 183.2 1,505.5 201.3 1,513.0 214.0 1,541.5 229.5 Net interest income after provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,023.2 1,127.9 319.8 1,409.1 1,306.4 1,304.2 1,299.0 1,312.0 Noninterest Income Credit card fee revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merchant and ATM processing revenue ÏÏÏÏÏÏÏ Trust and investment management fees ÏÏÏÏÏÏÏ Deposit service chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash management fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage banking revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trading account proÑts and commissionsÏÏÏÏÏÏ Investment products fees and commissionsÏÏÏÏ Investment banking revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial product revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities gains (losses), net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related gains ÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 191.7 58.0 225.0 146.5 76.8 48.2 71.9 125.7 60.2 76.1 216.0 Ì 104.8 198.2 62.4 228.0 176.7 84.9 57.0 55.8 114.2 71.1 93.8 31.3 62.2 91.0 192.2 138.5 226.2 168.7 89.7 60.3 43.6 108.0 56.9 96.2 59.8 Ì 68.2 192.2 169.9 215.2 168.7 95.9 68.5 50.3 112.2 70.0 119.8 22.0 Ì 38.9 161.4 57.5 230.9 123.4 71.8 42.7 85.3 140.8 94.0 61.6 (.3) Ì 112.3 187.4 59.9 230.4 138.0 74.1 48.1 59.8 109.1 72.9 71.6 .3 Ì 151.7 202.2 59.0 231.1 144.3 74.7 44.7 50.9 107.8 100.6 86.0 1.1 Ì 131.2 210.8 53.9 233.8 145.4 71.8 54.4 62.4 108.9 92.8 85.2 7.0 Ì 138.5 Total noninterest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,400.9 1,326.6 1,308.3 1,323.6 1,181.4 1,203.3 1,233.6 1,264.9 Noninterest Expense SalariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net occupancy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Furniture and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CommunicationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Postage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other intangible assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merger and restructuring-related chargesÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 590.5 108.1 110.1 76.9 38.7 46.9 67.8 46.6 404.2 308.7 570.5 90.7 101.4 74.9 50.3 43.8 58.6 54.0 252.8 297.7 580.3 85.4 102.5 74.9 49.4 44.7 62.3 84.8 148.8 334.4 605.8 82.0 103.9 78.8 43.0 44.4 62.4 93.0 140.6 390.6 629.6 111.9 97.2 76.7 33.6 44.6 56.5 39.3 65.0 268.2 601.4 100.3 95.7 75.7 33.8 42.6 57.8 39.0 81.9 282.9 602.4 89.4 99.8 79.6 35.7 43.1 58.5 39.2 117.7 286.0 593.7 98.2 104.2 76.2 35.7 44.2 62.2 39.8 84.1 293.6 Total noninterest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,798.5 1,594.7 1,567.5 1,644.5 1,422.6 1,411.1 1,451.4 1,431.9 Income before income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Applicable income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 625.6 215.5 859.8 297.5 60.6 21.9 1,088.2 392.8 1,065.2 378.4 1,096.4 386.6 1,081.2 370.9 1,145.0 376.3 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 410.1 $ 562.3 Earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ $ .22 .21 $ $ .30 .29 $ $ $ 38.7 $ 695.4 $ 686.8 $ 709.8 $ 710.3 $ 768.7 .02 .02 $ $ .36 .36 $ $ .36 .36 $ $ .37 .37 $ $ .37 .37 $ $ .41 .40 88 U.S. Bancorp Supplemental Financial Data Earnings Per Share Summary Earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ratios Return on average assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Return on average equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average total equity to average assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends per share to net income per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Statistics (Shares in Millions) Common shares outstanding Ì year end(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average common shares outstanding and common stock equivalents 2001 $.89 .88 1.03% 10.5 9.8 84.3 2000 $1.51 1.50 1.81% 20.0 9.1 43.0 1999 $1.25 1.23 1.59% 18.0 8.8 36.8 1998 $1.12 1.10 1.49% 17.2 8.7 29.5 1997 $.86 .85 1.24% 14.7 8.4 31.4 1,951.7 1,902.1 1,928.5 1,903.5 1,864.0 Earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Number of shareholders Ì year end(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common dividends declared (millions) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,927.9 1,939.5 76,395 $1,446.5 1,906.0 1,918.5 46,052 $1,267.0 1,907.8 1,930.0 45,966 $1,090.8 1,898.8 1,930.5 17,523 $977.6 1,841.0 1,872.2 12,010 $801.9 (a) DeÑned as total common shares less common stock held in treasury. (b) Based on number of common stock shareholders of record. Stock Price Range and Dividends First quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Closing price Ì December 31 2001 Sales Price Low $18.49 20.71 18.25 16.50 Dividends Declared $.1875 .1875 .1875 .1875 High $24.88 28.00 25.00 24.31 2000 Sales Price Low $16.38 20.88 19.25 15.38 Dividends Declared $.1625 .1625 .1625 .1625 High $26.06 23.60 25.24 22.95 20.93 23.25 The common stock of U.S. Bancorp is traded on the New York Stock Exchange, under the ticker symbol ""USB.'' U.S. Bancorp 89 Annual Report on Form 10-K Securities and Exchange Commission Washington, D.C. 20549 Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Ñscal year ended December 31, 2001 Commission File Number 1-6880 U.S. Bancorp Incorporated in the State of Delaware IRS Employer IdentiÑcation #41-0255900 Address: 225 South Sixth Street Minneapolis, Minnesota 55402-4302 Telephone: (612) 973-1111 Securities registered pursuant to Section 12(b) of the Act (and listed on the New York Stock Exchange): Common Stock, Par Value $.01. Prior to the merger of U.S. Bancorp with Firstar Corporation, the par value of U.S. Bancorp common stock was $1.25. Securities registered pursuant to section 12(g) of the Act: None. Index Part I Item 1 Item 2 Item 3 Item 4 Part II Page Business GeneralÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91-92 Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest DiÅerential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18-20, 86-87 Investment Portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27-28, 61 Loan Portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ23-27, 29-36, 54, 62-63 Summary of Loan Loss Experience ÏÏÏÏÏÏÏÏÏÏÏ 29-36, 54, 62-63 Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28-29 Return on Equity and Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17, 88 Short-Term Borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29, 67 Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92 Legal ProceedingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ none Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ none Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters ÏÏÏÏÏ 3, 40-41, 69-71, 73-75, 89, 90 Item 6 Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 As of January 31, 2002, U.S. Bancorp had Item 7 Management's Discussion and Analysis of 1,918,425,072 shares of common stock outstanding. The aggregate market value of common stock held by non- aÇliates as of January 31, 2002, was approximately $39.0 billion. U.S. Bancorp (1) has Ñled all reports required to be Ñled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such Ñling requirements for the past 90 days. Disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is contained in the registrant's deÑnitive proxy statement incorporated by reference in Part III of this Form 10-K and any amendment to this Form 10-K. This Annual Report and Form 10-K incorporates into a single document the requirements of the accounting profession and the Securities and Exchange Commission. Only those sections of the Annual Report referenced in the following cross-reference index and the information under the caption ""Forward-Looking Statements'' are incorporated in the Form 10-K. Financial Condition and Results of Operations ÏÏ 16-47 Item 7A Quantitative and Qualitative Disclosures About Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36-40 Financial Statements and Supplementary Data ÏÏÏÏÏ 49-89 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ÏÏÏÏÏÏÏÏÏÏÏÏ none Item 8 Item 9 Part III Item 10 Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 94-96* Item 11 Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ * Item 12 Security Ownership of Certain BeneÑcial Owners and ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ * Item 13 Certain Relationships and Related TransactionsÏÏÏÏÏÏÏÏ * Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92-93 *U.S. Bancorp's deÑnitive proxy statement for the 2002 Annual Meeting of Shareholders is incorporated herein by reference, other than the sections entitled ""Report of the Compensation and Human Resources Committee on Executive Compensation'' and ""Comparative Stock Performance.'' 90 U.S. Bancorp General U.S. Bancorp is a multi-state Ñnancial services holding company headquartered in Minneapolis, Minnesota and was created by the acquisition by Firstar Corporation of the former U.S. Bancorp of Minneapolis, Minnesota. The merger was completed on February 27, 2001, and the combined company retained the U.S. Bancorp name. U.S. Bancorp was incorporated in Delaware in 1929 and operates as a Ñnancial holding company and a bank holding company under the Bank Holding Company Act of 1956. U.S. Bancorp provides a full range of Ñnancial services, including lending and depository services, cash management, foreign exchange and trust and investment management services. It also engages in credit card services, merchant and automated teller machine (""ATM'') processing, mortgage banking, insurance, brokerage, leasing and investment banking. U.S. Bancorp's banking subsidiaries are engaged in the general banking business, principally in domestic markets. The subsidiaries range in size from $312 million to $108 billion in deposits and provide a wide range of products and services to individuals, businesses, institutional organizations, governmental entities and other Ñnancial institutions. Commercial and consumer lending services are principally oÅered to customers within the Company's domestic markets, to domestic customers with foreign operations and within certain niche national venues. Lending services include traditional credit products as well as credit card services, Ñnancing and import/export trade, asset-backed lending, agricultural Ñnance and other products. Leasing products are oÅered through non-bank subsidiaries. Depository services include checking accounts, savings accounts and time certiÑcate contracts. Ancillary services such as foreign exchange, treasury management and receivable lock-box collection are provided to corporate customers. U.S. Bancorp's bank and trust subsidiaries provide a full range of Ñduciary services for individuals, estates, foundations, business corporations and charitable organizations. Banking and investment services are provided through a network of 2,147 banking oÇces principally operating in 24 states in the Midwest and West. The Company operates a network of 4,904 branded ATMs and provides 24-hour, seven days-a-week telephone customer service. Mortgage banking services are provided through banking oÇces and loan production oÇces throughout the Company's markets. The Company is one of the largest providers of Visa@ corporate and purchasing card services and corporate trust services in the United States. Its wholly owned subsidiary Nova Information Systems, Inc. provides merchant processing services directly to merchants and through a network of banking aÇliations. U.S. Bancorp's other non-banking subsidiaries oÅer a variety of products and services to the Company's customers. Its wholly-owned subsidiary U.S. Bancorp Piper JaÅray Inc. engages in equity and Ñxed income trading activities and oÅers investment banking and underwriting services to corporate and public sector customers. This non- bank subsidiary also provides brokerage products, including securities, mutual funds and annuities, and insurance products to consumers and regionally based businesses through a network of 123 brokerage oÇces. On a full-time equivalent basis, employment during 2001 averaged a total of 50,461 employees. Competition The commercial banking business is highly competitive. Subsidiary banks compete with other commercial banks and with other Ñnancial institutions, including savings and loan associations, mutual savings banks, Ñnance companies, mortgage banking companies, credit unions and investment companies. In recent years, competition has increased from institutions not subject to the same regulatory restrictions as domestic banks and bank holding companies. Government Policies The operations of the Company's various operating units are aÅected by state and federal legislative changes and by policies of various regulatory authorities, including those of the numerous states in which they operate, the United States and foreign governments. These policies include, for example, statutory maximum legal lending rates, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States Ñscal policy, international currency regulations and monetary policies, and capital adequacy and liquidity constraints imposed by bank regulatory agencies. Supervision and Regulation U.S. Bancorp is a registered bank holding company and Ñnancial holding company under the Bank Holding Company Act of 1956 (the ""Act'') and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (the ""Board''). Under the Act, a Ñnancial holding company may engage in banking, managing or controlling banks, furnishing or performing services for banks it controls, and conducting other Ñnancial activities. U.S. Bancorp must obtain the prior approval of the Board before acquiring more than 5 percent of the outstanding shares of another bank or bank holding company, and must provide notice to, and in some situations obtain the prior approval of, the Board in connection with engaging in, or acquiring more than 5 percent of the outstanding shares of a company engaged in, a new Ñnancial activity. Under the Act, as amended by the Riegle-Neal Interstate Banking and Branching EÇciency Act of 1994 (the ""Interstate Act''), U.S. Bancorp may acquire banks throughout the United States, subject only to state or U.S. Bancorp 91 federal deposit caps and state minimum age requirements. The Interstate Act authorizes interstate branching by acquisition and consolidations in those states that have not opted out of interstate branching. National banks are subject to the supervision of, and are examined by, the Comptroller of the Currency. All subsidiary banks of the Company are members of the Federal Deposit Insurance Corporation (""FDIC'') and are subject to examination by the FDIC. In practice, the primary federal regulator makes regular examinations of each subsidiary bank subject to its regulatory review or participates in joint examinations with other federal regulators. Areas subject to regulation by federal authorities include the allowance for credit losses, investments, loans, mergers, issuance of securities, payment of dividends, establishment of branches and other aspects of operations. Properties U.S. Bancorp and its signiÑcant subsidiaries occupy their headquarter oÇces under long-term leases and are located in Minneapolis, Minnesota and Cincinnati, Ohio. The Company also leases seven principal freestanding operations centers in St. Paul, Portland, Nashville and Denver, and owns Ñve principal freestanding operations centers in Cincinnati, Kansas City, St. Louis, Fargo and Milwaukee. At December 31, 2001, U.S. Bancorp's subsidiaries owned and operated a total of 1,383 facilities and leased an additional 1,388 facilities, all of which are well maintained. The Company believes its current facilities are adequate to meet its needs. Additional information with respect to premises and equipment is presented in Notes 9 and 22 of the Notes to Consolidated Financial Statements. EXHIBITS Financial Statements Filed U.S. Bancorp and Subsidiaries Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏ Report of Independent Accountants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Page 49 53 48 Schedules to the consolidated Ñnancial statements required by Regulation S-X are omitted since the required information is included in the footnotes or is not applicable. During the three months ended December 31, 2001, the Company Ñled the following Current Reports on Form 8-K: Form 8-K Ñled October 17, 2001, relating to third quarter 2001 and anticipated full year 2001 earnings; Form 8-K Ñled October 31, 2001, announcing commencement of an underwritten oÅering of trust preferred securities; Form 8-K Ñled December 6, 2001, announcing commencement of an underwritten oÅering of trust preferred securities. The following Exhibit Index lists the Exhibits to the Annual Report on Form 10-K. (1)3.1 Restated CertiÑcate of Incorporation, as amended. Filed as Exhibit 3.1 to Form 10-K for the year ended December 31, 2000. 3.2 Restated bylaws, as amended. 4.1 ®Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments deÑning the rights of holders of long-term debt are not Ñled. U.S. Bancorp agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.© (1)4.2 Warrant Agreement, dated as of October 2, 1995, between U.S. Bancorp and First Chicago Trust Company of New York, as Warrant Agent and Form of Warrant. Filed as Exhibits 4.18 and 4.19 to Registration Statement on Form S-3, File No. 33-61667. (2)10.1 U.S. Bancorp 2001 Stock Incentive Plan. (2)10.2 U.S. Bancorp Executive Incentive Plan. (1)(2)10.3 U.S. Bancorp Executive Deferral Plan, as (2)10.4 (1)(2)10.5 amended. Filed as Exhibit 10.7 to Form 10-K for the year ended December 31, 1999. Summary of NonqualiÑed Supplemental Executive Retirement Plan, as amended, of the former U.S. Bancorp. 1991 Performance and Equity Incentive Plan of the former U.S. Bancorp. Filed as Exhibit 10.13 to Form 10-K for the year ended December 31, 1997. (1)(2)10.6 Description of Retirement BeneÑts of Joshua (1)(2)10.7 Green III. Filed as Exhibit 10.14 to Form 10-K for the year ended December 31, 1997. Form of Director IndemniÑcation Agreement entered into with former directors of the former U.S. Bancorp. Filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1997. (1)(2)10.8 U.S. Bancorp Independent Director Retirement and Death BeneÑt Plan, as amended. Filed as Exhibit 10.17 to Form 10-K for the year ended December 31, 1999. (1)(2)10.9 U.S. Bancorp Deferred Compensation Plan for Directors, as amended. Filed as Exhibit 10.18 to Form 10-K for the year ended December 31, 1999. 92 U.S. Bancorp (2)10.10 Summary of U.S. Bancorp Supplemental Victoria Buyniski Gluckman Executive Retirement Plan. (2)10.11 U.S. Bancorp Deferred Compensation Plan. (2)10.12 Form of Change in Control Agreement, eÅective November 16, 2001, between U.S. Bancorp and certain executive oÇcers of U.S. Bancorp. (2)10.13 Employment Agreement with Jerry A. Grundhofer. (2)10.14 Employment Agreement with John F. Grundhofer. Statement re: Computation of Ratio of Earnings to Fixed Charges. Director Arthur D. Collins, Jr. Director Peter H. Coors Director John C. Dannemiller Director Joshua Green III Director J.P. Hayden, Jr. Director Roger L. Howe Director Subsidiaries of the Registrant. Thomas H. Jacobsen Consent of PricewaterhouseCoopers LLP. Director 12 21 23 (1) Exhibit has previously been Ñled with the Securities and Exchange Commission and Delbert W. Johnson is incorporated herein as an exhibit by reference. (2) Management contracts or compensatory plans or arrangements required to be Ñled as an exhibit pursuant to Item 14(c) of Form 10-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on February 28, 2002, on its behalf by the undersigned thereunto duly authorized. U.S. Bancorp By: Jerry A. Grundhofer President and Chief Executive OÇcer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 28, 2002, by the following persons on behalf of the registrant and in the capacities indicated. Jerry A. Grundhofer President, Chief Executive OÇcer and Director (principal executive oÇcer) David M. MoÅett Vice Chairman and Chief Financial OÇcer (principal Ñnancial oÇcer) Terrance R. Dolan Executive Vice President and Controller (principal accounting oÇcer) John F. Grundhofer Chairman Linda L. Ahlers Director Director Joel W. Johnson Director Jerry W. Levin Director Sheldon B. Lubar Director Frank Lyon, Jr. Director Daniel F. McKeithan, Jr. Director David B. O'Maley Director O'dell M. Owens, M.D., M.P.H. Director Thomas E. Petry Director Richard G. Reiten Director S. Walter Richey Director Warren R. Staley Director Patrick T. Stokes Director John J. Stollenwerk Director U.S. Bancorp 93 EXECUTIVE OFFICERS Jerry A. Grundhofer Andrew Cecere Richard K. Davis Mr. Grundhofer, 57, has served as Mr. Cecere, 41, has served as Vice Mr. Davis, 44, has served as Vice President and Chief Executive OÇcer of Chairman of U.S. Bancorp since the Chairman of U.S. Bancorp since the U.S. Bancorp and Chairman, President merger of Firstar Corporation and U.S. merger of Firstar Corporation and U.S. and Chief Executive OÇcer of U.S. Bank Bancorp in February 2001. He assumed Bancorp in February 2001, when he National Association since the merger of responsibility for Private Client and Trust assumed responsibility for Consumer Firstar Corporation and U.S. Bancorp in Services in February 2001 and U.S. Banking and Payment Services. Previously, February 2001. Prior to the merger, Bancorp Asset Management in he had been Vice Chairman of Consumer Mr. Grundhofer was President and Chief November 2001. Previously, he had Banking of Firstar Corporation from 1998 Executive OÇcer of Firstar Corporation, served as Chief Financial OÇcer of U.S. until 2001 and Executive Vice President, having served as Chairman, President and Bancorp from May 2000 through Consumer Banking of Star Banc Chief Executive OÇcer of Star Banc February 2001. Additionally, he served as Corporation from 1993 until its merger Corporation from 1993 until its merger Vice Chairman of U.S. Bank with with Firstar Corporation in 1998. with Firstar Corporation in 1998. responsibility for Commercial Services Andrew S. DuÅ Jennie P. Carlson Ms. Carlson, 41, has served as Executive from 1999 to 2001, having been a Senior Vice President of Finance since 1992. Vice President, Human Resources since William L. Chenevich Mr. DuÅ, 44, has served as Vice Chairman of U.S. Bancorp, responsible for Private Advisory Services, Equity Capital January 2002. Until that time, she served Mr. Chenevich, 58, has served as Vice Markets and Fixed Income Capital as Executive Vice President, Deputy Chairman of U.S. Bancorp since the Markets, since November 2001, and until General Counsel and Corporate Secretary merger of Firstar Corporation and U.S. that time as Vice Chairman responsible of U.S. Bancorp since the merger of Bancorp in February 2001, when he for Wealth Management and Capital Firstar Corporation and U.S. Bancorp in assumed responsibility for Technology Markets since 1999. He has served as February 2001. From 1995 until the and Operations Services. Previously, he President and Chief Executive OÇcer of merger, she was General Counsel and had served as Vice Chairman of U.S. Bancorp Piper JaÅray since Secretary of Firstar Corporation and Star Technology and Operations Services of January 2000. Prior to that time, he had Banc Corporation, a predecessor Firstar Corporation from 1999 to 2001. served as President of Piper JaÅray Inc., company, as well as Senior Vice President Prior to joining Firstar he was Group the broker-dealer subsidiary of Piper from 1994 to 1999 and Executive Vice Executive Vice President at Visa JaÅray Companies, since January 1996. President from 1999 to 2001. International from 1994 to 1999. 94 U.S. Bancorp Edward Grzedzinski Lee R. Mitau Stephen E. Smith Mr. Grzedzinski, 46, has served as Vice Mr. Mitau, 53, has served as Executive Mr. Smith, 54, has served as Executive Chairman of U.S. Bancorp since July Vice President and General Counsel of Vice President and Director of Human 2001. He is President and Chief Executive U.S. Bancorp since 1995. Mr. Mitau also Resources of U.S. Bancorp since the OÇcer of NOVA Information Systems, serves as Corporate Secretary. Prior to merger of Firstar Corporation and U.S. which he co-founded in 1991 and which 1995 he was a partner at the law Ñrm of Bancorp in February 2001. Prior to the became a wholly owned subsidiary of Dorsey & Whitney LLP. merger, he was Executive Vice President U.S. Bancorp in connection with the acquisition of NOVA Corporation in July 2001. Mr. Grzedzinski served as Chairman of NOVA Corporation from 1995 until July 2001. Joseph E. Hasten David M. MoÅett Mr. MoÅett, 50, has served as Vice Chairman and Chief Financial OÇcer of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001. Prior to the merger, he was Vice and Corporate Director of Human Resources of Firstar Corporation and Star Banc Corporation, a predecessor company, since 1995, having served as Director of Human Resources of Star Banc Corporation since 1993. Mr. Hasten, 50, has served as Vice Chairman and Chief Financial OÇcer of Chairman of U.S. Bancorp since the Firstar Corporation, and had served as merger of Firstar Corporation and U.S. Chief Financial OÇcer of Star Banc Bancorp in February 2001, when he Corporation from 1993 until its merger assumed responsibility for Corporate with Firstar Corporation in 1998. Banking. Previously, he had been Vice Chairman of Wholesale Banking of Firstar Corporation, after joining Mercantile Bancorporation, a predecessor company, as President of its St. Louis bank and of Corporate Banking in 1995. J. Robert HoÅmann Daniel M. Quinn Mr. Quinn, 45, Vice Chairman of U.S. Bancorp, assumed responsibility for Commercial Banking in April 1999 and for Regional Commercial Real Estate in August 1999. Previously, he had been President of U.S. Bank in Colorado Mr. HoÅman, 56, has served as Executive (formerly Colorado National Bank) since Vice President and Chief Credit OÇcer of 1996. U.S. Bancorp since 1990. U.S. Bancorp 95 DIRECTORS John F. Grundhofer1 Thomas H. Jacobsen4 O'dell M. Owens, M.D., M.P.H.3,4 Chairman U.S. Bancorp Jerry A. Grundhofer1 Former Chairman Firstar Corporation Milwaukee, Wisconsin President and Chief Executive OÇcer Delbert W. Johnson1,3,4 Vice President Safeguard ScientiÑcs, Inc. Wayne, Pennsylvania Joel W. Johnson4,5 Chairman, President and Chief Executive OÇcer Medical Director United Healthcare Cincinnati, Ohio Thomas E. Petry1,2,3 Retired Chairman and Chief Executive OÇcer Eagle-Picher Industries, Inc. Cincinnati, Ohio Richard G. Reiten1,2,3 Chairman and Chief Executive OÇcer Hormel Foods Corporation Northwest Natural Gas Company Austin, Minnesota Jerry W. Levin2,5 Portland, Oregon S. Walter Richey1,2 Chairman and Chief Executive OÇcer Former Chairman and Sunbeam Corporation Boca Raton, Florida Sheldon B. Lubar1,5 Chairman Lubar & Company Milwaukee, Wisconsin Frank Lyon, Jr.2,4 President Wingmead Farms Chief Executive OÇcer Meritex, Inc. Roseville, Minnesota Warren R. Staley1,3 Chairman and Chief Executive OÇcer Cargill, Inc. Minneapolis, Minnesota Patrick T. Stokes1,5 President and Chief Executive OÇcer North Little Rock, Arkansas Daniel F. McKeithan, Jr.1,3,5 Anheuser-Busch, Inc. St. Louis, Missouri President and Chief Executive OÇcer John J. Stollenwerk2,3,4 Tamarack Petroleum Company, Inc. President and Chief Executive OÇcer Milwaukee, Wisconsin David B. O'Maley1,2 Chairman, President and Chief Executive OÇcer Ohio National Financial Services Cincinnati, Ohio Allen-Edmonds Shoe Corporation Port Washington, Wisconsin U.S. Bancorp Linda L. Ahlers3,4 President Marshall Field's Minneapolis, Minnesota Victoria Buyniski Gluckman3,4 President and Chief Executive OÇcer United Medical Resources, Inc. Cincinnati, Ohio Arthur D. Collins, Jr.1,2,5 President and Chief Executive OÇcer Medtronic, Inc. Minneapolis, Minnesota Peter H. Coors2,4,5 Chairman Coors Brewing Company Golden, Colorado John C. Dannemiller4,5 Retired Chairman Applied Industrial Technologies Cleveland, Ohio Joshua Green III3,4 Chairman and Chief Executive OÇcer Joshua Green Corporation Seattle, Washington J.P. Hayden, Jr.1,2,5 Chairman of the Executive Committee The Midland Company Amelia, Ohio Roger L. Howe1,2,3 Chairman Emeritus U.S. Precision Lens, Inc. Cincinnati, Ohio 1. Executive Committee 2. Compensation Committee 3. Audit Committee 4. Community Outreach and Fair Lending Committee 5. Governance Committee 96 U.S. Bancorp Corporate Information Executive Ofﬁces U.S. Bancorp 225 South Sixth Street Minneapolis, Minnesota 55402 After June 2002 800 Nicollet Mall Minneapolis, Minnesota 55402 Common Stock Transfer Agent and Registrar U.S. Bank National Association, a subsidiary of U.S. Bancorp, acts as our transfer agent and registrar, dividend paying agent and dividend reinvestment plan agent, and maintains all shareholder records for the corporation. Inquiries related to shareholder records, stock transfers, changes of ownership, changes of address and dividend payment should be sent to the transfer agent at the following address: U.S. Bank National Association 1555 North River Center Drive, Suite 301 Milwaukee, Wisconsin 53212 Phone: 800-637-7549 Fax: 414-905-5049 Internet: www.investorservice.usbank.com Independent Accountants PricewaterhouseCoopers LLP serves as the independent accountants of U.S. Bancorp. Common Stock Listing and Trading U.S. Bancorp common stock is listed and traded on the New York Stock Exchange under the ticker symbol USB. Dividends and Dividend Reinvestment Plan U.S. Bancorp currently pays quarterly dividends on our com- mon stock on or about the 15th day of January, April, July and October, subject to prior approval by our Board of Directors. U.S. Bancorp shareholders can choose to participate in a plan that provides automatic reinvestment of dividends and/or optional cash purchase of additional shares of U.S. Bancorp common stock. For more information, please contact: U.S. Bank National Association Dividend Reinvestment Department 1555 North River Center Drive, Suite 301 Milwaukee, Wisconsin 53212 Phone: 800-637-7549 Investment Community Contacts Howell D. McCullough Senior Vice President, Investor Relations howell.mccullough@usbank.com Phone: 612-973-2261 Judith T. Murphy Vice President, Investor Relations judith.murphy @usbank.com Phone: 612-973-2264 Financial Information U.S. Bancorp news and ﬁnancial results are available through our Web site and by mail. Web site. For information about U.S. Bancorp, including news and ﬁnancial results and online annual reports, access our home page on the Internet at www.usbank.com. Mail. At your request, we will mail to you our quarterly earnings news releases, quarterly ﬁnancial data reported on Form 10-Q and additional copies of our annual reports. To be added to the U.S. Bancorp mailing list for quarterly earnings news releases or to request other information, please contact: U.S. Bancorp Investor Relations 225 South Sixth Street Minneapolis, Minnesota 55402 Phone: 612-973-2263 corporaterelations@usbank.com Media Requests Steve Dale Senior Vice President, Media Relations Phone: 612-973-0898 Other Business Information For product and service information, branch ofﬁce and ATM locations, information about lines of business, account access, employment opportunities and more, visit www.usbank.com or www.ﬁrstar.com. Diversity U.S. Bancorp and our subsidiaries are committed to developing and maintaining a workplace that reﬂects the diversity of the communities we serve. We support a work environment where individual differences are valued and respected and where each individual who shares the fundamental values of the company has an opportunity to contribute and grow based on individual merit. Equal Employment Opportunity/Afﬁrmative Action U.S. Bancorp and our subsidiaries are committed to providing Equal Employment Opportunity to all employees and applicants for employment. In keeping with this commitment, employment decisions are made based upon performance, skill and abilities, rather than race, color, religion, national origin or ancestry, sex, age, disability, veteran status, sexual orientation or any other factors protected by law. The corporation complies with municipal, state and federal fair employment laws, including regulations applying to federal contractors. U.S. Bancorp, including each of our subsidiaries, is an Equal Opportunity Employer and a Drug-Free Workplace. U.S. Bank and Firstar Bank Members FDIC This report is printed on recycled paper containing a minimum 10 percent post-consumer recycled waste. Corporate Proﬁle U.S. Bancorp is a multi-state ﬁnancial holding company with headquarters in Minneapolis, Minnesota. The merger of Firstar Corporation and the former U.S. Bancorp closed on February 27, 2001, making the new U.S. Bancorp the 8th largest ﬁnancial holding company in the United States, with total assets exceeding $171 billion. We place No. 41 in The Super 100, a Forbes magazine composite ranking based on sales, proﬁts, assets and market value. Through U.S. Bank, Firstar Bank and other subsidiaries, U.S. Bancorp serves more than 10 million customers principally through 2,147 full-service branch ofﬁces in 24 states, additional specialized ofﬁces across the country and in several foreign countries, 4,904 ATMs, and Internet and telephone banking. U.S. Bancorp and our subsidiaries provide a compre- hensive selection of premium ﬁnancial products and services to individuals, businesses, nonproﬁt organizations, institu- tions and government entities. U.S. Bancorp, our subsidiary full-service banks and other subsidiaries operate the following major lines of business: Consumer Banking, Wholesale Banking, Payment Services, and Private Client, Trust and Asset Management. U.S. Bancorp Piper Jaffray offers full securities brokerage, equity capital, ﬁxed income capital and individual investment services. U.S. Bancorp is home of the exclusive Five Star Service Guarantee, which assures customers of certain key banking standards. U.S. Bancorp 225 South Sixth Street Minneapolis, Minnesota 55402 www.usbank.com www.ﬁrstar.com

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